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Chapter 13

Chapter 13. Limiting Market Power: Regulation and Antitrust. . . . the one law you can’t repeal is supply and demand. WILLIAM SAFIRE. Monopoly Power Versus Mere Size. Economies of scale Savings Through increases in quantities produced Increase in input: X% Output increase by > X%

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Chapter 13

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  1. Chapter 13 Limiting Market Power: Regulation and Antitrust . . . the one law you can’t repeal is supply and demand. WILLIAM SAFIRE

  2. Monopoly Power Versus Mere Size • Economies of scale • Savings • Through increases in quantities produced • Increase in input: X% • Output increase by > X% • Monopoly / market power • Firm - earn high profits • Increase prices • Keep them high

  3. Monopoly Power Versus Mere Size • Monopoly power: undesirable • High prices • Reduce wealth of consumers • Resource misallocation • Obstacle to efficiency & innovation • Monopoly & oligopoly • Threat public interest: monopoly power

  4. 1. Antitrust Laws and Policies • Antitrust policy • Laws & programs • Prevent • Deliberate creation of monopoly • Powerful firms - “anticompetitive practices”

  5. Table 1 Basic antitrust laws

  6. Measuring Market Power: Concentration • Concentration of an industry • Share of total sales / assets • By largest firms • Highly concentrated industry • Few firms • Large shares • Unconcentrated industry • Many small firms

  7. Measuring Market Power: Concentration • Concentration ratio • Measure: market power • Percentage of industry’s output • By four largest firms • Herfindahl-Hirschman Index (HHI) • Measure: market power • Add together • Squares of market shares - firms in industry

  8. Measuring Market Power: Concentration • HHI • Range • 10,000 – monopoly • 0 – near perfect competition • HHI < 1,000 • Unconcentrated market • HHI > 1,800 • Highly concentrated market

  9. Measuring Market Power: Concentration • Increase concentration • Very low concentration ratio • Firms – no market power • Successful price collusion • Facilitate market power • Reduce number of firms • Easy & inexpensive exit & entry • No change in market power

  10. Table 2 Concentration ratios and Herfindahl-Hirschman indexes for selected manufacturing industries, 2002

  11. Measuring Market Power: Concentration • Evidence of concentration • Antitrust laws • Some effectiveness • OR • Technical developments • Market forces

  12. Table 3 The historical trend in concentration in manufacturing industries, 1901–1997

  13. Crucial Problem for Antitrust • Vigorous competition • Actions - similar to monopoly power • Tough on rivals • Force competitors out of business • Legitimate competition • Consumers benefit • Monopoly power • Consumers pay

  14. Anticompetitive Practices & Antitrust • Predatory pricing • Threat - keep a competitor out • Price – low • Profitable only if • Rival - driven from market • Abuse via bottlenecks • Facility / product - single firm • Competitors – need it for their products

  15. Anticompetitive Practices & Antitrust • Bundling • Pricing arrangement • Supplier - substantial discounts • Buy several products • Price of bundle • Less than sum of prices • Legitimate • Price cut = cost saving • Illegitimate • Cost saving < price cut

  16. Use of Antitrust Laws: Prevent Competition • Misuse of antitrust laws • Prevent competition • Firm • Unable to compete effectively • Sue to seek protection

  17. 2. Regulation • Regulation of industry • Process – law • Restricts / controls • Specified decisions • Limit market power • Protect: public from exploitation • Carried out: special government agency • Acts as a court

  18. Some Objectives of Regulation • Market power • Economies of scale • Economies of scope • Economies of scope • Savings • Simultaneous production • Many different products • Cheaply

  19. Figure 1 Economies of scale B A C $7 Price and Cost per Unit 5 AC P MC 0 50 100 Quantity Produced per Year

  20. Some Objectives of Regulation • If monopoly production – cheapest • Free competition • Not sustainable • Industry • Natural monopoly • Society • Not want competition

  21. Some Objectives of Regulation • Universal service • Available to everyone • Reasonable prices • Cross-subsidization • Sell one product at a loss • Higher profits on another products

  22. Two Key Issues that face Regulators • Regulators – select prices • Best serve public interest • May cause financial problems for firms • No excessive profits • Incentive for innovation & efficiency

  23. Two Key Issues that face Regulators • Marginal vs. Average cost pricing • If P=MC: firms – bankrupt • MC < AC • Option 1: P = MC • Use public funds • Option 2: P = AC • Problem – multiproduct firm • Option 3: Price-cap approach

  24. Two Key Issues that face Regulators • Sources of inefficiency • Paperwork & legal proceedings • Resource misallocation • No excessive profits • Incentives for efficiency • Price caps • Ceiling price

  25. Pros and Cons of “Bigness” • Cons “Big firms” • Monopoly power • Pros “Big firms” • Benefit general public • Advantage of big business • Cost minimization • Resources & motivation for innovation

  26. Deregulation • Effects of deregulation • Prices – lower • Local services • Entry – increase number of firms • Unions – badly hurt • Product quality – better • Safety • Profits and wages

  27. Figure 2 A “Hub-and-Spoke” airline routing pattern F E D H A B C

  28. Figure 3 U.S. airline accident rates, 1960–2005

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