Chapter 3

Question 1

Structure-Conduct-Performance Paradigm (SCPP) see page 63 in text

Answer 1

Structure -> Conduct -> Performance
^ ^
Govt. Policy

Question 2

SCPP- Conduct

Answer 2

Conduct- policies (a. pricing, b. advertising, c. r&d)
• Dotted line is advertising may give more control, but it could be an entry barrier
o Detergent Industry- Soap Opera ( sponsored by detergents)
• R&D – more monopolistic co is the more money you can get?; more concentrated the industries the firms do not do more R&D

Question 3

SCPP- Performance

Answer 3

Performance- what economic results to you get?
• a. Efficiency- objective, start with basic condition, scarcity
o Allocative – allocation of resources always allocate more (resources) anytime one prod is more profitable than the other
o Productive – produce something at the lowest average cost

b. Technical Progress- the idea that things are going to change and you need a way to respond
1. the idea of dynamic efficiency (static efficiency – at a certain point you make x” and that is efficient)
a. as the conditions change you need a way to dynamically respond

Question 4

SCPP- Government Policy

Answer 4

• a. Antitrust- affects the structure of markets
o Focus is structure
o Mergers if FTC or DOJ come out against co, trying to prevent market concentration
o b. Regulatation If regs say you cant make certain prod claims- affects product differentiation
o Entry barriers – Alcoa plants, govt built plants and sold them to other firms, not alcoa
o Conduct – regus pricing, advertising claims, and govt. policy (r&d

Question 5

SCPP - Structure

Answer 5

o a Concentration. B. Product diff. C. Entry barriers
The structure of the market leads to certain types of conduct; how does it performance measure to economic efficiency?
o Mergers change structure of the market; smaller market with a larger firm
 CR(sub)4 = how to measure size and strength of the firms
 Structure and Entry Barriers – more important than it used to be ; Ex. Alcoa monopoly
• If its easy for others to enter the mkt it affects conduct and performance

Question 6

Federal Antitrust Statutes -What they outlaw- Sherman Act

Answer 6

1. Sect. 1 : Prohibits contracts, combinations and conspiracies in restraint of trade (i.e.- prohibits price fixing)
2. Section 2: Monopolization, attempts to monopolize and combinations or conspiracies to monopolize
3. Left a lot of unanswered questions – what does congress mean by ‘monopolization’ – Act is too vauge; govt. didn’t win a case until 1904
4. Not effective by itself

Question 7

Federal Antitrust Statutes -What they outlaw- Clayton Act

Answer 7

)-an effort to spell out more clearly what was illegal- enforced by DOJ

1. Purpose- “ to substantially lessen competition or tend to create a monopoly in any line of commerce”
   a. This still didn’t fully explain – left a lot for interpretation
   i. Price Discrimination- charging diff. prices to diff. customers that are not based upon differences in cost.
2. Ex: Pittsburgh Plus- charged factory price+ freight from Pittsburgh
   ii. Exclusive + Tying Contracts – usually together, but diff. things.
3. Exclusive- In order to buy something you have to agree not to buy anything from the competitor; or have to buy a certain amount b4 you can buy from competitor
4. Tying- require you when you buy one item to buy something in addition; cant buy one w/out the other
   iii. Mergers- does it substantially lessen competition?

Question 8

Federal Antitrust Statutes -What they outlaw- FTC Act

Answer 8

• The FTC Act (1914)- est. FTC; other agency that deals w/mergers and price fixing
• Cellar-Kefauver Act (1950)- closed loophole; cant merge if it were to substantially lessen competition by purchasing assets
• Hart-Scott-Rodino (1976)- Required prior notice to be given to the govt. of mergers

Question 9

Federal Antitrust Statutes -Enforcement Agencies

Answer 9

• DOJ- mainly dealing with the criminal aspects
• FTC- mainly dealing w/ criminal aspects; not a court, but can be appealed in court
• Civil suits- private cases, proving that harm was done, not guilty

Question 10

Federal Antitrust Statutes -Remedies

Answer 10

• Jail – individuals
• Fines- not that discouraging; tends to be a small percentage
• Divestiture- AT&T (telephone monopoly “Ma-Bell”); breaking up into smaller firms
o May in include an agreement to get rid of certain assets
• Treble damages- damages measured as the excess payments made by customers over what prices would have been in the absence of the conspiracy; Only in civil cases- triple damages
o Have to be appropriately measured