Competition and Profits
P
Marg. Cost
Av. Cost
Market Price 1
Market Price 2
Market Price 3
q
© 2001 J. Douglass Klein
Monopoly and Profits
P
Marg. Cost
Av. Cost
B
D
C
A
E
Entire market demand
Marginal revenue
q
Welfare loss, or Allocative Inefficiency is shown by the gap
between Willingness-to-Pay (B) and Marginal Cost (A)
© 2001 J. Douglass Klein
Monopsony (one buyer takes advantage of many sellers)
P
Marginal Expense of Input (MEI)
Market Supply
B
D
P(comp)
P(monops)
A
Monopsonist demand
= M.B.
q
Welfare loss, or Allocative Inefficiency is shown by the gap
between Willingness-to-Pay (B) and Marginal Cost (A)
© 2001 J. Douglass Klein
The Bugaboo of Trusts - 1889
Page 145-146
“capital, like water, has again found its level.”
“Such is the law, such has been the law, and such promises to be the
law for the future; for, so far, no device has yet been devised that has
permanently thwarted its operation.
“Given freedom of competition, and all combinations or trusts that
attempt to extract from the consumer more than a legitimate return
upon capital and services, write the charter of their own defeat.”
© 2001 J. Douglass Klein
Page 146
The Bugaboo of Trusts - 1889
“Given freedom of competition…”
Page 148
“Provided capital is free to embark in competing lines.”
Page 149
“Only let them [the people of America] hold firmly to the
doctrine of free competition. Keep the field open.”
Page 150
“so long as all are free to compete”
© 2001 J. Douglass Klein
The Bugaboo of Trusts - 1889
Exactly what does Carnegie have to
say about the protective tariff in his
essay on Trusts?
© 2001 J. Douglass Klein
Carnegie on Wealth
“Formerly articles were manufactured at the
domestic hearth… The master and his apprentices
worked side by side … There was, substantially,
social equality…. The inevitable result of such a
mode of manufacture was crude articles at high
prices.” (p. 654)
© 2001 J. Douglass Klein
Carnegie on Wealth
“To-day the world obtains commodities of excellent
quality at prices which even the generation preceding
this would have deemed incredible… The price which
society pays for the law of competition… is great, but the
advantages are greater still.” (p. 654)
“We accept and welcome… as conditions to which we
must accommodate ourselves, great inequality of
environment, the concentration of business, industrial
and commercial in the hands of a few….” (p. 654-55)
© 2001 J. Douglass Klein
Carnegie on Wealth
1. What was Carnegie’s “Gospel of Wealth”?
2. Do you agree with it? (Why?)
Use Carnegie, and the Economist articles, and anything
else you choose.
Post in pairs to WEALTH.
© 2001 J. Douglass Klein
What to do with your wealth?
1. Leave to families
2. Leave to state
3. Administer during lifetime
© 2001 J. Douglass Klein
What to do with your wealth? (661)
“…the man of Wealth … [must] set an example of
modest, unostentatious living, shunning display or
extravagance … and … to consider all surplus
revenues which come to him simply as trust funds,
which he is called upon to administer.”
© 2001 J. Douglass Klein
Vanderbilt’s 5th Ave. Apartment
Butterfield, The American Past
© 2001 J. Douglass Klein
One Idea of Government
Which side of Bryan’s “two great ideas” does
Carnegie fall on?
Find examples from pages 660 to the end of “Wealth”.
© 2001 J. Douglass Klein
The workers’ opinion
Collective
Ownership
© 2001 J. Douglass Klein
Butterfield,
The American
Past
Trusts and Tariff
© 2001 J. Douglass Klein
Two ideas again
How are goods produced and
distributed in a capitalist
society?
People get what
they need,
How are goods produced and
distributed in a socialist
society?
People get what
they need.
Which is better, and why?
© 2001 J. Douglass Klein
and can afford.
Period.
Affluence
Define AFFLUENCE
“[T]here are two possible courses to affluence.
Wants may be ‘easily satisfied’ either by producing
much or desiring little…
“Adopting the Zen strategy, a people can enjoy an
unparalleled material plenty--with a low standard of
living.”
Marshall Sahlins, Stone Age Economics, 1972, pp. 1-2
© 2001 J. Douglass Klein
Outline
The Antitrust Laws
Sherman, Clayton, FTC
Early enforcement
First successes
Current status (WSJ handout)
© 2001 J. Douglass Klein
Monopoly, Competition, and Efficiency
In the 1880s and 1890s, JP Morgan & Co. re-organized, and
came to dominate the Boards of:
Reading RR, B&O, C&O, Santa Fe, Erie, Northern Pacific,
Southern.
“The investment bankers reduced the debt structures and
rationalized the distribution of routes; they also reduced
competition.” (Bryant & Dethloff, A History of American Business, 124)
© 2001 J. Douglass Klein
Clark on the Trusts
• First, we may prosecute with more
intelligence the effort to break up the trusts
into smaller corporations.
• Secondly, … abolish customs duties on all
articles manufactured by the trusts.
• Thirdly, … introduce an elaborate system of
price regulation.
• Fourthly, … put all monopolized industries
into the hands of the state…
• Is there no further recourse? …Give to
potential competition greater effectiveness.
-- J. B. Clark, “How to Regulate Trusts” (1900)
© 2001 J. Douglass Klein
The Sherman Antitrust Act - 1890
Section 1: Contracts, Combinations, and Conspiracies
in Restraint of Trade
= E.G.: PRICE FIXING; BID RIGGING
Explicit evidence (smoking gun) = guilt
Per se illegal
Section 2: Monopolization and Attempts to
Monopolize
= DOMINANT MARKET SHARE;
GAINED
Judged under the Rule of Reason
© 2001 J. Douglass Klein
UNREASONABLY
The Sherman Antitrust Act - 1890
Some early cases:
1895 Knight Sugar
1904 Northern Securities
1911 Standard Oil
1911 American Tobacco
1920 U.S. Steel
1945 Alcoa
© 2001 J. Douglass Klein
U.S. Steel
Martin, Industrial Economics
© 2001 J. Douglass Klein
Monopoly, Competition, and Efficiency
In the Chicago School (conservative) view,
and in Carnegie’s view, competition takes
place on a higher plane than at the single
market or industry level. There is
competition for investor dollars, and for
consumer dollars. No firm is insulated from
©this
2001 J. Douglass
levelKleinof competition.
Auerbach,
Competition: The Economics
of Industrial Change, 58
Microsoft could maximize short-run
profits by charging relatively high
prices for its products and allowing
its market position to dwindle over
time -- or it could charge relatively
low prices and maintain, or even
expand, its market share over time.
-- Becker & Murphy, WSJ, 2/26/01
© 2001 J. Douglass Klein
Predatory Pricing
Profit
A. Hamilton’s view
Predatory
Pricing
Smith’s view
Normal
Time
US Steel; Alcoa; Microsoft
© 2001 J. Douglass Klein
The End – 1 (Monopoly & Antitrust, 1998)
Regulators ponder Conrail takeover
Two makers of phone gear join forces
Intel and the threat of low-cost chips: Despite monopoly position, company seems
highly vulnerable
Browning-Ferris approached by Allied Waste Industries with proposed merger
Is big tobacco reeling? Maybe not; it wins new rounds in court
Travelers agreed to invest $1.6 billion in Nikko Securities … latest move to make
Travelers into a global powerhouse
Ten Asian shipping lines are under investigation for unauthorized price setting
United Health to acquire Humana, Inc. $5.5 billion deal thins patients’ choices
MCI to sell Internet unit amid chill in merger review
The hows and whys of FTC action against Intel
Much of Europe eases its rigid labor laws, and temps proliferate
Boeing will phase out production of its MD11 wide-body jet after merger
NAFTA reality check: trucks, trains, ships face costly delays
Trustbuster Joel Klein, once viewed as timid, comes on like a tiger
© 2001 J. Douglass Klein
The End – 2 (Monopoly and Antitrust, Winter, 2001)
Claritin and Schering-Plough: A Prescription for Profit
Market Insight: Microsoft's Future, in Court and the Markets
U.S. Court Ruling Lets Cable Giants Widen Their Reach
VeriSign May Get Control of .com Registrations Until '07
Democracy's Tricky Radio Signal (Congress's move to kill low-power radio
stations)
New Directors for Mexico Oil Monopoly
United Flight Attendants Threaten To Strike Because of USAir Deal
Wall St. Banks Sued Over Initial Offerings
Drive by the Phillips auction house to break up the decades-old duopoly of
Sotheby's and Christie's.
Jurors Find Mitsubishi Guilty Of Aiding a Price-Fixing Scheme for Graphite
Electrodes
© 2001 J. Douglass Klein
Bryan’s Two Ideas
Federalist
Whig
Republican
Democratic
© 2001 J. Douglass Klein
Few; wealthy, business,
Washington aristocracy; Protection;
Hamilton
“What’s good for GM is good for
Webster
the country;”
McKinley laissez faire toward business;
Reagan
Capital gains tax cuts; free trade;
“W”
Trickle-down
Jefferson
Calhoun
Jackson
Bryan
FDR
Kennedy
Many, masses, farmers, workers,
consumers, the poor;
Free trade (for consumers);
regulation of railroads; antitrust;
Welfare programs; Labor law;
Tax credits for children;
Protection (for workers)