2 Monopolization 1. If earned through better performance is not illegal. 2. Agreements to ‘restrain trade’ are per se illegal. 3. Definition of market is often crucial here.
3 Cartels 1.Firms try to collectively act like a monopolist. This means restricting output to raise price. 2.What are the impediments? 1.KEY POINT: FIRMS HAVE AN INCENTIVE TO CHEAT because their elasticity is greater than the industry as a whole. 3. Even if firms can reach an agreement, how can it be enforced?
4 Cartels 1.Enforcement is the crucial problem for a cartel. Since every firm individually has an incentive to cheat, some impediment to cheating is required if the cartel is to succeed. The usual impediments to rule breaking are detection and punishment. Cartels need to implement the same impediments. 2. Detection: How can the cartel determine when someone has violated the agreement? 3. (1) Can it use police power of the state? 4.(2) Can it use its own enforcement agency? Mafia, etc.
5 Cartels 1.Can the Cartel punish one firm without hurting member firms to the same extent? 2.Can they all target their punishment to harm only the one cheating firm? 3.Is OPEC a cartel? 4.It is unclear whether OPEC is a classic cartel. Did everyone in the organization have to cut output?
6 Price Discrimination 1. Illegal if it gives some firm an advantage over other firms. 2. If individuals are consumers, is not illegal. 3. Price Discrimination is not likely to harm efficiency. Perfect Price discrimination is perfectly efficient. 4. Intention of this rule was to protect ‘mom-and- pop’ stores and grocers from department stores and supermarkets. It was intended to reduce competition.
7 Predatory Pricing 1. Current court-created definition (known as Areeda-Turner rule) : price below average variable cost. 2. Also requires that there be a serious likelihood of driving prey out of business and of recouping losses. 3. Likely to lose money for the predator, and unlikely to remove the prey. 4. Can only succeed if prey is removed. 5. Few real world examples. Standard Oil cases are largely fictional.
8 AVC AC AFC P Q p3 p2 p1 S MC Predatory Pricing
9 Resale Price Maintenance 1.These are laws (also called ‘fair trade’ laws), at the state level, that forbid retailers from charging less than a price specified by a manufacturer. 2.Puzzle: why would manufacturers not be happy to have retailers selling their product at low prices, since that would seem to increase sales and profits?
10 Resale Price Maintenance 1.Answer: Two possible answers a.Firms are colluding and Resale Price Maintenance removes the incentives to cheat since if they lower their price to retailers it won’t get passed on to consumers and it will not increase their profits. b.Goods need special treatment from retailer, and free riding by some retailers will force others to stop providing the treatment. RPM stops some retailers from free riding off of other retailers.
11 Tie-In sales. 1. Generally considered to be an ‘extension of monopoly’ by courts. In other words, courts believed it was an attempt to use one monopoly to create a second. 2. Tie-In sales are poorly understood by courts, imperfectly understood by most economists. 3. Frequently, tying good is sold very cheaply, while tied good is very expensive. Famous cases: IBM and computer cards, Xerox and toner, Canning machines and tin plate. 4. Two monopolies are not better than one if products are used together (in fixed proportions).
12 P Q Tie In Sale when products used together PLPL Q1Q1 MR D pairs of shoes MC=AC left or right shoes MC=AC pairs of shoes 2P L P P -P L
13 PD version of Tie-In Story 1.Seller is thought to have two types of customers – heavy versus light users. 2.Tied good is thought to ‘meter’ the use of the tying good, to separate heavy from light users. 3.By lowering price of tying good, and raising price of tied-good, producer increases payments made by heavy user relative to light user. 4.Problems: heavy users likely to use up machines faster – tie-in may have no impact on relative payments.
14 Risk Reduction version of Tie-In 1.Consumers are unsure how much use they will get from the tying good (machine). 2.This riskiness causes them not to be willing to pay the full expected (predicted) value of the product. 3.Seller has many such customers and can provide ‘insurance’ since the large numbers makes overall results predictable. 4.By lowering price of tying good, and raising price of tied-good, producer provides insurance for consumers afraid they might not have much use for machine.