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Announcements: Tuesday

Announcements: Tuesday. Breakout sections: the DeBeers case Next week: the Dupont case Remember to take Quiz 1 on Oncourse. Announcements: Thursday mng. Pd question—no change Last part of Market failure, missed because of fire alarm Remember to take Quiz 1 on Oncourse

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Announcements: Tuesday

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  1. Announcements: Tuesday • Breakout sections: the DeBeers case • Next week: the Dupont case • Remember to take Quiz 1 on Oncourse

  2. Announcements: Thursday mng. • Pd question—no change • Last part of Market failure, missed because of fire alarm • Remember to take Quiz 1 on Oncourse • Next week: the Dupont case

  3. Announcements: Thursday evng. • PD question---no change • Remember to take Quiz 1 on Oncourse • Next week: the Dupont case

  4. 5: Market Power

  5. What you will learn today... • Why your company and the government care about market power • How the government controls market power

  6. Market Power P P Demand Demand 5 Q Q A business with market power A business with no market power

  7. Two ways to increase profit P P Demand Demand MC0 P1 MC0 P0 P0 MC1 Q0 Q0 Q Q Q1 Reduce costs Increase the price

  8. Sources of Market Power • Unique products • Economies of scale • Network externalities • Anti-competitive strategies • Government entry barriers • ________________________ • ________________________ • ________________________ • ________________________ • ________________________

  9. What’s Wrong with Market Power? 1. Customers pay prices above marginal cost, and buy less— “deadweight loss” 2. Low-cost firms are kept out of the market—bad for them and consumers both 3. Higher costs “the lazy monopolist” 4. Rent-seeking 1. _______________________________ 2. _______________________________ 3. ________________________________ 4._________________________________

  10. Two Losses from Monopoly Price Monopoly profit Pmonop Deadweight loss Pcomp MC Demand Quantity Qmonop Qcomp

  11. What Should the Government Do About Monopolies?

  12. Sometimes monopoly may be unavoidable because costs are lowest if a single firm supplies the whole market. We call this a _____________________ Examples:________________________________________________________________________________________ natural monopoly electricity, telephone service, cable TV, water to homes

  13. Natural Monopoly $/Q 18 The monopoly price is ___, marginal cost is ___, and P=AC requires a price of ___. 5 Demand 10 18 Deadweight loss ___________________ 10 9 AC 5 MC Q 800 900 500 P=MC subsidies Govt. ownership government failure ________ _______________

  14. Rate of Return Regulation: P=AC • Find the value of the firm’s equity • Decide a fair rate of return on equity • Find the firm’s variable costs • Estimate an output price that gives the firm the fair rate of return on equity The rate of return is not guaranteed--only the price is, for a few years.

  15. 1. Did the sign-in sheet get around? 2. If you answered a question, bring up a notecard for me. MC Which area is deadweight loss? (a) B+C P (b) C (c) C+H A Pmon (d) C+D D E B (e) C+D+H+J C F H L G Write on a notecard: What does area A+B+C+G+H represent? Demand J K I Q Qmon

  16. Antitrust Law Having a monopoly is legal: creating one without creating social value is not Sherman Act (1890): No price-fixing, dividing up markets, cartels Clayton Act (1914): Mergers, exclusive dealing, tying, bundling, low pricing are illegal if done to monopolize

  17. Price fixing is illegal per se • Sotheby’s and Christie’s auctioneers (2001) • New York city school lunch suppliers (2001) • Oil rig workers (2001) (a private suit) • Those who are hurt by it can sue for treble damages

  18. Mergers • Firms apply for permission to merge • The Justice Department and Federal Trade Commission ask: Will this merger substantially lessen competition? • Often firms must divest portions of their business

  19. Why Did the Government Go After Microsoft?

  20. Bill Gates in 1994, on anti-trust law: "None of the people who run Microsoft's seven divisions are going to change what they do or think or forecast. Nothing. Nothing."

  21. A Justice Dept. Attorney: "It was foolish and provocative. It was like saying, 'I'm going to break the law. Catch me if you can.' "

  22. The Justice Department’s Accusations: • Bundling Internet Explorer with Windows and making it hard to use Netscape • Requiring computer makers who bought Windows for any of their machines to pay a royalty per machine whether they use Windows on it or not • Offering AOL to bundle AOL with Windows if AOL dropped Netscape

  23. What Happened • Microsoft decided to fight, not settle the suit • Judge Jackson found Microsoft guilty • On appeal, the higher court said that Jackson’s remedy was inappropriate • Settlement proposal: MS will stop using exclusive contracts and will charge uniform prices

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