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Lecture+26+December+13 - Todays agenda Pick u p hand out...

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Today’s agenda Remedies for market failure, concluded Overview and review Review session and exam information Pi ck u p han d o u t
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Antitrust Laws Sherman Act (1890) Bans price fixing and other “conspiracies in restraint of trade” Bans “monopolization” of an industry Clayton Act (1914) Bans mergers that “may substantially lessen competition” Bans other anti-competitive practices Federal Trade Commission Act (1914) Bans “unfair methods of competition” Created FTC Exemptions Unions, sports leagues, regulated industries, agricultural cooperatives
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Current U.S. merger guidelines Competitive Moderately concentrated Concentrated Pre-merger HHI Below 1000 1000 to 1800 Above 1800 Challenge merger if Δ HHI > 100 50
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Applying the merger guidelines Defining the relevant market Smallest set of producers (or geographic area) over which a hypothetical monopoly could significantly increase prices–say, by 5 to 10 percent Attempt to identify all the suppliers of close substitutes for the products of the merging firms Role of cross-elasticity of demand
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Applying the merger guidelines Coke sought to buy Dr. Pepper in late 1980s Legal under the Merger Guidelines? What’s the relevant market? All soft drinks » includes fruit juices and bottled water » highly competitive » HHI = 120 Carbonated soft drinks » highly concentrated Narrow market definition prevailed.
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Coke-Dr. Pepper merger analysis Initial market shares Coke = 39% Pepsi = 28% Dr. Pepper = 7% 7-Up = 6% RJR = 5% plus a competitive fringe (say 15 firms with a 1 % market share each) Pre-merger HHI = 39 2 + 28 2 + 7 2 + 6 2 + 5 2 + 15 (1 2 ) = 2430 Post-merger HHI = ( 39 + 7 ) 2 + 28 2 + 6 2 + 5 2 + 15 (1 2 ) = 2976 Increase in HHI = 546 FTC blocked the merger.
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The antitrust debate Case for vigorous antitrust enforcement Allocative efficiency of competitive behavior Case against antitrust enforcement Are we penalizing winners? Schumpeter’s hypothesis Are barriers to entry falling?
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Remedies for informational inefficiencies Signaling Warranties Regulation or public operation of markets
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Remedies for externalities Direct regulation Taxes and subsidies Auctioning of externality-generation rights
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Alternatives to markets for public goods Suppose a public good costs $C per unit. Each citizen has a fixed tax share t i . With a downward sloping MB curve, each citizen has single-peaked preferences over the amount of the public good to provide.
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How well do political mechanisms do?
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Utility for various voters
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Each voter has a most preferred level of the public good, taking account of taxes
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Suppose new proposals can replace the status quo if they defeat it by majority rule.
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Any proposal different from the median most preferred value can be defeated by a majority.
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How well do political mechanisms do?
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