Monopoly, Antitrust, and Regulation
tying sales/bundling
"ill sell you product A, only if you agree to buy product B"
How do anti trust laws work?
-DOJ (department of justice) and FTC (federal trade commission) -Procedure -Penalties -Antitrust, politics and academic opinion
measuring market competitive
-four-firm concentration ratio -Herfindahl-Hirschman Index (the sum of each market share squared) -Problems -definition of market -study prices and profits
Corporate Mergers are:
-mergers and acquisitions -pre-notification -economics issues -divestment -changing standards as politics and academic findings change
There are 6 firms in an industry with market shares of 40%, 30%, 20%, 5%, 3% and 2%. What is the Herfindahl-Hirshman index equal to?
A. 2938 B. 9283 C. 4115 D. 95 Answer: A
There are 6 firms in an industry with market shares of 40%, 30%, 20%, 5%, 3% and 2%. What is the 4-firm concentration ratio equal to?
A. 40 B. 95 C. 100 D. 15 Answer: B
If Levi Co. were to require every retailer that carried its clothing to charge $42 for each pair of jeans, Levi would be practicing A. Resale price maintenance B. Fixed retail pricing C. Tying D. Cost plus pricing
A. Resale price maintenance
if government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will A. earn economic losses B. earn economic profits C. earn zero economic profits D. produce a lower quantity of output than is socially optimal
A. earn economic losses
The primary purpose of antitrust legislation is to A. protect small business B. protect the competitiveness of U.S. markets C. protect the prices of American-made products D. ensure firms earn only a fair profit
B. protect the competitiveness of U.S. markets
Additional natural monopoly regulation issues
Cost-Plus v. Price Cap Regulation Regulatory Capture - revolving door Regulatory lag
Predatory Pricing occurs when a firm A. Exercises its oligopoly power by raising its price through the formation of a cartel B. Exercises its monopoly power by raising its price C. Cuts its prices in order to make itself more competitive D. Cuts its prices temporarily in order to drive out any competition
D. Cuts its prices temporarily in order to drive out any competition
other antitrust issues
Restrictive Practices: -price fixing, market sharing, predatory pricing -resale price maintenance -exclusive dealing -tying sales/bundling Mere Bigness is not a crime
anti trust laws:
Series of laws that tried to protect consumers against monopolization and limited competition
What were the first and second anti trust laws?
The Sherman Act (1890). It prevented monopolization and conspiracy in restraint of trade . Clayton Act (1914). Interlocking directorates, allowed gov. to oversee mergers, triple damages
mere bigness is not a crime
a business that is huge and dominates its market; as long as it play fair, theres not an antitrust problem
exclusive dealing
a firm will agree to sell a good to a retailer only if the retailer agrees only to buy from the firm. this reduces competition because the retailer can't go out and find better prices
how does government oversight the market place
by anti trust laws and through regulation of business
economics issues
economics issues: -efficiency from economies of scale -decrease in market competition *the more concentrated it is, it is less competitive it is
market sharing
firms agree not to compete against each other
substantial economies of scale occur when
fixed costs are upfront and the rest of the marginal costs are lower. this results in the AVFC to be lower. inevitably, these firms can become monopolies. 1. the industry is a monopoly 2. these natural monopoly situations often occur with goods and services that we tend to think are viable to our well being. the govt has declared certain natural monopolies to be public utilities and if the firm is said to be a public utility then the govt. has the right to regulate that firm. by regulating it means; govt. has approval over the prices that it will charge but the regulation inevitably goes further than that...
mergers and acquisitions
mergers and acquisitions:
pre-notification
pre-notification: -if two companies want to merge they have to notify the govt. and say "we want to merge". The govt. is then given 90 days to study this proposal and if they think the merger will not be a good thing, then they get to challenge it.
resale price maintenance
sells goods to a retailer and then tells the retailer "you need to sell this good for this price". it limits competition to the harm of consumers.
if the average total cost curve of a firm is constantly falling then
the marginal cost curve MUST be bellow it. it must be that the cost of producing an additional unit goes down.
competition is good for consumers true or false?
true
large scale production can reduce average cost of production through economies of scale, true or false?
true
markets in the real world are rarely perfectly competitive, true or false?
true
Regulatory Lag
when a company requests a rate increase, the hearing process of studying the issue and hearing the decision can drag on for a long time
predatory pricing
when a large established firm artificially lowers its price if a new firm enters the market. By pushing the price really low, the new firm will not be able to establish its position in the market. Even though the big firm will lose money for a little while, they will kick the small firm out.
