Lecture+26+December+13

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 P i c k u p h a n d o 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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Suppose a public good costs $C per unit. Each citizen has a fixed tax share t i . With a downward sloping MB curve, each
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This note was uploaded on 10/25/2011 for the course ECONOMICS 01:220:102 taught by Professor Prusa during the Fall '10 term at Rutgers.

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

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