class 11 whiteboard antitrust, fall, 2012 monopolization under sec. 2 randal c. picker leffmann...
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Class 11 WhiteboardAntitrust, Fall, 2012
Monopolization under Sec. 2
Randal C. PickerLeffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/[email protected] © 2000-12 Randal C. Picker. All Rights Reserved.
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Strategic Entry Hypo: Capacity Competition
Starting Point Incumbent (I) owns single cement plant in
town. Transportation costs preclude shipments
from other locations. I earns profits of $25 per period.
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Strategic Entry Hypo: Capacity Competition
Decisions I can leave its plant capacity alone or
expand it. A potent entrant (E) can build a cement
plant and go into competition with I or build a general manufacturing plant and not compete with I.
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Incumbent Profits
I would earn: $25 profits per period from the cement plant if it
did not expand it and E entered M. $30 profits per period from the cement plant if it
expanded the plant and E entered M. $10 profits per period from the cement plant if it
did not expand and E entered C. $5 profits per period from the cement plan if it
expanded and E entered C.
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Entrant Profits
E would earn $10 profits per period from manufacturing.
E would earn: $15 profits from entering C if I doesn’t
expand its plant. $5 profits from entering C if I expands its
plant.
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Profits Table
We can represent this in the following table:
Incumbent
Entrant
Not Exp
Expand
Enter M Instead
(25,10)(10,15)
(5,5) (30,10)
1. Suppose that E were going to …, what would I do?
2. Suppose that I were going to …, what would E do?
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Simultaneous Moves Suppose that E and I make their decisions at
the same time: what would happen? Two (Pure-Strategy) Nash Equilibria Exist
If E were going to enter, I would not expand; if I were going to not expand, E would enter. These are strategically consistent decisions, or they form a Nash equilibrium.
If E were going to Man, I would expand, and if I were going to expand, E would Man. This is a 2nd Nash equilibrium.
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Substantial Uncertainty
With two Nash equilibria, we can have little confidence in how this game will be resolved.
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E Moves First
Suppose E moves first:
I expands I not I expands I not exp
E opens man E enters cement
1
2 3
(10,30) (10,25) (5,5) (15,10)Payoffs: (E, I)
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Results
Use backwards induction to solve this game. At node 3, I will not expand. At node 2, I will expand. At node 1, if E enters, putting I at node 3, I
will not expand, and E will get 15; if E manufactures instead, putting I at node 2, I will expand, and E will get 10.
E will enter the cement business.
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I Moves First
Suppose I moves first:
E opens M E enters C E opens M E enters C
I expands I doesn’t expand
1
2 3
(30,10) (5,5) (25,10) (10,15)Payoffs: (I, E)
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Results
Use backwards induction to solve this game. At node 3, E will enter C. At node 2, E will manufacture instead. At node 1, if I doesn’t expand, putting E at
node 3,E will enter, and I will get 10; if I expands instead, putting E at node 2, E will manufacture, and I will get 30.
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Results
In the Model I will expand. Order resolves the uncertainty, and
determines the outcome. In reality
Is this Alcoa and should we think of it as an SA2 violation?