Georgetown University

“Immunity from competition is a narcotic, and rivalry a stimulant to industrial progress...the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone.” Judge Lerned Hand “The best of all monopoly profits is the quite life.” Sir John Hicks

Monopoly: Profit Maximization $ Q P(Q) MR QMQM PMPM PROFIT ATC MC

Sherman Act (1890)  Section 1 “Any contract, combination or conspiracy in restraint of trade...is hereby declared illegal.”  Section 2 “Every person who shall monopolize or attempt to monopolize...any part of trade or commerce among the several states shall be guilty of a felony.”

“People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith The Wealth of Nations

The Simple Economics of Collusion? Firm Industry MR D P qQ $/q Q S= Σmc AC mc PmPm q QmQm qmqm

Competition (?) in the Airline Industry Crandall: I think it's dumb as hell... to sit here and pound the (deleted) out of each other and neither one of us making a (deleted) dime.... We can both live here [Dallas] and there ain't no room for Delta. But there's, ah, no reason that I can see, all right, to put both companies out of business. Putnam: Do you have a suggestion for me? Crandall: yes, I have a suggestion for you. raise your goddamn fares twenty percent. I'll raise mine the next morning.... You'll make more money, and I will too. Putnam: We can't talk about pricing. Crandall: Oh (deleted), Howard. We can talk about any goddamn thing we want to talk about.

Economic conditions conducive to and destructive of Collusion  Number of firms (market concentration)  Barriers to entry  Product homogeneity  Elasticity of market demand  Ability to detect cheating  Cost symmetry/asymmetry Economic research indicates that despite obstacles, economic barriers to successful collusion can often be overcome

The Role of Industry Associations  Real Estate ‚ highly fragmented brokerage structure  Association (CMLS) produces MLS, critical to successful brokerage  Economics Traditional Model – Full srevice percent of sales price Traditional Model – Full srevice percent of sales price Home price increases create incentives for new business models Home price increases create incentives for new business models Exclusive Agency, fee for service, home office, internetExclusive Agency, fee for service, home office, internet  CMLS adopted membership rules to prevent innovative business models (e.g., “active involvement“ rule)  Denied consumer choices and raised prices  DOJ sued Role of associations Role of associations Role of competition, innovation and competition policy Role of competition, innovation and competition policy

Policy deterrents to Price fixing  Sherman Act, section 1 – felony, up to $1 million, 10 years in jail  Case Law – Per Se violation Trenton Potteries (1927) : “The aim of every price-fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves the power to control the market and to fix arbitrary and unreasonable prices. The reasonable price fixed today may..become the unreasonable price of tomorrow..” Trenton Potteries (1927) : “The aim of every price-fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves the power to control the market and to fix arbitrary and unreasonable prices. The reasonable price fixed today may..become the unreasonable price of tomorrow..”  Corporate Leniency Policy

Section 1, Odds and Ends  Non-compete clauses Hughes sells Direct TV to Rupert Murdoch but with a clause agreeing not to compete in DBS DTH market until >2007. Non-competitive? Hughes sells Direct TV to Rupert Murdoch but with a clause agreeing not to compete in DBS DTH market until >2007. Non-competitive?  Tacit collusion (Odd-Eighths at the Nasdaq market)  Joint Selling Arrangements BMI v. CBS (1979) BMI v. CBS (1979) NCAA v. Board of Regents of the University of Oklahoma (1984) NCAA v. Board of Regents of the University of Oklahoma (1984)