announcements: tuesday
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Announcements: Tuesday. Breakout sections: the DeBeers case Next week: the Dupont case Remember to take Quiz 1 on Oncourse. Announcements: Thursday mng. Pd question—no change Last part of Market failure, missed because of fire alarm Remember to take Quiz 1 on Oncourse - PowerPoint PPT PresentationTRANSCRIPT
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Announcements: Tuesday Breakout sections: the DeBeers case Next week: the Dupont case
Remember to take Quiz 1 on Oncourse
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Announcements: Thursday mng.
Pd question—no change
Last part of Market failure, missed because of fire alarm
Remember to take Quiz 1 on Oncourse
Next week: the Dupont case
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Announcements: Thursday evng.
PD question---no change
Remember to take Quiz 1 on Oncourse
Next week: the Dupont case
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5: Market Power
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What you will learn today... Why your company and the
government care about market power
How the government controls market power
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Market Power
P
Q
P
QA business withmarket power
A business with no market power
Demand Demand5
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Two ways to increase profit
P
Q
Reduce costs
DemandP
Q
Increase the price
Demand
P0 P0
P1
Q1 Q0Q0
MC0 MC0
MC1
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Sources of Market Power
________________________ ________________________ ________________________ ________________________ ________________________
Unique products Economies of scale Network externalities Anti-competitive strategies Government entry barriers
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What’s Wrong with Market Power?
1. _______________________________
2. _______________________________
3. ________________________________
4._________________________________
1. Customers pay prices above marginal cost, and buy less—“deadweight loss”
2. Low-cost firms are kept out of the market—bad for them and consumers both
3. Higher costs “the lazy monopolist”
4. Rent-seeking
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Two Losses from Monopoly
Pcomp MC
DemandQuantity
Price
Qmonop Qcomp
Pmonop
Monopoly profit
Deadweight loss
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What Should the Government Do About Monopolies?
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Sometimes monopoly may be unavoidable because costs are lowest if a single firm supplies the whole market.
We call this a _____________________Examples:________________________________
________________________________________________________
natural monopoly
electricity, telephone service, cable TV, water to homes
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Natural Monopoly$/Q
Q
5
910
800 900
MC
AC
Demand
___________________
18
500
The monopoly price is ___,marginal cost is ___, and P=AC requires a price of ___.
185
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Deadweight loss
P=MC ________subsidiesGovt. ownership government failure_______________
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Rate of Return Regulation: P=AC
Find the value of the firm’s equity Decide a fair rate of return on equity Find the firm’s variable costs Estimate an output price that gives
the firm the fair rate of return on equity
The rate of return is not guaranteed--only the price is, for a few years.
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Which area is deadweight loss?
MC
Demand
A
B CD E
F
GH
IJ K
Q
P
Pmon
Qmon
(a) B+C
L
(c) C+H
(b) C
(d) C+D
(e) C+D+H+J
Write on a notecard: What does area A+B+C+G+H represent?
1. Did the sign-in sheet get around? 2. If you answered a question, bring up anotecard for me.
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Antitrust Law
Having a monopoly is legal: creating one without creating social value is not
Sherman Act (1890): No price-fixing, dividing up markets, cartels
Clayton Act (1914): Mergers, exclusive dealing, tying, bundling, low pricing are illegal if done to monopolize
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Price fixing is illegal per se
Sotheby’s and Christie’s auctioneers (2001)
New York city school lunch suppliers (2001)
Oil rig workers (2001) (a private suit)
Those who are hurt by it can sue for treble damages
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Firms apply for permission to merge
The Justice Department and Federal Trade Commission ask: Will this merger substantially lessen competition?
Often firms must divest portions of their business
Mergers
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Why Did the Government Go After Microsoft?
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Bill Gates in 1994, on anti-trust law:
"None of the people who run Microsoft's seven divisions are going to change what they do or think or forecast. Nothing. Nothing."
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A Justice Dept. Attorney:
"It was foolish and provocative. It was like saying, 'I'm going to break the law. Catch me if you can.' "
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The Justice Department’s Accusations: Bundling Internet Explorer with
Windows and making it hard to use Netscape
Requiring computer makers who bought Windows for any of their machines to pay a royalty per machine whether they use Windows on it or not
Offering AOL to bundle AOL with Windows if AOL dropped Netscape
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What Happened
Microsoft decided to fight, not settle the suit
Judge Jackson found Microsoft guilty
On appeal, the higher court said that Jackson’s remedy was inappropriate
Settlement proposal: MS will stop using exclusive contracts and will charge uniform prices