2. 1 Announcements: Tuesday Breakout sections: the DeBeers case Next week: the Dupont case Remember to take Quiz 1 on Oncourse

3. 2 Announcements: Thursday mng. Pd question—no change Last part of Market failure, missed because of fire alarm Remember to take Quiz 1 on Oncourse Next week: the Dupont case

4. 3 Announcements: Thursday evng. PD question---no change Remember to take Quiz 1 on Oncourse Next week: the Dupont case

5. 4 5: Market Power

6. 5 What you will learn today... Why your company and the government care about market power How the government controls market power

7. 6 Market Power P Q P Q A business with market power A business with no market power Demand 5

8. 7 Two ways to increase profit P Q Reduce costs Demand P Q Increase the price Demand P0P0 P0P0 P1P1 Q1Q1 Q0Q0 Q0Q0 MC 0 MC 1

9. 8 Sources of Market Power ________________________ Unique products Economies of scale Network externalities Anti-competitive strategies Government entry barriers

10. 9 What’s Wrong with Market Power? 1. _______________________________ 2. _______________________________ 3. ________________________________ 4._________________________________ 1. Customers pay prices above marginal cost, and buy less— “deadweight loss” 2. Low-cost firms are kept out of the market—bad for them and consumers both 3. Higher costs “the lazy monopolist” 4. Rent-seeking

11. 10 Two Losses from Monopoly P comp MC Demand Quantity Price Q monop Q comp P monop Monopoly profit Deadweight loss

12. 11 What Should the Government Do About Monopolies?

13. 12 Sometimes monopoly may be unavoidable because costs are lowest if a single firm supplies the whole market. We call this a _____________________ Examples:_________________________ ________________________________ _______________________________ natural monopoly electricity, telephone service, cable TV, water to homes

14. 13 Natural Monopoly $/Q Q 5 9 10 800900 MC AC Demand ___________________ 18 500 The monopoly price is ___, marginal cost is ___, and P=AC requires a price of ___. 18 5 10 Deadweight loss P=MC ________ subsidiesGovt. ownershipgovernment failure _______________

15. 14 Rate of Return Regulation: P=AC Find the value of the firm’s equity Decide a fair rate of return on equity Find the firm’s variable costs Estimate an output price that gives the firm the fair rate of return on equity The rate of return is not guaranteed--only the price is, for a few years.

16. 15 Which area is deadweight loss? MC Demand A B C D E F G H I J K Q P P mon Q mon (a) B+C L (c) C+H (b) C (d) C+D (e) C+D+H+J Write on a notecard: What does area A+B+C+G+H represent? 1. Did the sign-in sheet get around? 2. If you answered a question, bring up a notecard for me.

17. 16 Antitrust Law Having a monopoly is legal: creating one without creating social value is not Sherman Act (1890): No price-fixing, dividing up markets, cartels Clayton Act (1914): Mergers, exclusive dealing, tying, bundling, low pricing are illegal if done to monopolize

18. 17 Price fixing is illegal per se Sotheby’s and Christie’s auctioneers (2001) Sotheby’s New York city school lunch suppliers (2001) Oil rig workers (2001) (a private suit) Those who are hurt by it can sue for treble damages

19. 18 Firms apply for permission to merge The Justice Department and Federal Trade Commission ask: Will this merger substantially lessen competition? Often firms must divest portions of their business Mergers

20. 19 Why Did the Government Go After Microsoft?

21. 20 Bill Gates in 1994, on anti-trust law: "None of the people who run Microsoft's seven divisions are going to change what they do or think or forecast. Nothing. Nothing."

22. 21 A Justice Dept. Attorney: "It was foolish and provocative. It was like saying, 'I'm going to break the law. Catch me if you can.' "

23. 22 The Justice Department’s Accusations: Bundling Internet Explorer with Windows and making it hard to use Netscape Requiring computer makers who bought Windows for any of their machines to pay a royalty per machine whether they use Windows on it or not Offering AOL to bundle AOL with Windows if AOL dropped Netscape

24. 23 What Happened Microsoft decided to fight, not settle the suit Judge Jackson found Microsoft guilty On appeal, the higher court said that Jackson’s remedy was inappropriate Settlement proposal: MS will stop using exclusive contracts and will charge uniform prices