Lecture 24 - Announcements No Class Monday! MT grades are...

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Announcements No Class Monday!! MT grades are up. HW for ch. 15 due Monday (read the chapter). Key for MT2 will be up on Scholar on Tuesday Lectures: Ch 15 and start Ch 11 today and Weds, 12 on Weds-Friday, and 13 on Friday-Monday.
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Government Agencies that Enforce Antitrust Laws Federal Trade Commission (FTC) A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful “unfair” behavior, and to issue cease-and-desist orders to those found in violation of antitrust law. Antitrust Division (of the Department of Justice) is also empowered to act against violators of antitrust laws. It initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges (FTC cannot bring criminal charges). In general, the government does not like “anti-competitive” behavior. They want to make sure that industries don’t move too far from the “perfectly competitive” outcome. Two organization are responsible for this.
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What do the FTC and DOJ do? These two organizations keep an eye on all the industries in the US to make sure they are not doing anything “anticompetitive”, like: “Price-fixing” – when competitors get together and decide to raise the prices (remember cartels?) “Tying contracts” – making a customer buy something from someone else in order to be allowed to buy form you. “Exclusive dealing” – not letting your customers buy from a competitor.
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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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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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THE ROLE OF GOVERNMENT Department of Justice Merger Guidelines (revised 1984)
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This note was uploaded on 12/20/2011 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 24 - Announcements No Class Monday! MT grades are...

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