Lecture 25 - Announcements New "skip" schedule...

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Announcements New “skip” schedule for MT3 posted on Blackboard HW for ch. 15 due Tonight! MT2 grades will be up by Thursday.
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Mergers and Regulation 2 U.S. merger waves in the past century Wave Years Dominant type of merger Examples Stimulus First Second Third Fourth 1887-1904 1916-1929 1948-1969 1982- present Horizontal Vertical Conglomerate Horizontal and vertical U.S. Steel, Standard Oil Copper refiner with fabricator Litton Industries Banking, tele- communications, health services, insurance Span national markets Stock market boom Diversification Span national and global markets, stock market boom
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3 of 38 THE ROLE OF GOVERNMENT REGULATION OF MERGERS (when firms combine) The government (FTC and DOJ) looks closely at all mergers, especially in oligopolistic markets. The primary screening tool they use to determine whether or not to challenge a merger is the HHI. If a merger is challenged, the government and the merging firms each have teams of lawyers and economists that argue their case. Herfindahl-Hirschman Index (HHI) A mathematical calculation that uses market share figures to determine whether or not a proposed merger will be challenged by the government.
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4 of 38 THE ROLE OF GOVERNMENT Calculation of a Simple Herfindahl-Hirschman Index for Four Hypothetical Industries, Each with No More Than Four Firms PERCENTAGE SHARE OF: HERFINDAHL- HIRSCHMAN INDEX FIRM 1 FIRM 2 FIRM 3 FIRM 4 Industry A 50 50 - - 50 2 + 50 2 = 5,000 Industry B 80 10 10 - 80 2 + 10 2 + 10 2 = 6,600 Industry C 25 25 25 25 25 2 + 25 2 + 25 2 + 25 2 = 2,500 Industry D 40 20 20 20 40 2 + 20 2 + 20 2 + 20 2 = 2,800 If the Herfindahl-Hirschman Index is less than 1,000, the industry is considered unconcentrated, and any proposed merger will go unchallenged by the Justice Department. If the index is between 1,000 and 1,800, the department will challenge any merger that would increase the index by over 100 points. Herfindahl indexes above 1,800 mean that the industry is considered concentrated already, and the Justice Department will challenge any merger that pushes the index up more than 50 points.
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5 of 38 THE ROLE OF GOVERNMENT Department of Justice Merger Guidelines (revised 1984)
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6 of 38 THE ROLE OF GOVERNMENT Historically, governments in market economies have assumed two basic and seemingly contradictory roles with respect to imperfectly competitive industries: (1) They promote competition and restrict market power, primarily through antitrust laws, and (1) they restrict competition by regulating some industries (price floors and ceiling are examples of this).
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7 of 38 ANTITRUST POLICY THE DEVELOPMENT OF ANTITRUST LAW: HISTORICAL BACKGROUND trust An arrangement in which shareholders of independent firms agree to give up their stock in exchange for trust certificates that entitle them to a share of the trust’s common profits. A group of trustees then operates the trust as a monopoly, controlling output and setting price.
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8 of 38 ANTITRUST POLICY LANDMARK ANTITRUST LEGISLATION
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This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 25 - Announcements New "skip" schedule...

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