Eco 100 Lecture 7-3

1. Eco 100Lecture 7-3 Feb 20, 2009 Regulation: Monopoly, Cartels and Mergers

2. Colbert on Monopoly • http://www.colbertnation.com/the-colbert-report-videos/60116/march-08-2006/the-word---monopoly

3. 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

4. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

10. 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

11. 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

12. 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?

13. Another Look At Mergers • Courtesy of Stephen Colbert • http://video.aol.com/video-detail/the-new-atandt/792090619