Econ 425 1st Exam

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Econ 425 1st Exam

• Review

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1. Hazlett's view of Sherman

• Main interest was McKinley tariff, known to be
  protectionist and anti-consumer
• Legislators pro-tariff were pro-Sherman vice
  versa
• Large enterprises were supplanting small ones
  efficient, Q, -P
• Clear concern for protection of small business
  against more efficient, large firms

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Fringe Firms Merger Offers

• A DF uses market power to P by -Q
• If a fringe plant were to merge, it adds to the
  profits of a DF
• But profits of FF remaining independent are
  higher since it Q when P
• Hence, DF can't offer enough to FF once the FF
  figures out the game
• Remedy is a take-it-or-leave it offer contingent
  on widespread acceptance

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Cournot Competition

• 1. Show QCournot Q N/(N1)
• Linear demand p(q) a - bQ
• Max profit ? (a - bq - bQ')q - cq
• Where Q' Q - q
• Set d?/dq 0
• q (a - bQ' - c ) / 2b
• Q Nq ...............A little algebra......
• a - c/b N/N1
• Which is the result

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Cournot Competition, con't

• Implications for GFT
• As N Q in Cournot -gt Q in comp model
• implies GFT approaches comp benchmark
• Conclusions
• It does not take many firms to yield
  approximately competitive results
• These calculations ignore threats of potential
  competition entry and are perhaps conservative
  (N has been held fixed

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DOJ Approach to Market Definition

• Basic Approach Would a Small Price Increase be
  Profitable?
• Approach expand definition of product/geog area
  to incorporate more firms/products.
• Assess profitability of a price increase
• Stop when you find that price increase would be
  profitable. This is to DOJ "a market"
• New approach is systematic and provides clearer
  signals to firms when merger challenges are
  unlikely
• This reduces regulatory uncertainty allows the
  95 of unchallenged and presumably efficient
  mergers to take place in unimpeded fashion

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Sherman Common Law

• Common law opposed to monopoly, ditto Sherman
• Common law only negated enforceability of
  contracts in restraint of trade Sherman made
  them illegal (toughened stance)
• Common law evolves slowly Sherman was a quick
  fix at a time of increasing business size and
  widespread creation of trusts
• Sherman solved public good/free rider problem by
  creating standing for gov't agency to sue on
  behalf of consumers

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Williamsonian Tradeoff

• Bigger firms may have cost advantage by also may
  have market power
• Tradeoff cost savings versus welfare
  consequences of market power
• If cost savings exceed welfare triangle from
  lower output bigger is better
• Such combinations should not be challenged if
  objective of law is efficiency
• Note I tend to believe this tradeoff is mostly
  imaginary in an economy with free entry

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Price Fixing Per Se Approach

• Origins Trans-Missouri
• Peckham reasonableness is no defense
• Logic
• Makes sense court would sink in quicksand and
  act like a public utility commission if it had to
  judge reasonableness of fixed prices
• Some act so clearly a restraint of trade that
  inquiry into their effects is pointless per se
  approach (if facts established, case closed)
  makes law's job much easier

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Limits of the per se approach

• NCAA vs. OU
• NCAA limited of TV games for CFB
• Effect was to limit competition
• Court ruled against NCAA
• BMI vs. CBS
• Joint licensing buy the whole package and pay a
  fee
• Court found that joint licenses were efficient
  price effects were secondary to the primary
  objective of minimizing transactions costs
  between 1000s of artists and 1000s of stations
• Court allowed to joint licensing form of contract
• Clear Difference no efficiency rationale in the
  NCAA case to overcome the per se treatment
  accorded to price fixing

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Mix Match

• Addyston Pipe (1897) _________B, D_____
• American Tobacco (1911)_________A_______
• Brown Shoe (1962) ________G______
• Northern Securities (1904) ________E, C______
• Standard Oil (1911) ________A, F____
• Staples-Office Depot (1997) _______G_____
• Trans-Missouri (1895) ___________C_____