Anti-Competitive Behavior Monopolies, Barriers to Entry and How to Construct Them

Barriers to Entry Monopolist needs a “barrier” (or obstacle) to entry so that potential competitors can’t get into the Monopolist’s market Monopolies earn + long-run and short-run profits that would “normally” attract new entrants (i.e. potential competitors) Long-run profits = 0 in competitive firms where any one can enter the market (no barriers)

How A Firm Could Limit/Reduce Competition Mergers Merging with a competitor can Reduce competition Possible to increase price without worrying about competitor’s offering a lowering price Rational for DOJ, FCC, FTC being involved and having to approve mergers

Are All Mergers Anti-Competitive? Conglomerate Merger of firms in unrelated industries Vertical Merger Merger of firms upstream/downstream from each other in production stream FCC: ownership of more than 1 media type Microsoft Horizontal Mergers Firms in the same industry Telecomm industry AT&T divestiture Verizon/GTE merger; RBOC mergers Would the HHI be a valid measure of competitiveness?

Reviewing Mergers Primarily aimed at preventing mergers or acquisitions that reduce competition FCC regulates communications media (newspapers, tv, telecomm, radio) FTC and DOJ regulate the rest

Where We’re Going How do we tell if a merger is anti-competitive? Market Concentration CR4: market share for the 4 largest firms Herfindahl Index (HHI): computed from the squares of the market shares Strategic behavior (how do they behave in the market place) Collusive: act together Non-collusive: act separately and/or stratgeicially

How do we tell? Market concentration refers to the size and distribution of firm market shares and the number of firms in the market. Economists use two measures of industry concentration: Four-firm Concentration Ratio The Herfindahl-Hirschman Index

Four-Firm Concentration Ratio The four-firm concentration ratio (CR4) measures market concentration by adding the market shares of the four largest firms in an industry. If CR4 > 60, then the market is likely to be oligopolistic.

Example Firm Market Share Nike 62% New Balance 15.5% Asics 10% Adidas 4.3%

The Herfindahl-Hirschman Index The Herfindahl-Hirschman index (HHI) is found by summing the squares of the market shares of all firms in an industry. Advantages over the CR4 measure: Captures changes in market shares Uses data on all firms

Example Firm Market Share Nike 62% New Balance 15.5% Asics 10% Adidas 4.3%

Example (cont’d) What happens if market shares are evenly distributed? Firm Market Share Nike 22.95% New Balance Asics Adidas

How do they determine whether a merger reduces competition? Herfindahl-Hirschman Index or HHI, measure of the size of firms in relationship to the industry Meant to be an indicator of the amount of competition sum of the squares of the market shares of each individual firm. decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite DOJ guidelines Mergers resulting in HHI > 1800 can be challenged

Figure 12.11 Four-Firm Concentration Ratio (CR4) for Selected Industries in 1997

Are All Mergers Equal? Conglomerate Vertical Merger Horizontal Mergers Merger of firms in unrelated industries Vertical Merger Merger of firms upstream/downstream from each other in production stream FCC: ownership of more than 1 media type Microsoft Horizontal Mergers Firms in the same industry Telecomm industry AT&T divestiture Verizon/GTE merger; RBOC mergers Would the HHI be a valid measure of competitiveness?