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1423class4 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 4 1
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Outline • Definitions • Markets and Concentration • Barriers to Entry • Contestable Markets • Dominant Firm theory • Strategic competition and limit pricing • Entry Deterrence • Brand Proliferation 2
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Definition of a Market • This is not as easy as it seems. • Identification of real markets can be done by: – physical characteristics of firms’ products – the technology/raw materials employed – the cross price elasticity of demand between products – statistical definition (SIC figures) • SIC system changed to NAICS in 1999. The example of Alcoa (aluminium ingots) and DuPont (cellophane wrappings) 3
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Measurement of Concentration • Concentration Ratio: CRx, or mkt share of largest x firms. – Easy to measure • Herfindahl index: H= Σ s i 2 , where s i =mkt share of ith firm. – Ideal properties – Numbers equivalent property Herfindahl Hirschman Index: HHI= Σ(100 s i ) 2 –H HI= Σ(100 s i ) 2= 10000 Σ s i 2 – Used by the Department of Justice Anti-Trust Division – Note connection with N-firm Cournot Model –( P-MC i )/P=s i / η; Σ s i [(P-MC i )/P]=HHI / 10000* η
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Scale Economies and Entry Barriers • Why do markets become concentrated? – Scale economies and Entry barriers Scale Economies related to LRAC and plant and multiplant economies. – Diseconomies, usually of management, set in eventually. Under Free entry, N participants, π ( n e ) is the profit to each firm if there are N firms (excluding entry costs). K is the fixed cost of entry. – This implies that entry occurs up to the point that: π ( n e ) K > 0 > ( n e + 1) K 5 r r
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Barriers to Entry Difficult to define and can arise for a host of innocent, regulatory and strategic reasons. Bain : defines barriers to entry (BTE) in terms of outcome – they exist if firms make super normal profits. Stigler : BTE are costs of production incurred by new entrants which are not incurred by incumbents.
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1423class4 - 14.23 Government Regulation of Industry Class...

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