Industrial
Organization
Exam Two
Friday May 13
Spring 2011
.
A. Major Laws
1.
2. Clayton
Act 1914
3. Federal Trade
Commission Act 1914
B. Enforcement
Agencies
1. Department of Justice
2. FTC
3. private
4. states
C. Enforcement varies
1. stricter
periods
2. lax
periods
3. political
climate
a. Presidential
appointees
b. new laws and
amendments
c. public
sentiment
4. court
cases
a. precedent
b. economic theory
II. Monopolization
A. Sherman Action, Section Two
1. American Tobacco
a. dominant firm
created by mergers
b. antitrust case
(1911)
c. break-up
2. US Steel
a. dominant firm
created by mergers
b. antitrust case
c. not guilty
i) price umbrella allowed rivals to thrive
ii) US
Steel lost market share
B. Rule of Reason
1. Dominant market share alone
is not illegal
a. economies of
scale
b. superior
management
c. efficiency
2. Conduct
matters
3. Each case judged on
its specifics
III. Price Fixing
A. Sherman Action, Section One
1. Socony
Vacuum
a. gasoline
retailing
b. dancing partners
c.
“reasonableness” is not a defense: guilty
2. Ivy League Overlap Group
a. financial aid
coordination
b. antitrust
investigation
c. practice was
illegal
B. Per Se illegal
1. Price fixing by competitors
is broadly prohibited
2. Courts do not need to
consider reasonableness or efficiency arguments
3. Very clear standard
IV. Unions and Antitrust
A. Economics
1. monopoly
a. increase wage,
reduce number of workers
b. unemployment or
decrease wages in non-union sector
2. monopsony
a. buyer power
b. employer may
reduce number of workers (Q) to reduce wage (P)
c. MC derived from
labor supply curve
d. Q where MC = MR
(Marginal Revenue Product), P on supply curve
e. input P + Q
below efficient level
3. transactions
costs
a. negotiate
single contract with union
b. negotiate with
every individual
B. Antitrust—early years
1. Courts applied Sherman Act
to unions
2. Pullman
strike
3. wording
of law versus intent
C. Clayton Act Section Six
1. specifically
exempted unions from antitrust
2. permitted
collective bargaining, strikes, etc
D. Wagner Act (1935)
1. National Labor Relations
Board
2. protected
union rights
E. Taft Hartley amendment (1947)
1. restricted
union power
V. Mergers
A. Laws
1. Sherman Act Section Two
(1911)
a. prevents
mergers to create a monopoly
b. only prohibits
extreme instances
2. Clayton Action, Section
Seven (1914)
a. prevents
mergers that substantially lessen competition
b. level of
enforcement varies
i. at times, relatively small
horizontal mergers have been prohibited
ii.
Other times larger mergers have been allowed
3. Cellar
Kefauver Amendment (1950)
4. Hart Scott Rodino Act (1976)
a. requires prior
notification for large mergers
b. FTC and
Department of Justice review
c challenged
mergers usually dropped by firms before court case
B. Types of mergers
1. Horizontal
mergers
2. Vertical
mergers
3. Conglomerate
mergers
4. International
mergers
C. Cases
1. Brown
Shoe
a. relatively
small horizontal merger
b. some vertical
elements
c. divestiture
2. Coca-Cola Dr Pepper
a. highly
concentrated market
b. challenge
c. block merger
3.
At&t T-Mobile
a. concentrated
market
b. current investigation
(spring 2011)
D. Merger Guidelines
1. signal
to firms by FTC & Dept of Justice
2. large horizontal mergers in
concentrated markets are most likely to be challenged
a. if Herfindahl Index < 1500, mergers safe
b. if 1500<Herfindahl <2500
i) small mergers safe (change in H<100)
ii)
large mergers challenged (change in H>100)
c. if Herfindahl >2500
i) most mergers by big firms challenged
ii)
very small mergers safe (change in H<50)
E. Rule of Reason
1. market
power vs efficiency
a. substantially
lessen competition (price increases)
b. economies of
scale, management (cost decreases)
2. most
mergers are small, and legal
3. even
large horizontal mergers are considered on the specifics of the case
4. market
definition
a. product
b. geographic
VI. Antitrust and anticompetitive business
practices
A. Antitrust Statutes
1.
a. Section One
b. Restraint of
Trade
2. Clayton Act
a. Section Two
i) Price discrimination
ii)
that substantially lessens competition
b. Section Three
i) Tying
ii)
Exclusive dealing
iii)
that substantially lessens competition
3. Federal Trade Commission
a. Section Five
i) unfair methods of competition
ii)
deception
iii)
broad antitrust authority
B. Price discrimination
1. Necessary conditions
a. monopoly power
b. separate
segments by willingness to pay
c. prevent resale
2. Welfare
effects
a. less consumer
surplus
b. more profit
c. less deadweight
loss
3. Laws
a. Clayton Act,
Section two
b. Robinson Patman Act
4. Cases
a. Morton Salt
b. Volvo Trucks
C. Resale Price Maintenance
1. Vertical price fixing
a. manufacturer
sets retail price
b. Sherman Act,
Section One
c. reduces
competition between retailers
2. Cases
a. Dr Miles (1911)
- per
se violation
b. Leegin (2007)
i) makes efficiency argument: fixed prices = better service
ii)
Supreme Court changes to rule of reason standard
D. Predation
1. Strategic behavior aimed at causing
rivals to exit
2. Predatory pricing
a. pricing below cost
i) Areeda-Turner rule
ii) P < MC or
P< AVC
b. widespread
accusations in the airline industry
3. competing
theories
a. predation is
irrational
b. predation may be
rational, but it's too costly
c. reputation effect
i. predatory pricing as an investment
ii.
accept losses now
iii. discourage future competition
iv.
"irrational" behavior can maximize long-run
profits
E Tying
1. Tie-in
sales or bundling
2. requirement
to buy multiple products together
3. extend
market power from one product to tied product
4. restricted
by Clayton Act, Section Three
F. Unfair Business Practices
VII. Alternatives to Antitrust
A. Natural Monopoly
1. economies
of scale
2. a
single producer is most efficient
3. Monopoly
power
B. Public ownership
1. not
profit maximizing
2. operate
at efficient scale
3. keep
price low, quantity high
4. incentive
problems
5. widely
used in some countries
C. Economic Regulation
1. government
approves rates (prices), services, returns, investments
2. Federal and
State agencies
a. FCC
b. Public
Service Commissions or Public Utility Commissions
D. Price regulation
1. optimal
price may be below ATC
a. fixed
costs are often high in natural monopolies
b. P <
ATC: short run loss/ long run exit
2. Ramsey pricing
a. price
closest to marginal cost that allows firm to break even
b. average
cost pricing
3. asymmetric
information problems
a. firm may
not accurately reveal costs
b. incentive
to over-build
Industrial Organization and Public Policy