1. Regulation: Anit-Competitive Behavior
Econ 201
Regulation:
Anit-Competitive Behavior

2. Government Regulation
Major categories
Anti-competitive behavior
Price Discrimination and Monopoly Pricing
Collusion
Mergers/acquisitions
Natural Monopolies
Economies of Scale – cost + pricing

3. Government Regulation
Tools available
Statutory
Prohibitive
E.g. Price fixing/restricting output, cartels, collusive behavior
Fines, breakup (divestiture)
Deregulation
Removing regulation
Airlines, Banking
Incentive mechanisms
Managed competition
Incentive design

4. Promoting Efficiency Goals of regulation
Promote Technological Innovation
Efficiency in Production
Efficiency in Allocation

5. Efficiency in Production
Produce Goods at Least Cost
Firms to operate at the minimum of their Long Run Average Cost Curve

6. Efficiency in Allocation
Marginal value consumers place on last (marginal unit) produced to equal the resource “opportunity” costs
MV = MC at the marginal unit

7. Inefficient Allocation Deadweight Loss of Monopoly
Image: Animated Figure 10.5
Lecture notes:
From text:
The monopolist charges too high a price and produces too little of the product, so some consumers who would benefit from a competitive market lose out. Since the demand curve, or the willingness to pay, is greater than the marginal cost between output levels QM and QC, society would be better off if output was expanded to QC. But a profit-maximizing monopolist will limit output to QM. The result, a deadweight loss equal to the area of the yellow triangle, is inefficient for society.

8. Government Regulatory Agencies Administrative Agencies
Federal Trade Commission (1914) Act
“empowered to pursue abuses of trade that could lessen competition”
Department of Justice (DOJ)
Jointly charged with FTC for overseeing and enforcing antitrust policy
Established by the Judiciary Act of 1789
1870 Act: handle the legal business of the United States.
control over all criminal prosecutions and civil suits in which the United States had an interest
Federal Communications Commission (FCC)
established by the Communications Act of 1934
charged with regulating all non-Federal Government use of the radio spectrum (including radio and television broadcasting), and all interstate telecommunications (wire, satellite and cable) as well as all international communications that originate or terminate in the United States.

9. What Happens in Different Markets?
Monopoly/Oligopoly
Single-price monopolist/cartel (collusive)
Higher price and lower quantity at equilibrium (than PC)
Price Discrimination
Block pricing – 2nd degree
Seller extracts CS by charging different prices for different blocks of Q
Third degree: different prices for different markets/different WTP
Income, sex, age, geography
Perfect Competition
Compete by reducing costs
Maximizes gains from trade
CS + PS is larger than in monopoly
Average Price is lower and Quantity (at equilibrium) is greater
Average Costs of Production are Lower

10. How Has the Government Sought to Regulate Markets?
Punishing Anti-Competitive Behavior
Pricing/market tactics
Collusion
Price-fixing, restricting output
Price Discrimination
Predatory Pricing
Impose fines for AC tactics
Preventing Anti-competitive Behavior
Mergers and Acquisitions
Review by appropriate administrative agency
Divestiture/breakups
Deregulation(sic) of Selected Industries

11. Punishing AC Behavior Punishing firms for behaving like a monopoly
Sherman anti-trust Act (1890)
“conspiring to fix prices or restrict output”
Clayton Act (1914)
More sophisticated price discrimination
Tie-in sales – requiring the purchase of 2nd good
Stock purchases/acquisitions
Robinson-Patman(1936)
3rd degree price discrimination
Amendment to Clayton Act

12. Price Fixing DOJ Guidelines
American consumers have the right to expect the benefits of free and open competition — the best goods and services at the lowest prices
Most criminal antitrust prosecutions involve price fixing, bid rigging, or market division or allocation schemes. Each of these forms of collusion may be prosecuted criminally
Collusion is more likely to occur if there are few sellers.
probability of collusion increases if other products cannot easily be substituted

13. 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

14. 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

15. 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

16. 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.

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

18. 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

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

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

21. 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

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

23. 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?