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Public Policy in Private Markets

Public Policy in Private Markets. Introduction. Welcome to ResEc 453. Introduction What is this course about? How will this course work? Course Overview. Public Policy in Private Markets.

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Public Policy in Private Markets

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  1. Public Policy in Private Markets Introduction

  2. Welcome to ResEc 453 • Introduction • What is this course about? • How will this course work? • Course Overview

  3. Public Policy in Private Markets Basic Conditions: Technologies, Price Elasticity, Available substitutes, Type of Good, Location, Raw Materials Market Structure: # of Sellers and buyers, product differentiation, barriers of entry and exit, vertical integration Government Policies: Antitrust policy, regulation, taxes & subsidies, trade regulations, price controls, wage regulations, investment incentives, macroeconomic policies Conduct: Pricing strategies, product introduction, advertising, R & D, mergers, collusion Performance: Profits, market share, production efficiency

  4. Public Policy in Private Markets Basic Conditions: Technologies, Price Elasticity, Available substitutes, Type of Good, Location, Raw Materials Market Structure: # of Sellers and buyers, product differentiation, barriers of entry and exit, vertical integration Government Policies: Antitrust policy, regulation, taxes & subsidies, trade regulations, price controls, wage regulations, investment incentives, macroeconomic policies Conduct: Pricing strategies, product introduction, advertising, R & D, mergers, collusion Performance: Profits, market share, production efficiency

  5. Public Policy in Private Markets • IO: Market imperfections create market power • Monopoly • Oligopoly • Product differentiation • Costly entry • Transportation costs • Imperfect information • Heterogeneous technology • Advertising • Network externalities Is this market power significant? Is it being abused?

  6. Public Policy in Private Markets • Why do we care about market power? (use your i>clicker) • It is bad for firms because this is a measure of inefficiency • It is good for consumers because products made by firms with market power are of higher quality • It is good for society because better products are manufactured by firms with market power • It is inefficient for society because there is a deadweight loss with respect to the benchmark of perfect competition

  7. Public Policy in Private Markets • Other types of (extensive) regulation • Car safety • Food safety/quality • Agricultural products: price floors, trade restrictions • Minimum wage • Mortgage market

  8. Public Policy in Private Markets A couple of ways to look at this course: • Practical/Business: What does regulation mean for my business? • Social/citizen/public policy: Why do we need regulation and how much (an economist’s view)?

  9. Public Policy in Private Markets Example: • Microsoft: use of market power in OS market to control internet browser market • Should Microsoft be punished? Why? • How much? • What does this mean for my company (MS) now?

  10. Syllabus • Contact • Class Material • Kwoka & White: cases (required) • i>clicker, every day, starts counting on Feb. 2 • Waldman and Jensen: IO, policy, regulation (recommended)

  11. Syllabus • Website: • http://courses.umass.edu/resec453/ • Academic Honesty Policy: • Your own writing, citing properly, no cheating in exams, no bringing your friend’s clicker.

  12. Class Format

  13. Syllabus • Grades: • 3 Exams: 50% - 80% of total grade • 2 midterms (March 8, April 19) • Final • Homework: 5-8 assignments (1 page memos), 20% • Mandatory • Based on cases presented in class (more later)

  14. Syllabus • In-Class Work: • i>clicker activities, group work, classroom experiments, other in-class writing • 80% if you participate (blue questions), 20% based on correct response (orange questions). • 10% toward final grade optional. If you do poorly, exams weight increases by 10% • Enter response within 30 secs, be aware of academic honesty policy. • Register your i>clicker! Points start counting on Feb. 2.

  15. Syllabus • Casework: • Optional, 20% of your grade; if you opt out, exams weight is increased by 20% • Presentation based on an antitrust case • Group of 4-5 students; you come up with group formation. • 15 min pre-recorded video of your presentation • Day of “debate”: both videos are shown • Both parties have 5 minutes to reply, class votes

  16. Class Format • Grade calculation

  17. Class Overview • Competition Policies • Monopolization (e.g. predatory practices, tying, etc.) • Collusion • Mergers • Vertical Restraints • Time permitting: information policies, product quality regulation

  18. Public Policy in Private Markets • Do we have too much or too little government intervention in the US? (use your i>clicker) • Too much • Too little

  19. Class Overview • Rationales for government intervention: • Dominant belief: US favors free enterprise • Regulation: Why alter the operation of markets? • What is done when there is unhappiness about market outcomes? • Extent of government intervention varies with cycles (politics) • Government regulation is often criticized (e.g. mortgage crisis); how should things work? • However, regulation remains in place and is continously growing and evolving

  20. Class Overview: Competition Policies • Antitrust laws: how firms compete with each other (rules of the game) • What is legal? What is illegal? • What are the economics behind government intervention? • Focus: market power and its use in detriment of buyers and consumers

  21. Class Overview: Competition Policies • Example: Vitamin Cartel • Cartel involved vitamins, A, B, C and folic acid • Firms involved: Roche, BASF, Aventis, Solvay, Merck, Daiichi, Esai and Takeda • Firms admitted to participating in worldwide price fixing conspiracy over 10 years • 1999: in US, Canada and Australia, Roche & BASF pay $750 million in fines to settle suit. • 2001: in EU 8 companies pay approx. 1.2 bill

  22. Class Overview: Competition Policies • Example: Vitamin Cartel • Why was this illegal? • How did they conspire? • How did they get caught? • How are standards set? (what are the economic issues)

  23. Class Overview: Competition Policies • Example: Lysine Cartel • 1995: Archer Daniels Midland (ADM) investigated for price fixing by DOJ • 3 food ingredients: lysine, citric acid, high fructose corn syrup • ADM pleads guilty to criminal charges • $100 million to US government for criminal charges • Several millions in private damage suits to compensate customers. • Top executives sent to jail

  24. Class Overview: Types of regulation • Information Policies (time permitting) • How much information is needed? What format should this information have? • E.g. Nutrition labeling: recent proposals to have traffic lights on nutrition labels • Product Quality (time permitting) • Safety: crash ratings for cars, pesticide levels, etc. • What are the processing standards? Do we need this? (cost-benefit analysis)

  25. Goals for the course • Review of the existing laws and how they apply to business • Analyze the laws from an economics angle. Do they serve desirable goals? What are the alternatives?

  26. Public Policy in Private Markets • Do we have too much or too little government intervention in the US? (use your i>clicker) • Too much • Too little

  27. For next class • Check class website for class slides and important updates

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