14 - Government In the Marketplace Flashcards
Reasons why free markets may fail to provide socially efficient quantities.
Market Power
Externalities
Public Goods
Incomplete Information
Antitrust Policy
Attempts to eliminate deadweight loss created when market power exists by making activities such as price-fixing and collusion illegal.
First addressed by the Sherman Antitrust Act of 1890.
Antitrust Law
Sherman Antitrust Act 1890
Sec. 1 - addresses collusive behavior
Sec. 2 - addresses monopoly practices
The Rule of Reason
The practice or size of company does not ensure legal penalties. It is the intent behind the practice that matters. A firm must take explicit action to lessen competition before it can be found guilty of section 2 violation.
Clayton Act 1914
Robinson-Patman Act 1936
Rule of Reason was a bit ambiguous.
Clayton attempted to an example of price discrimination.
Robinson attempted to clarify Clayton - outlining the extent that price discrimination is defined.
Clayton Act details
20 Sections
Illegal to:
Hide kickbacks as commissions or fees
Offer rebates to select customers
Engage in exclusive supplier dealings unless supplier adds furnishings (private branding)
Fix prices
Reduce market choice through acquisition
Celler-Kefauver Act 1950
Strengthened Sec. 7 of Clayton Act by further constraining merger and acquisition activity.
Herfindahl-Hirschman Index HHI
10,000 times the sum of the squared market shares of firms in market.
Increase <100 or new total <1,500 usually ok
Totals from 1,500 to 2,500 and a change >100 may pose concerns.
Totals >2500 or changes >200 usually lead to investigation.
HHI and Efficiency
Mergers may be allowed if firms can show greater efficiencies lead to better opportunities for customers.
However, per Horizontal Merger Guidelines “…efficiencies almost never justify a merger to full or near-monopoly.
Notification
DOJ Antitrust Division and FTC are charged with enforcing regs.
Hart-Scott-Rodino Antitrust Act 1976 requires parties to potential acquisition or merger must report if combined fun value exceeds a threshold of currently about $70M
30 day waiting period. DOJ or FTC may request more info 3% of the time.
Agencies have another 30 days to evaluate.
Concerns usually settled out if court.
Price Regulation
Used by the govt to allow a monopoly but reduce cost or deadweight loss to society.
If regulated price set below MC=D, then deadweight loss will be greater than under monopoly AND there will be a shortage.
If regulated price is set below the monopolist’s ATC, the firm will exit. Or, if govt subsidizes, the firm will become lazy and wasteful.
Economies of Scale
When economies of scale are large it may be best for a monopoly to serve the market. Setting regulated price at socially economic level may eliminate deadweight loss.
However - if the cost to regulate the price ceiling is greater than deadweight loss saved, it may be best for society to leave the market unregulated.
Externalities
Costs to parties that are not part of the production or consumption of a good or service.
Pollution
Because customers do not face external costs directly, the are allowed to buy too much at too low a price. The firm’s supply curve is too low. The money customers save plus money of non-customers must pay for the external costs.
Permits and rights
Fixed number of permits or rights become a barrier to entry unless they can be sold. Allowing sale motivates current owners to improve technology to reduce externality production and need for the permit. It also allows other firms to enter.
Social MC
Simply
MCsocial =
MCinternal + MCexternal
Socially efficient QTY is where price = MCsoc
Competitive QTY is where price = MCint
Monopoly QTY is where MR = MCint
Public goods
Nonrival - the use by one person does not prevent others from benefit.
Nonexclusionary - everyone can get it!
Total demand is the vertical sum of all benefactor’s demand functions.
Socially efficient qty is found where MC = total demand
