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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