Foundations & Economics Flashcards
Sherman Act § 1
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”
Translated: Any agreement that restrains trade where parties agree not to compete in situations they otherwise would is illegal.
Sherman Act § 2
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony . . .”
Translated: Prohibits monopolization, attempt to monopolize, or an agreement to try to monopolize.
Not illegal to be a monopoly… only to monopolize.
Clayton Act § 4
Treble damages.
Primary remedial provision of antitrust law for private plaintiffs.
Antitrust Interpretation: Textualism
Starts and ends with the text itself (TransMissouri)
Problems:
1. Statutes don’t lend themselves to this approach
- No definitions (like modern statutes). Kind of need to know what monopolize/attempt to monopolize means.
2. Absurd outcome
- A vast majority of commercial contracts restrain trade.
- - Two contracting parts agree on one course of action and that contract normally restrains them from taking a competing action.
- - -If all agreements that restrain trade were illegal… most commercial contracts would be illegal.
Antitrust Interpretation: Purposivism
What it is and three popular stories
What was congress’s purpose drafting the statutes? Kind of like legislative history.
Three popular stories about what congress’ purpose was
1. Addresses social-political concenrs when companies get too big. Super wealthy companies will have too much power and influence information/politics/government.
- Current DOJ and FTC really really like this one.
- Promote consumer welfare by enhancing market efficiency.
- Minimize the sum of productive and allocative inefficiencies.
- True consumer welfare just looks at consumer, not producer.
- TL likes this one best, but doesn’t think it’s actually supported well. - Protection for small businesses.
- Small businesses can’t match big company efficiency/low prices.
- TL thinks this is the most historically supported one.
Antitrust Interpretation: Purposivism
Problems
- Completely indeterminate. Multiple conflicting goals.
- Can just pull on whichever purpose you want achieve the end result you’re looking for. (A ton of descrition on the enforcer)
- “Kind of like trying to find your friends at a large cocktail party—you see what you’re looking for.”
- Brown Shoe quote mentioning all three.
- “The sole consistency I can find with [antitrust law] is that the government always wins.” - Justice Potter Stewart
Antitrust Interpretation: Federal Common Law
This is the currently accepted theory of interpretation we use today.
Antitrust law is a species of federal common law guided by economics with an eye towards maximizing consumer welfare in light of economics (market output).
Begun by Addyston Pipe – Taft
- Agreements that restrain trade are reasonable (enforceable) if they are
1. Ancillary to some output enhancing venture; and
2. Necessary for the success of that venture.
Reservation price
The maximum price a person is willing to pay for an item (theoretically, the amount a person values it).
Ex: Artificial hip manufuacturer values 1 lb of plastic more than a bar cup manufacturer does – hip people have a higher reservation price.
What does the demand curve illustrate?
Illustrates the inverse relationship between quantity and the willingness to pay of the marginal consumer (last dude to buy at that price).
- The willingness to pay of the marginal consumer determines the shape of the demand curve.
What does the supply curve illustrate?
The supply curve illustrates a producer’s marginal cost (how much it costs them to produce the last unit).
- This increases with quantity because producers will use the most available (cheapest) resources first. When those run out, they will turn to the next cheapest.
- As long as producer can cover the cost of making one additional unit, they are going to be willing to make it.
- Marginal cost covers ALL costs. So if you are able to cover the cost of the operation (including your salary and everyone else’s), that’s successful!
What does the equilibrium point illustrate on supply & demand curve?
Where the demand cost (margin consumer) intersects with the supply curve (marginal cost).
The area between the supply curve and the demand curve to the left of the equilibrium point is surplus wealth.
- The marginal consumers to the left of intersection got a deal on the price because they would have paid more (gives them surplus).
- The producers made surplus wealth on the extra profit above the marginal cost to make each unit left of the equilibrium point.
Elasticity of Demand
Elasticity = The measure of price sensitivity.
High Elasticity = big change in demand with price change.
- The more elastic demand is, the flatter the demand curve is.
Low Elasticity = small/no change in demand with price change.
- The less elastic demand it, the steeper the demand curve.
Key determiner of elasticity = availability of close substitutes (fungibility).
Perfectly elastic product
Fungible.
Item so interchangeable because they are practically identical to each other. (flat demand curve)
Ex: Wheat
Inelastic demand
Non-fungible product
Product is so indispensable that a predetermined quantity will be demanded no matter what price is charged.
- Ex: HIV drug, insulin
Perfectly Inelastic (vertical demand curve)
- TL: doesn’t actually exist. There are always other options at a certain price.
- HIV drug way too expensive? Another option is to die.
Price discrimination
Why it’s desirable for producers and why it doesn’t work
price discrimination = charging people different amounts for the same product based on how much they value it.
Super desirable for producers because it would turn the consumer profit into producer profit.
Impossible though because of arbitrage (people who can get a favorable price turning it around and selling it at a discount for the people who got a crappy price)
