Markets,Regula.on,andtheCompe..veProcess

Global Antitrust Institute

Kahuku, Hawaii

November 2015

1October30,2012

EfficiencyofMarketAlloca9on

•  MaximizingSocietalWelfare–  Inequilibrium,thesizeofthepie–producer+consumersurplus–ismaximized.

•  Pricesasinforma9on– Marketsproduceinforma9oninformofprices–  Pricessendsignalstoproducersandconsumersaboutrela9vescarci9es

–  Incen9vestoenter–  Pricecoordinatesac9vi9esamongstrangers

2

MarketDemandCurve

3

Price

Quantity

D = Marginal Value Curve

DemandCurve

4

Price

Quantity

D = Marginal Value Curve

q1

DemandCurve

5

Price

Quantity

D = Marginal Value Curve

q1

p1

LAWOFDEMANDàInverserela9onshipbetweenprice&quan9tydemanded,ceterisparibus

6

Price

Quantity

D = MV

q1

p1

q2

p2

LAWOFDEMANDàderivedfromra9onalbehavioramongtradersaSemp9ngtomaximizeu/lity

7

Price

Quantity

D = MV

q1

p1

q2

p2

LAWOFSUPPLYàderivedfromra9onalbehaviorandtheideaofopportunitycost

8

Price

Quantity

Supply = Marginal Cost Curve

LAWOFSUPPLYàexpandingsupplyinthismarket,pullsmoreinputsfromothers

9

Price

Quantity

Supply = MC

q1 q2

Equilibrium

Law 123 * GMU Lecture 1 10

p*

Quantity

MC

MV

Price

q*

p*,q*proper9es

•  spontaneity– compe99veauc9onprocess

•  pricesignalsvalue– minimumdemand– maximumsupply

•  coordinatesmaximumtotalvalue– marginalcondi9ons–  resourcesusedforeveryunitwhereMV>MC

Law 123 * GMU Lecture 1 11

MaximizingSocialWelfare(=CS+PS)

12

p*

Quantity

MC

MV

Price

q*

ConsumerSurplus(=WTP–price)

13

p*

Quantity

MC

MV

Price

q*

CS

Producers’Surplus(=price–oppcost)

14

p*

Quantity

MC

MV

Price

q*

PS

SocialWelfare(=CS+PS)

15

p*

Quantity

MC

MV

Price

q*

PS

CS

SoHere’sthePie(SW=CS+PS)

16

p*

Quantity

MC

MV

Price

q*

PS

CS

PriceRegula9on&BarrierstoEntry

•  Pricesasinforma9on– Marketsproduceinforma9oninformofprices– Pricessendsignalstoproducersandconsumersaboutrela9vescarci9es

– Pricecoordinatesac9vi9esamongstrangers

•  Welfareimplica9onsofregula9on– Barrierstoentry

17

Price

Quantity

S

D

5

6 12

Shortage 12 - 6 = 6

If price is too low…

Price

Quantity

S

D

9

14

Surplus 14 - 6 = 8

6

If price is too high…

Impact of Price Restrictions •  Priceceiling:maximumlegalpriceBELOWtheequilibriummarketprice•  Examples:gaspricesin70s,rentcontrol,pricegouginglaws,prohibi9onsoncompensa9onfororgandona9on

•  Pricefloor:minimumlegalpriceABOVEtheequilibriummarketprice•  Examples:minimumwage

Price

Quantity

S

D

P*

Q*

Ceiling Price

Qs

PF

Impact of a Price Ceiling

Shortage

Qd

Non Pecuniary Price

Full Economic Price

Pecuniary Price

ImpactofaPriceFloor

Federal Minimum Wage Relative to Wages in Manufacturing, 1938–2009

July22,2015 EconomicIns9tuteforLawProfessors 24

MinimumWage•  Only3.9%ofhourlyworkersearnatorbelowminimumwage•  48%are16-24.•  65%workpart9me.•  23%haveyettograduatehighschool•  31%haveahighschooldegree•  37%havehighschooldegreeandsomecollege

25

0% 2% 4% 6% 8%

10% 12% 14% 16% 18%

Perc

enta

ge o

f Wor

kfor

ce

Age Cohort

Percentage of Workers Earning at or Below Minimum Wage by Age

At or below Minimum Wage

Empiricales9matesoftheimpactoftheminimumwageonemployment

–  Decreaseinemploymentofteenagers:elas9cityofteenageemploymentwithrespecttochangesintheminimumwagebetween-0.2to-0.6.

–  Decreasesinemploymentoflow-wageworkersthatearnatorneartheminimumwagebeforeitisincreased:elas9cityoftheiremploymentwithrespecttochangesintheminimumwageis-0.12.

–  ButseeCard&Krueger(AER,1994):smallorevenslightlyposi9veimpactonemployment.

–  Butbutsee:Neumark&Wascher(AER2000):Card&Kruegerresultsturnnega9veusingdifferentdata.

26

BarrierstoEntry:Occupa9onalLicensing

•  Requirementofgovernmentcer9fica9ontoenterprofession•  Openmandateseduca9onalrequirementsandtest:

–  E.g.,8monthsofeduca9ontobecosmetologistinNY;3yearstobecomeasecurityguardinMichigan

•  ¼USworkersneedalicense—5xmorethan1950s•  Examples:

–  Doctors–  Den9sts–  Lawyers–  Florists

27

EffectofLicensingRequirement

28

Wages

Number of Workers

Supply2

EntryLimit

Supply1

W2

W1

Q2 Q1

Demand

Innova9ontoLowerCosts

31

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

Innova9ontoImproveProducts

32

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

MV’

SocialGains–butInefficient?

33

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

MV’

Supposenewoutput=qi

34

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

MV’

qi

sonewprice=pi

35

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

MV’

qi

pi

Dead-weightloss

36

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

MV’

qi

pi

But“innova9on”surplusdominates

37

p*

Quantity

MC

MV

Price

q*

PS

CS MC’

MV’

qi

pi

F.A.Hayek

•  ‘Nobodycanbeagreateconomist

whoisonlyaneconomist—andIameventemptedtoaddthattheeconomistwhoisonlyaneconomistislikelytobecomeanuisanceifnotaposi9vedanger’

--F.A.Hayek

HayekonMarketPricesandInforma9on

F.A.Hayek,TheUseofKnowledgeinSociety,35Am.Econ.Rev.519(1945).

•  Itismorethanametaphortodescribethepricesystemas

akindofmachineryforregisteringchange,orasystemoftelecommunica9onswhichenablesindividualproducerstowatchmerelythemovementofafewpointers,asanengineermightwatchthehandsofafewdials,inordertoadjusttheirac9vi9estochangesofwhichtheymayneverknowmorethanisreflectedinthepricemovement.

HayekonMarketPricesandInforma9on

F.A.Hayek,TheUseofKnowledgeinSociety,35Am.Econ.Rev.519(1945).

•  Wemustlookatthepricesystemassuchamechanismforcommunica9nginforma9onifwewanttounderstanditsrealfunc9on.

•  Themostsignificantfactaboutthissystemistheeconomy

ofknowledgewithwhichitoperates,orhowliSletheindividualpar9cipantsneedtoknowinordertobeabletotaketherightac9on.

•  [O]nlythemostessen9alinforma9onispassedonandpassedononlytothoseconcerned.

NYCWithSurgePricing

NYCWithSurgePricing

NYCWithoutSurgePricing

UBERinLow-IncomeNeighborhoodsinLosAngeles

Sydney,December14,2015

Transitional Gains Trap (Tullock 1975)

•  The new generation faces the costs of the licensing requirements. –  These costs must be factored in to any notion of

lifetime returns, considering those people’s alternative life paths.

•  Even if the subsequent generations earn only normal returns, they have as much incentive to oppose abolition of licensing as the first generation had to support its imposition – transitional gains trap.

•  The beneficiaries end with the first generation of privilege, yet occupational licensing policies continue one generation after another because of transitional interests.

Adver9singasNon-PriceCompe99on•  What is the impact of the grade cards on

– consumers’ restaurant choices – restaurants’ hygiene quality – incidence of foodborne illness?

•  Why did some restaurants have high hygiene

scores before grade cards? •  Do grade cards change the behavior of restaurant

inspectors?

Impact of Grade Cards on Consumers’ Choices

Impact of Grade Cards on Consumers’ Choices

•  Before grade cards, restaurant revenue is insensitive to changes in inspection scores

•  After grade cards, revenue responds to grades

– A grade: + 5.7% – B grade: + 0.7% – C grade: – 1.0%

•  Total industry revenue increases by 3.3% ($250

million increase in LA)

Impact of Grade Cards on Average Inspection Scores

•  BEFORE AFTER DIFF •  ---------------------------------------------------------------- •  ALL restaurants 81.6 88.7 7.1 •  Chains 87.1 92.6 5.5 •  Zagat guide 78.4 88.6 10.2 •  Chinese food 78.4 86.3 7.9 •  Mexican food 82.5 88.9 6.4 •  Pizza 84.2 89.7 5.5 •  Low income areas 80.5 88.5 8.0 •  ------------------------------------------------------------------ •  •  All entries are statistically different from the

mean for all restaurants

Aretheseimprovementschangesinactualqualityoffoodarisingfromgradecards?Ordotheyrepresentchangesinbehaviorofinspectors?Somethingelse?

•  Compare the number of food-related hospitalizations in LA with –  non-food-related hospitalizations in LA –  food-related hospitalizations outside LA

•  Hospitalizations for which 90% or more of cases are transmitted via food. This includes

Salmonella Shigellosis Amebiasis E. coli Tularemia Brucellosis Listeriosis Other food-poisoning

Impact of Grade Cards on Foodborne Illnesses

Impact of Grade Cards on Foodborne Illnesses