Eco 100
Lecture 7-3
Feb 20, 2009
Regulation:
Monopoly, Cartels and Mergers
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Colbert on Monopoly
• http://www.colbertnation.com/the-colbertreport-videos/60116/march-08-2006/theword---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-newatandt/792090619
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