Cartel agreement they will not release new models

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Unformatted text preview: forget what I for merriment and diversion, promised. Suppose I develop but the conversation ends new car models and release them to the market next year. in a conspiracy against If my competitors hold to the the public, or in some contrivance to raise prices.” cartel agreement, they will not release new models next —Adam Smith year, and I will be the only car company with new models. My company should be able to take business away from our competitors. Instead of not competing with my competitors, why don’t I just try to run them out of business?” Each of the CEOs feels a strong monetary incentive to break the promise made with the other CEOs. Each is likely to break the agreement in the hope of getting rid of his or her competition, once and for all. If all three break the agreement out of self-interest, the agreement is gone. The three car companies are back where they started, competing with each other. 214 Chapter 8 Competition and Markets Is It Buyers Against Sellers or Sellers Against Sellers? The noneconomist may think that the best interests of consumers or buyers are pitted against the best interests of producers or sellers. They may believe that buyers want to buy high-quality products at low prices. Sellers want to produce cheap products and sell them for high prices. Whatever is good for buyers is bad for sellers, and whatever is good for sellers is bad for buyers. In short, buyers and sellers are on different sides of the fence; it’s sellers against buyers. Putting things this way makes it sound as if buyers and sellers are natural enemies and always at war. However, this view does not accurately represent the forces at work. The real war may not be between buyers and sellers but among sellers. Sellers may indeed be on one side of the fence and buyers on the other side, but not all the sellers on the same side of the fence are happy with one another. Some want to get rid of other sellers so that there will be fewer sellers on the selling side of the fence. General Motors wants to get rid of Toyota so there will be fewer car companies. Dell wants to get rid of HewlettPackard so there will be fewer computer manufacturers. NBC wants to get rid of CBS; and NBC, CBS, and ABC wish that cable television had never come to exist. Sellers may (initially) have interests opposed to those of consumers, but it does not mean sellers will get what they want at the expense of consumers. Often, what keeps sellers in line is other sellers—either other sellers currently in the market or sellers who 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 215 may one day enter the market. In other words, it is the threat of actual or potential competition from other sellers that ends up aligning the interests of sellers with buyers. It is competition between sellers that keeps downward pressure on prices (sellers want to underprice their competitors) and on costs (if sellers can lower their costs, then they have a better chance of outcompeting their competitors). QUESTION: What about underhanded, manipulative sellers who try to scam buyers? ANSWER: Probably all buyers have come across sellers that haven’t told them everything they would like to know about a product, or tried to get them to buy something they might not have wanted, or tried to cheat them in some way. Nothing we have said is meant to imply that unscrupulous sellers do not exist. What we are suggesting, though, is that what essentially keeps sellers in line, and trying to serve the buying public, is not a seller’s “big heart,” but the competition it faces from other sellers. In other words, fewer sellers and less competition would mean a lot more “underhanded, manipulative sellers” in the world. town it charges $2.50 for the same loaf of bread. Is this situation an example of price discrimination? Well, it could be, but not necessarily. In this town, the crime rate is higher on the east side than on the west side, which means the insurance rates for the company are higher on the east side of town. As a result, it may be more costly to sell bread on the east side of town than on the west side of town, and this higher cost is reflected in the higher price of bread on the east side of town. The difference in price here is not an example of price discrimination. When we have price discrimination, though, we need to ask two important questions: (1) Why would a seller want to price discriminate? (2) Under what conditions can a seller price discriminate? Why Discriminate? A seller would want to price discriminate if it increased total revenue. Look at the following three points on a market demand curve. Point Price Quantity demanded A B C $10 8 6 1 2 3 As you can see, price and quantity demanded move in the opposite direction according to the law of demand, which says that more is purchased at lower prices than at higher prices. price discrimination Practice by which a seller charges different prices (to different buyers) for the product it sells when the price differences do not reflect cost differences. Would CNN’s coverage of news events, such as Barack Obama...
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This document was uploaded on 01/16/2014.

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