Public Policy in Private
Markets
Introduction
Welcome to ResEc 453
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Introduction
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What is this course about?
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How will this course work?
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Course Overview
Public Policy in Private Markets
Basic Conditions: Technologies, Price Elasticity, Available substitutes,
Type of Good, Location, Raw Materials
Market Structure: # of Sellers and
buyers, product differentiation, barriers
of entry and exit, vertical integration
Conduct: Pricing strategies, product
introduction, advertising, R & D,
mergers, collusion
Performance: Profits, market share,
production efficiency
Government Policies:
Antitrust policy,
regulation, taxes &
subsidies, trade
regulations, price
controls, wage
regulations, investment
incentives,
macroeconomic policies
Public Policy in Private Markets
Basic Conditions: Technologies, Price Elasticity, Available substitutes,
Type of Good, Location, Raw Materials
Market Structure: # of Sellers and
buyers, product differentiation, barriers
of entry and exit, vertical integration
Government Policies:
Conduct: Pricing strategies, product
introduction, advertising, R & D,
mergers, collusion
regulation, taxes &
subsidies, trade
regulations, price
controls, wage
regulations, investment
incentives,
macroeconomic policies
Performance: Profits, market share,
production efficiency
Antitrust policy,
Public Policy in Private Markets
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IO: Market imperfections create market power
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Monopoly
Oligopoly
Product differentiation
Costly entry
Transportation costs
Imperfect information
Heterogeneous technology
Advertising
Network externalities
Is this market power
significant?
Is it being abused?
Public Policy in Private Markets
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Why do we care about market power? (use your
i>clicker)
A.
It is bad for firms because this is a measure of
inefficiency
It is good for consumers because products made by
firms with market power are of higher quality
It is good for society because better products are
manufactured by firms with market power
It is inefficient for society because there is a
deadweight loss with respect to the benchmark of
perfect competition
B.
C.
D.
Public Policy in Private Markets
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Other types of (extensive) regulation
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Car safety
Food safety/quality
Agricultural products: price floors, trade
restrictions
Minimum wage
Mortgage market
Public Policy in Private Markets
A couple of ways to look at this course:
1. Practical/Business: What does
regulation mean for my business?
2.
Social/citizen/public policy: Why do we
need regulation and how much (an
economist’s view)?
Public Policy in Private Markets
Example:
 Microsoft: use of market power in OS
market to control internet browser
market
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Should Microsoft be punished? Why?
How much?
What does this mean for my company
(MS) now?
Syllabus
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Contact
Class Material
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Kwoka & White: cases (required)
i>clicker, every day, starts counting on
Feb. 2
Waldman and Jensen: IO, policy,
regulation (recommended)
Syllabus
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Website:
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http://courses.umass.edu/resec453/
Academic Honesty Policy:
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Your own writing, citing properly, no
cheating in exams, no bringing your
friend’s clicker.
Class Format
Syllabus
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Grades:
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3 Exams: 50% - 80% of total grade
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2 midterms (March 8, April 19)
Final
Homework: 5-8 assignments (1 page
memos), 20%
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Mandatory
Based on cases presented in class (more later)
Syllabus
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In-Class Work:
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i>clicker activities, group work, classroom
experiments, other in-class writing
80% if you participate (blue questions), 20%
based on correct response (orange
questions).
10% toward final grade optional. If you do
poorly, exams weight increases by 10%
Enter response within 30 secs, be aware of
academic honesty policy.
Register your i>clicker! Points start
counting on Feb. 2.
Syllabus
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Casework:
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Optional, 20% of your grade; if you opt out,
exams weight is increased by 20%
Presentation based on an antitrust case
Group of 4-5 students; you come up with
group formation.
15 min pre-recorded video of your
presentation
Day of “debate”: both videos are shown
Both parties have 5 minutes to reply, class
votes
Class Format
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Grade calculation
Coursework
Dates
Exams (lowest is
dropped; 60% to best,
40% to 2nd best)
1st Mid-term (March 8);
2nd Mid-term (April 19);
Final Exam (see finals
schedule)
Homework (Best 5 out
of 6)
In-Class Work
Case Presentation
On “Case” days and
other select days
Almost every day
On “Case” days, but
presentation needs to be
sent in advance
Mandatory/Opt Weight
ional
Mandatory (but
50%, 60%,
70% or 80%
you drop the
lowest)
Mandatory
20%
Optional
Optional
10%
20%
Total
100%
Class Overview
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Competition Policies
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Monopolization (e.g. predatory practices,
tying, etc.)
Collusion
Mergers
Vertical Restraints
Time permitting: information policies,
product quality regulation
Public Policy in Private Markets
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Do we have too much or too little government
intervention in the US? (use your i>clicker)
A.
Too much
B.
Too little
Class Overview
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Rationales for government intervention:
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Dominant belief: US favors free enterprise
Regulation: Why alter the operation of markets?
What is done when there is unhappiness about
market outcomes?
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Extent of government intervention varies with cycles
(politics)
Government regulation is often criticized (e.g. mortgage
crisis); how should things work?
However, regulation remains in place and is continously
growing and evolving
Class Overview: Competition Policies
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Antitrust laws: how firms compete with
each other (rules of the game)
What is legal? What is illegal?
What are the economics behind
government intervention?
Focus: market power and its use in
detriment of buyers and consumers
Class Overview: Competition Policies
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Example: Vitamin Cartel
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Cartel involved vitamins, A, B, C and folic acid
Firms involved: Roche, BASF, Aventis, Solvay,
Merck, Daiichi, Esai and Takeda
Firms admitted to participating in worldwide
price fixing conspiracy over 10 years
1999: in US, Canada and Australia, Roche &
BASF pay $750 million in fines to settle suit.
2001: in EU 8 companies pay approx. 1.2 bill
Class Overview: Competition Policies
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Example: Vitamin Cartel
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Why was this illegal?
How did they conspire?
How did they get caught?
How are standards set? (what are the
economic issues)
Class Overview: Competition Policies
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Example: Lysine Cartel
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1995: Archer Daniels Midland (ADM)
investigated for price fixing by DOJ
3 food ingredients: lysine, citric acid, high
fructose corn syrup
ADM pleads guilty to criminal charges
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$100 million to US government for criminal charges
Several millions in private damage suits to
compensate customers.
Top executives sent to jail
Class Overview: Types of regulation
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Information Policies (time permitting)
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How much information is needed? What
format should this information have?
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E.g. Nutrition labeling: recent proposals to
have traffic lights on nutrition labels
Product Quality (time permitting)
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Safety: crash ratings for cars, pesticide levels,
etc.
What are the processing standards? Do we
need this? (cost-benefit analysis)
Goals for the course
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Review of the existing laws and how
they apply to business
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Analyze the laws from an economics
angle. Do they serve desirable goals?
What are the alternatives?
Public Policy in Private Markets
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Do we have too much or too little government
intervention in the US? (use your i>clicker)
A.
Too much
B.
Too little
For next class
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Check class website for class slides
and important updates