1 eco 100 lecture 7-3 feb 20, 2009 regulation: monopoly, cartels and mergers
TRANSCRIPT
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Eco 100Lecture 7-3
Feb 20, 2009
Regulation:
Monopoly, Cartels and Mergers
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Colbert on Monopoly
• http://www.colbertnation.com/the-colbert-report-videos/60116/march-08-2006/the-word---monopoly
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Government Regulation
• Major categories – Anti-competitive behavior
• Price Discrimination• Collusion• Mergers/acquisitions
– Deregulation– Natural Monopolies
• Regulatory solutions• Deregulating where economies of scale no longer exist• Managed competition
– Externalities• Pollution• Fishing, forestry, mining, oil drilling
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Promoting Efficiency
• Goals of regulation– Efficiency in Production
• Produce at least cost
– Efficiency in Allocation• Value consumers place on goods = opportunity
costs of resources used
– Promote Technological Innovation• Regulatory incentives should promote, or at least
not discourage, development and adoption of new cost saving technology
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Perfect Competition
• Standard of comparison for all market models (optimal)– Productive efficient
• Firms operate at min of LRAC or exit
– Technological innovate• Innovate or die
– Allocative efficient• Consumers value marginal unit at MV
– Equals firm’s cost of producing marginal unit
• No deadweight loss
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Monopoly/Cartels
• Not Efficient in Production– Never operate at min of LRAC– Underutilized capacity and resources
• Not Technologically Innovative– No incentive to invest in/develop new
technology when you’re the only firm
• Not Efficient in Allocation– P (=MV) > MR = MC– Deadweight loss
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Monopolistic Competition
• Not Efficient in Production– Never operate at min of LRAC– Underutilized capacity and resources
• Technologically Innovative– Competition with other firms provides incentive
• Not Efficient in Allocation– P (=MV) > MR = MC– Deadweight loss (but not as great as Monopoly)
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How Has the Government Sought to Regulate Markets?
• Punishing Anti-Competitive Behavior– Pricing/market tactics
• Collusion– Price-fixing, restricting output
• Price Discrimination• Predatory Pricing
– Impose fines for AC tactics
• Preventing Anti-competitive Behavior– Mergers and Acquisitions
• Review by appropriate administrative agency
– Divestiture/breakups
• Regulating Natural Monopolies• Deregulation(sic) of Selected Industries
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Punishing AC Behavior
• Punishing firms for behaving like a monopoly– Sherman anti-trust Act (1890)
• “conspiring to fix prices or restrict output”
– Clayton Act (1914)• More sophisticated price discrimination• Tie-in sales – requiring the purchase of 2nd good• Stock purchases/acquisitions
– Robinson-Patman(1936)• 3rd degree price discrimination • Amendment to Clayton Act
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Reviewing Mergers
• Primarily aimed at preventing mergers or acquisitions that reduce competition– FCC regulates communications media
(newspapers, tv, telecomm, radio)– FTC and DOJ regulate the rest
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How do they determine whether a merger reduces competition?
• Herfindahl-Hirschman Index or HHI, – measure of the size of firms in relationship to the
industry – Meant to be an indicator of the amount of competition– sum of the squares of the market shares of each
individual firm. • decreases in the Herfindahl index generally indicate a loss of
pricing power and an increase in competition, whereas increases imply the opposite
• DOJ guidelines– Mergers resulting in HHI > 1800 can be challenged
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Are All Mergers Equal?
• Conglomerate – Merger of firms in unrelated industries
• Vertical Merger– Merger of firms upstream/downstream from each other in
production stream• FCC: ownership of more than 1 media type• Microsoft
• Horizontal Mergers– Firms in the same industry
• Telecomm industry– AT&T divestiture– Verizon/GTE merger; RBOC mergers
• Would the HHI be a valid measure of competitiveness?
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Another Look At Mergers
• Courtesy of Stephen Colbert
• http://video.aol.com/video-detail/the-new-atandt/792090619