Section 10 Flashcards
Four-firm Concentration
Output of the four largest firms in an industry divided by the total industry.
20%, 20%, 20%, 20%, 10%, 10% = 20+20+20+20 = 80 - 80/100
Herfindahl Index
Sum of the squared percentage market share of all firms.
Take each firms percentage and square it, then add them
10%, 20%, 20% and 50% = 10(2)+20(2)+20(2)+50(2)
Game Theory
Process of analyzing the best way for two or more players to play a game where what one player does affects the other player. They don’t know what the other player will since they go at the same time.
One-Time Game
Firms select their optimal strategy in a single time period without regard to interactions in further time periods.
Also a simultaneous game and a positive sum game.
Simultaneous Game
Firms choose their strategies at the same time.
Positive Sum Game
Where the sum of two firms outcomes is positive.
Zero Sum Game
Where the sum is zero because one firms gain must equal the other firms losses.
Negative Sum Game
Where the sum of the two firms is negative.
Dominant Strategy
This is where the choice selected will be the best choice in all conditions - regardless of what the other firm does you will make more with this choice then the other choice.
Nash Equilibrium
The optimal strategy.
Outcome that neither of your want, but is based less risk then the other options given the other firms potential choice.
Credible Threat
A threat that is believable by the other firm. One that will convince them.
Must carry out punishment quickly.
Empty Threat
A threat that is not believable, so the other firm won’t listen to it.
Repeated Game
Where the game is repeated more then once, so it might be better to cooperate.
Sequential Game
Where one firm moves and the other firm can decide how to respond based on the first firms choices.
First-mover Advantage
Where your moving in first could prevent them from even playing because they know they will only see losses.
Concepts of a Game
- Rules
- Players
- Strategies
- Payoffs
Payoff Matrix
A representation that shows the possible payouts based on each potential outcome.
Prisoners Dilemma
Where the players will rat each other out because they fear being rated out themselves. So they could have done better by both of them not saying anything, but they don’t know since they weren’t able to collude.
Perfect Information in a Game
Each individual knows the payoffs and unable to collude.
Tit-for-tat
Where firms punish each other for not cooperating with strategies - so you do to them what they did to you in a future round.
Grim Trigger
Where a firm will seek to punish another firm forever if there is any noncooperation.
Asymmetric Information in a Game
Information is known to one party but not to another.
Price Match Guarantees
If you do this you can discourage other firms from reducing their prices in the first place.
Backward Induction in Games
Where you start at the right side and work left (consequences to choice)
Antitrust Policy
Laws and government actions designed to prevent monopoly and promote competition to achieve allocative efficiency.
Industrial Regulation
Government regulation of prices. Objective is to embody the public interest theory of regulation (which says that it is needed to keep the monopoly from charging high prices and hurting society)
Social Regulation
Government regulation of conditions of production, characteristics of a product, and impact of goods on society.
Allocative and Productive Efficiency
Allocative: P = MC
Productive: P = lowest ATC
Government Actions to Enforce Allocative Efficiency
- Regulatory Agencies - Designed to regulate natural monopolies
- Antritrust Laws - Inhibit or prevent growth of monopolies
- Ignore if they think it will be short lived or has negligible impact on competition.
Sherman Act of 1890
Outlawed:
- Restraint of trade - collusion, price-fixing, dividing up markets.
- Monopolies
Said that courts could issue injunctions to limit anticompetitive practices and break up monopolies.
Awarded treble damages - triple the damage costs has to be paid to those firms they hurt.
Clayton Act of 1914
Elaborated the Sherman Act.
Outlaws:
- Price discrimination
- Tying contracts - requiring to buy something else
- Purchase of stocks of a competing company
- Interlocking directorates
Blocks horizontal mergers that will lessen competition
Federal Trade Commission Act of 1914
Enforce anti-trust laws.
Issue cease-and-desist orders when it finds unfair methods of competition.
Wheeler-Lea Act of 1938
Gives FTC independent oversight of deceptive practices like misleading or misrepresentation.
Celler-Kefauver Act of 1950
Amended the Clayton Act prohibits a firm from purchasing the assets of another competing firm.
Interpretation of Antitrust
Two questions have risen:
- Should the focus be on monopoly behavior or monopoly structure
- How broadly should markets be defined in antitrust cases.
Rule of Reason
Only monopolies that restrain trade violate the Sherman Act - established in the 1920 U.S. Steel case.
90-60-30 Rule
90% of the market is a monopoly, 60% is probably a monopoly, 30% is not.
Active Antitrust Perspective
Competition is insufficient in some cases to achieve allocative efficiency.
Merger Types
Horizontal: Sell similar products in the same region (two banks)
Vertical: Sell at different stages of production (wheat farmer and a flower mill)
Upstream is input suppling
Downstream is output suppling
Conglomerate: Different industries.
Merger Blocking Conditions
Horizontal: If the new HHI index will be over 1800 and it added more then 100 points.
Vertical: Can be blocked if it could restrict distribution channels (like Barnes and Noble and a publisher)
Price-fixing
Strongly enforced.
AKA per se violations - because they are illegal in and of themselves and not subject to reason.
Price Discrimination
Rarely enforced except when used to block entry.
Tying Contracts
Strongly enforced, especially when done by dominate firms.
Natural Monopoly
When economies of scale are so extensive that a single firm can supply the entire market at a lower average cost.
Regulation of a Monopoly
- Government Ownership
2. Public regulation (or industrial regulation)
Legal Cartel Theory
Supplying regulation to firms who fear the impact of competition on their profits or even on their long-term survival. They desire regulation since it yields a legal monopoly.
Professional licensing is an example.
Deregulation
Produced large net benefits for consumers and society. Unleashed technical advances and lower costs.
Distinguishing Features of Social Regulation
- Applies to far more firms than industrial regulation
- Intrudes into the day-to-day production process to a greater extent
- Expanded rapidly during the same time in which industrial regulation has waned.
Structure of the Market
Number of firms in the market and the barriers to entry.
Performance Conduct
Behavior of firms and the resulting prices and efficiencies.
Market Concentration
Higher with fewer firms and lower with many.
Horizontal Merger Guidelines
Small change in concentration (less than 100 point increase) - no effect
Unconcentrated Markets (HHI below 1500) - no effect
Moderately Concentrated Markets (HHI between 1500-2500) - HHI of more then 100 warrants scrutiny
Highly Concentrated Markets (HHI above 2500) - Increase between 100-200 raises significant concerns. Over 200 presumed unlikely to allow.
