Chapter 7: Monopolistic Competition and Oligopoly Objectives of chapter 7: Monopolistic competition Price and output in monopolistic competition Monopolistic competition and efficiency Product variety Oligopoly and its behavior- a game theory overview Three oligopoly models Oligopoly and advertising Oligopoly and efficiency Chapter 7 by TITH Seyla

What Is Monopolistic Competition? Monopolistic competition is a market structure in which A large number of firms compete. Each firm produces a differentiated product. Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry. Chapter 7 by TITH Seyla

Monopolistic Competition Large Number of Firms The presence of a large number of firms in the market implies: Each firm has only a small market share and therefore has limited market power to influence the price of its product Each firm is sensitive to the average market price, but no firm pays attention to the actions of others. So no one firm’s actions directly affect the actions of others. Collusion, or conspiring to fix prices, is impossible. Chapter 7 by TITH Seyla

What Is Monopolistic Competition? Product Differentiation A firm in monopolistic competition practices product differentiation if the firm makes a product that is slightly different from the products of competing firms. Chapter 7 by TITH Seyla

What Is Monopolistic Competition? Competing on Quality, Price, and Marketing Product differentiation enables firms to compete in three areas: quality, price, and marketing. Quality includes design, reliability, and service. Because firms produce differentiated products, the demand for each firm’s product is downward sloping. But there is a tradeoff between price and quality. Because products are differentiated, a firm must market its product. Marketing takes the two main forms: advertising and packaging. Chapter 7 by TITH Seyla

Monopolistic Competition Entry and Exit There are no barriers to entry in monopolistic competition, so firms cannot make an economic profit in the long run. Examples of Monopolistic Competition Producers of audio and video equipment, clothing, jewelry, computers, and sporting goods operate in monopolistic competition. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition The Firm’s Short-Run Output and Price Decision A firm that has decided the quality of its product and its marketing program produces the profit-maximizing quantity at which its marginal revenue equals its marginal cost (MR = MC). Price is determined from the demand curve for the firm’s product and is the highest price that the firm can charge for the profit-maximizing quantity. Figure 14.1 shows a firm’s economic profit in the short run. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition The firm in monopolistic competition operates like a single-price monopoly. The firm produces the quantity at which MR equals MC and sells that quantity for the highest possible price. It earns an economic profit (as in this example) when P > ATC. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Profit Maximizing Might Be Loss Minimizing A firm might incur an economic loss in the short run. Here is an example. At the profit-maximizing quantity, P < ATC and the firm incurs an economic loss. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Long Run: Zero Economic Profit In the long run, economic profit induces entry. And entry continues as long as firms in the industry earn an economic profit—as long as (P > ATC). In the long run, a firm in monopolistic competition maximizes its profit by producing the quantity at which its marginal revenue equals its marginal cost, MR = MC. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition As firms enter the industry, each existing firm loses some of its market share. The demand for its product decreases and the demand curve for its product shifts leftward. The decrease in demand decreases the quantity at which MR = MC and lowers the maximum price that the firm can charge to sell this quantity. Price and quantity fall with firm entry until P = ATC and firms earn zero economic profit. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Figure 14.3 shows a firm in monopolistic competition in long-run equilibrium. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Monopolistic Competition and Perfect Competition Two key differences between monopolistic competition and perfect competition are: Excess capacity Markup A firm has excess capacity if it produces less than the quantity at which ATC is a minimum. A firm’s markup is the amount by which its price exceeds its marginal cost. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Firms in monopolistic competition operate with excess capacity in long-run equilibrium. Firms produce less than the efficient scale—the quantity at which ATC is a minimum. The downward-sloping demand curve for their products drives this result. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Firms in monopolistic competition operate with positive markup. Again, the downward-sloping demand curve for their products drives this result. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition In contrast, firms in perfect competition have no excess capacity and no markup. The perfectly elastic demand curve for their products drives this result. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Is Monopolistic Competition Efficient? Price equals marginal social benefit. The firm’s marginal cost equals marginal social cost. Price exceeds marginal cost, so marginal social benefit exceeds marginal social cost. So the firm in monopolistic competition in the long run produces less than the efficient quantity. Chapter 7 by TITH Seyla

Price and Output in Monopolistic Competition Making the Relevant Comparison The markup that drives a gap between price and marginal cost arises from product differentiation. People value product variety, but product variety is costly. The efficient degree of product variety is the one for which the marginal social benefit of product variety equals its marginal social cost. The loss that arises because the quantity produced is less than the efficient quantity is offset by the gain that arises from having a greater degree of product variety. Chapter 7 by TITH Seyla

Product Development and Marketing Innovation and Product Development We’ve looked at a firm’s profit-maximizing output decision in the short run and in the long run, for a given product and with given marketing effort. To keep making an economic profit, a firm in monopolistic competition must be in a state of continuous product development. New product development allows a firm to gain a competitive edge, if only temporarily, before competitors imitate the innovation. Chapter 7 by TITH Seyla

Product Development and Marketing Innovation is costly, but it increases total revenue. Firms pursue product development until the marginal revenue from innovation equals the marginal cost of innovation. The amount of production development is efficient if the marginal social benefit of an innovation (which is the amount the consumer is willing to pay for the innovation) equals the marginal social cost that firms incur to make the innovation. Chapter 7 by TITH Seyla

Product Development and Marketing Advertising A firm with a differentiated product needs to ensure that customers know that its product differs from its competitors. Firms use advertising and packaging to achieve this goal. A large proportion of the price we pay for a good covers the cost of selling it. Advertising expenditures affect the firm’s profit in two ways: They increase costs, and they change demand. Chapter 7 by TITH Seyla

Product Development and Marketing Selling Costs and Total Costs Selling costs, like advertising expenditures, fancy retail buildings, etc. are fixed costs. Average fixed costs decrease as production increases, so selling costs increase average total costs at any given quantity but do not affect the marginal cost of production. Selling efforts such as advertising are successful if they increase the demand for the firm’s product. Chapter 7 by TITH Seyla

Product Development and Marketing Advertising costs might lower the average total cost by increasing equilibrium output and spreading their fixed costs over the larger quantity produced. Here, with no advertising, the firm produces 25 units of output at an average total cost of $60. Chapter 7 by TITH Seyla

Product Development and Marketing With advertising, the firm produces 100 units of output at an average total cost of $40. The advertising expenditure shifts the ATC curve upward, but the firm operates at a higher output and lower average total cost than it would without advertising. Chapter 7 by TITH Seyla

Product Development and Marketing Advertising might also decrease the markup. In Fig. 14.6(a), with no advertising, demand is not very elastic and the markup is large. In Fig. 14.6(b), advertising makes demand more elastic, increases the quantity, and lowers the price and markup. Chapter 7 by TITH Seyla

Product Development and Marketing Using Advertising to Signal Quality Why do Coke and Pepsi spend millions of dollars a month advertising products that everyone knows? One answer is that these firms use advertising to signal the high quality of their products. A signal is an action taken by an informed person or firm to send a message to uninformed people. Chapter 7 by TITH Seyla

Product Development and Marketing Coke is a high quality cola, and Oke is a low quality cola. If Coke spends millions on advertising, people think “Coke must be good.” If it is truly good, when they try it, they will like it and keep buying it. If Oke spends millions on advertising, people think “Oke must be good.” If it is truly bad, when they try it, they will hate it and stop buying it. Chapter 7 by TITH Seyla

Product Development and Marketing So if Oke knows its product is bad, it will not bother to waste millions on advertising it. And if Coke knows its product is good, it will spend millions on advertising it. Consumers will read the signals and get the correct message. None of the ads need mention the product. They just need to be flashy and expensive. Chapter 7 by TITH Seyla

Product Development and Marketing Brand Names Why do firms spend millions of dollars to establish a brand name or image? Again, the answer is to provide information about quality and consistency. You’re more likely to overnight at a Holiday Inn than at Joe’s Motel because Holiday Inn has incurred the cost of establishing a brand name and you know what to expect if you stay there. Chapter 7 by TITH Seyla

Product Development and Marketing Efficiency of Advertising and Brand Names To the extent that advertising and selling costs provide consumers with information and services that they value more highly than their cost, these activities are efficient. Chapter 7 by TITH Seyla

What Is Oligopoly? Oligopoly is a market structure in which Natural or legal barriers prevent the entry of new firms. A small number of firms compete. Chapter 7 by TITH Seyla

What Is Oligopoly? Barriers to Entry Either natural or legal barriers to entry can create oligopoly. Figure 15.1 shows two oligopoly situations. In part (a), there is a natural duopoly—a market with two firms. Chapter 7 by TITH Seyla

What Is Oligopoly? In part (b), there is a natural oligopoly market with three firms. A legal oligopoly might arise even where the demand and costs leave room for a larger number of firms. Chapter 7 by TITH Seyla

What Is Oligopoly? Small Number of Firms Because an oligopoly market has a small number of firms, the firms are interdependent and face a temptation to cooperate. Interdependence: With a small number of firms, each firm’s profit depends on every firm’s actions. Cartel: A cartel and is an illegal group of firms acting together to limit output, raise price, and increase profit. Firms in oligopoly face the temptation to form a cartel, but aside from being illegal, cartels often break down. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The Kinked Demand Curve Model In the kinked demand curve model of oligopoly, each firm believes that if it raises its price, its competitors will not follow, but if it lowers its price all of its competitors will follow. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models Figure 15.2 shows the kinked demand curve model. The firm believes that the demand for its product has a kink at the current price and quantity. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models Above the kink, demand is relatively elastic because all other firm’s prices remain unchanged. Below the kink, demand is relatively inelastic because all other firm’s prices change in line with the price of the firm shown in the figure. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The kink in the demand curve means that the MR curve is discontinuous at the current quantity—shown by that gap AB in the figure. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models Fluctuations in MC that remain within the discontinuous portion of the MR curve leave the profit-maximizing quantity and price unchanged. For example, if costs increased so that the MC curve shifted upward from MC0 to MC1, the profit-maximizing price and quantity would not change. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The beliefs that generate the kinked demand curve are not always correct and firms can figure out this fact. If MC increases enough, all firms raise their prices and the kink vanishes. A firm that bases its actions on wrong beliefs doesn’t maximize profit. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models Dominant Firm Oligopoly In a dominant firm oligopoly, there is one large firm that has a significant cost advantage over many other, smaller competing firms. The large firm operates as a monopoly, setting its price and output to maximize its profit. The small firms act as perfect competitors, taking as given the market price set by the dominant firm. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models Figure 15.3 shows10 small firms in part (a). The demand curve, D, is the market demand and the supply curve S10 is the supply of the 10 small firms. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models At a price of $1.50, the 10 small firms produce the quantity demanded. At this price, the large firm would sell nothing. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models But if the price was $1.00, the 10 small firms would supply only half the market, leaving the rest to the large firm. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The demand curve for the large firm’s output is the curve XD on the right. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The large firm can set the price and receives a marginal revenue that is less than price along the curve MR. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The large firm maximizes profit by setting MR = MC. Let’s suppose that the marginal cost curve is MC in the figure. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The profit-maximizing quantity for the large firm is 10 units. The price charged is $1.00. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models The small firms take this price and supply the rest of the quantity demanded. Chapter 7 by TITH Seyla

Two Traditional Oligopoly Models In the long run, such an industry might become a monopoly as the large firm buys up the small firms and cuts costs. Chapter 7 by TITH Seyla

Oligopoly Games Game theory is a tool for studying strategic behavior, which is behavior that takes into account the expected behavior of others and the mutual recognition of interdependence. The Prisoners’ Dilemma The prisoners’ dilemma game illustrates the four features of a game. Rules Strategies Payoffs Outcome Chapter 7 by TITH Seyla

Oligopoly Games Rules The rules describe the setting of the game, the actions the players may take, and the consequences of those actions. In the prisoners’ dilemma game, two prisoners (Art and Bob) have been caught committing a petty crime. Each is held in a separate cell and cannot communicate with each other. Chapter 7 by TITH Seyla

Oligopoly Games Each is told that both are suspected of committing a more serious crime. If one of them confesses, he will get a 1-year sentence for cooperating while his accomplice get a 10-year sentence for both crimes. If both confess to the more serious crime, each receives 3 years in jail for both crimes. If neither confesses, each receives a 2-year sentence for the minor crime only. Chapter 7 by TITH Seyla

Oligopoly Games Strategies Strategies are all the possible actions of each player. Art and Bob each have two possible actions: 1. Confess to the larger crime. 2. Deny having committed the larger crime. With two players and two actions for each player, there are four possible outcomes: 1. Both confess. 2. Both deny. 3. Art confesses and Bob denies. 4. Bob confesses and Art denies. Chapter 7 by TITH Seyla

Oligopoly Games Payoffs Each prisoner can work out what happens to him—can work out his payoff—in each of the four possible outcomes. We can tabulate these outcomes in a payoff matrix. A payoff matrix is a table that shows the payoffs for every possible action by each player for every possible action by the other player. The next slide shows the payoff matrix for this prisoners’ dilemma game. Chapter 7 by TITH Seyla

Oligopoly Games Chapter 7 by TITH Seyla

Oligopoly Games Outcome If a player makes a rational choice in pursuit of his own best interest, he chooses the action that is best for him, given any action taken by the other player. If both players are rational and choose their actions in this way, the outcome is an equilibrium called Nash equilibrium—first proposed by John Nash. Finding the Nash Equilibrium The following slides show how to find the Nash equilibrium. Chapter 7 by TITH Seyla

Bob’s view of the world Chapter 7 by TITH Seyla

Bob’s view of the world Chapter 7 by TITH Seyla

Art’s view of the world Chapter 7 by TITH Seyla

Art’s view of the world Chapter 7 by TITH Seyla

Equilibrium Chapter 7 by TITH Seyla

Oligopoly Games An Oligopoly Price-Fixing Game A game like the prisoners’ dilemma is played in duopoly. A duopoly is a market in which there are only two producers that compete. Duopoly captures the essence of oligopoly. Cost and Demand Conditions Figure 15.4 on the next slide describes the cost and demand situation in a natural duopoly. Chapter 7 by TITH Seyla

Oligopoly Games Part (a) shows each firm’s cost curves. Part (b) shows the market demand curve. Chapter 7 by TITH Seyla

Oligopoly Games This industry is a natural duopoly. Two firms can meet the market demand at the least cost. Chapter 7 by TITH Seyla

Oligopoly Games How does this market work? What is the price and quantity produced in equilibrium? Chapter 7 by TITH Seyla

Oligopoly Games Collusion Suppose that the two firms enter into a collusive agreement. A collusive agreement is an agreement between two (or more) firms to restrict output, raise the price, and increase profits. Such agreements are illegal in the United States and are undertaken in secret. Firms in a collusive agreement operate a cartel. Chapter 7 by TITH Seyla

Oligopoly Games The strategies that firms in a cartel can pursue are to Comply Cheat Because each firm has two strategies, there are four possible combinations of actions for the firms: 1. Both comply. 2. Both cheat. 3. Trick complies and Gear cheats. 4. Gear complies and Trick cheats. Chapter 7 by TITH Seyla

Oligopoly Games Colluding to Maximize Profits Firms in a cartel act like a monopoly and maximum economic profit. Chapter 7 by TITH Seyla

Oligopoly Games To find that profit, we set marginal cost for the cartel equal to marginal revenue for the cartel. Chapter 7 by TITH Seyla

Oligopoly Games The cartel’s marginal cost curve is the horizontal sum of the MC curves of the two firms and the marginal revenue curve is like that of a monopoly. Chapter 7 by TITH Seyla

Oligopoly Games The firm’s maximize economic profit by producing the quantity at which MCI = MR. Chapter 7 by TITH Seyla

Oligopoly Games Each firm agrees to produce 2,000 units and each firm shares the maximum economic profit. The blue rectangle shows each firm’s economic profit. Chapter 7 by TITH Seyla

Oligopoly Games When each firm produces 2,000 units, the price is greater than the firm’s marginal cost, so if one firm increased output, its profit would increase. Chapter 7 by TITH Seyla

Oligopoly Games One Firm Cheats on a Collusive Agreement Suppose the cheat increases its output to 3,000 units. Industry output increases to 5,000 and the price falls. Chapter 7 by TITH Seyla

Oligopoly Games For the complier, ATC now exceeds price. For the cheat, price exceeds ATC. Chapter 7 by TITH Seyla

Oligopoly Games The complier incurs an economic loss. The cheat makes an increased economic profit. Chapter 7 by TITH Seyla

Oligopoly Games Both Firms Cheat Suppose that both increase their output to 3,000 units. Chapter 7 by TITH Seyla

Oligopoly Games Industry output is 6,000 units, the price falls, and both firms make zero economic profit—the same as in perfect competition. Chapter 7 by TITH Seyla

Oligopoly Games Possible Outcomes If both comply, each firm makes $2 million a week. If both cheat, each firm makes zero economic profit. If Trick complies and Gear cheats, Trick incurs an economic loss of $1 million and Gear makes an economic profit of $4.5 million. If Gear complies and Trick cheats, Gear incurs an economic loss of $1 million and Trick makes an economic profit of $4.5 million. The next slide shows the payoff matrix for the duopoly game. Chapter 7 by TITH Seyla

Payoff Matrix Chapter 7 by TITH Seyla

Trick’s view of the world Chapter 7 by TITH Seyla

Trick’s view of the world Chapter 7 by TITH Seyla

Gear’s view of the world Chapter 7 by TITH Seyla

Gear’s view of the world Chapter 7 by TITH Seyla

Equilibrium Chapter 7 by TITH Seyla

Oligopoly Games Nash Equilibrium in Duopolists’ Dilemma The Nash equilibrium is that both firms cheat. The quantity and price are those of a competitive market, and the firms make zero economic profit. Other Oligopoly Games Advertising and R&D games are also prisoners’ dilemmas. An R&D Game Procter & Gamble and Kimberley Clark play an R&D game in the market for disposable diapers. Chapter 7 by TITH Seyla

Oligopoly Games The payoff matrix for the Pampers Versus Huggies game. Chapter 7 by TITH Seyla

Oligopoly Games The Disappearing Invisible Hand In all the versions of the prisoners’ dilemma that we’ve examined, the players end up worse off than they would if they were able to cooperate. The pursuit of self-interest does not promote the social interest in these games. Chapter 7 by TITH Seyla

Oligopoly Games A Game of Chicken In the prisoners’ dilemma game, the Nash equilibrium is a dominant strategy equilibrium, by which we mean the best strategy for each player is independent of what the other player does. Not all games have such an equilibrium. One that doesn’t is the game of “chicken.” Chapter 7 by TITH Seyla

Payoff Matrix Chapter 7 by TITH Seyla

KC’s view of the world Chapter 7 by TITH Seyla

KC’s view of the world Chapter 7 by TITH Seyla

P&G’s view of the world Chapter 7 by TITH Seyla

P&G’s view of the world Chapter 7 by TITH Seyla

Equilibrium Chapter 7 by TITH Seyla

Repeated Games and Sequential Games A Repeated Duopoly Game If a game is played repeatedly, it is possible for duopolists to successfully collude and make a monopoly profit. If the players take turns and move sequentially (rather than simultaneously as in the prisoner’s dilemma), many outcomes are possible. In a repeated prisoners’ dilemma duopoly game, additional punishment strategies enable the firms to comply and achieve a cooperative equilibrium, in which the firms make and share the monopoly profit. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games One possible punishment strategy is a tit-for-tat strategy. A tit-for-tat strategy is one in which one player cooperates this period if the other player cooperated in the previous period but cheats in the current period if the other player cheated in the previous period. A more severe punishment strategy is a trigger strategy. A trigger strategy is one in which a player cooperates if the other player cooperates but plays the Nash equilibrium strategy forever thereafter if the other player cheats. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games Table 15.5 shows that a tit-for-tat strategy is sufficient to produce a cooperative equilibrium in a repeated duopoly game. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games Price wars might result from a tit-for-tat strategy where there is an additional complication—uncertainty about changes in demand. A fall in demand might lower the price and bring forth a round of tit-for-tat punishment. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games A Sequential Entry Game in a Contestable Market In a contestable market—a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants—firms play a sequential entry game. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games Figure 15.8 shows the game tree for a sequential entry game in a contestable market. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games In the first stage, Agile decides whether to set the monopoly price or the competitive price. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games In the second stage, Wanabe decides whether to enter or stay out. Chapter 7 by TITH Seyla

Repeated Games and Sequential Games In the equilibrium of this entry game, Agile sets a competitive price and makes zero economic profit to keep Wanabe out. A less costly strategy is limit pricing, which sets the price at the highest level that is consistent with keeping the potential entrant out. Chapter 7 by TITH Seyla

Antitrust Law Antitrust law provides an alternative way in which the government may influence the marketplace. The Antitrust Laws The first antitrust law, the Sherman Act, was passed in 1890. It outlawed any “combination, trust, or conspiracy that restricts interstate trade,” and prohibited the “attempt to monopolize.” Chapter 7 by TITH Seyla

Antitrust Law Chapter 7 by TITH Seyla

Antitrust Law A wave of merger activities at the beginning of the twentieth century produced a stronger antitrust law, the Clayton Act, and created the Federal Trade Commission. The Clayton Act was passed in 1914. The Clayton Act made illegal specific business practices such as price discrimination, interlocking directorships, and acquisition of a competitor’s shares if the practices “substantially lessen competition or create monopoly.” Chapter 7 by TITH Seyla

Antitrust Law Table 15.7 (next slide) summarizes the Clayton Act and its amendments, the Robinson-Patman Act passed in 1936 and the Cellar-Kefauver Act passed in 1950. The Federal Trade Commission, formed in 1914, looks for cases of “unfair methods of competition and unfair or deceptive business practices.” Chapter 7 by TITH Seyla

Antitrust Law Chapter 7 by TITH Seyla

Antitrust Law Price Fixing Always Illegal Price fixing is always a violation of the antitrust law. If the Justice Department can prove the existence of price fixing, there is no defense. Chapter 7 by TITH Seyla

Antitrust Law Three Antitrust Policy Debates But some practices are more controversial and generate debate. Three of them are Resale price maintenance Tying arrangements Predatory pricing Chapter 7 by TITH Seyla

Antitrust Law Resale Price Maintenance Most manufacturers sell their product to the final consumer through a wholesale and retail distribution chain. Resale price maintenance occurs when a manufacturer agrees with a distributor on the price at which the product will be resold. Resale price maintenance is inefficient if it promotes monopoly pricing. But resale price maintenance can be efficient if it provides retailers with an incentive to provide an efficient level of retail service in selling a product. Chapter 7 by TITH Seyla

Antitrust Law Tying Arrangements A tying arrangement is an agreement to sell one product only if the buyer agrees to buy another different product as well. Some people argue that by tying, a firm can make a larger profit. Where buyers have a differing willingness to pay for the separate items, a firm can price discriminate and take a larger amount of the consumer surplus by tying. Chapter 7 by TITH Seyla

Antitrust Law Predatory Pricing Predatory pricing is setting a low price to drive competitors out of business with the intention of then setting the monopoly price. Economists are skeptical that predatory pricing actually occurs. A high, certain, and immediate loss is a poor exchange for a temporary, uncertain, and future gain. No case of predatory pricing has been definitively found. Chapter 7 by TITH Seyla

Antitrust Law Merger Rules The Federal Trade Commission (FTC) uses guidelines to determine which mergers to examine and possibly block. The Herfindahl-Hirschman index (HHI) is one of those guidelines (explained in Chapter 9). If the original HHI is between 1,000 and 1,800, any merger that raises the HHI by 100 or more is challenged. If the original HHI is greater than 1,800, any merger that raises the HHI by more than 50 is challenged. Chapter 7 by TITH Seyla