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© 2001 J. Douglass Klein Competition and Profits q P Marg. Cost Av. Cost Market Price 1 Market Price 2 Market Price 3
© 2001 J. Douglass Klein Monopoly and Profits q P Marg. Cost Av. Cost D E Entire market demand Marginal revenue B C A Welfare loss, or Allocative Inefficiency is shown by the gap between Willingness-to-Pay (B) and Marginal Cost (A)
© 2001 J. Douglass Klein Monopsony (one buyer takes advantage of many sellers) q P Market Supply D Monopsonist demand = M.B. B A Welfare loss, or Allocative Inefficiency is shown by the gap between Willingness-to-Pay (B) and Marginal Cost (A) Marginal Expense of Input (MEI) P(monops) P(comp)
© 2001 J. Douglass Klein The Bugaboo of Trusts Page “capital, like water, has again found its level.” “Such is the law, such has been the law, and such promises to be the law for the future; for, so far, no device has yet been devised that has permanently thwarted its operation. “Given freedom of competition, and all combinations or trusts that attempt to extract from the consumer more than a legitimate return upon capital and services, write the charter of their own defeat.”
© 2001 J. Douglass Klein The Bugaboo of Trusts Page 146 “Given freedom of competition…” Page 148 “Provided capital is free to embark in competing lines.” Page 149 “Only let them [the people of America] hold firmly to the doctrine of free competition. Keep the field open.” Page 150 “so long as all are free to compete”
© 2001 J. Douglass Klein The Bugaboo of Trusts Exactly what does Carnegie have to say about the protective tariff in his essay on Trusts?
© 2001 J. Douglass Klein Carnegie on Wealth “Formerly articles were manufactured at the domestic hearth… The master and his apprentices worked side by side … There was, substantially, social equality…. The inevitable result of such a mode of manufacture was crude articles at high prices.” (p. 654)
© 2001 J. Douglass Klein Carnegie on Wealth “To-day the world obtains commodities of excellent quality at prices which even the generation preceding this would have deemed incredible… The price which society pays for the law of competition… is great, but the advantages are greater still.” (p. 654) “We accept and welcome… as conditions to which we must accommodate ourselves, great inequality of environment, the concentration of business, industrial and commercial in the hands of a few….” (p )
© 2001 J. Douglass Klein Carnegie on Wealth 1. What was Carnegie’s “Gospel of Wealth”? 2. Do you agree with it? (Why?) Use Carnegie, and the Economist articles, and anything else you choose. Post in pairs to WEALTH.
© 2001 J. Douglass Klein What to do with your wealth? 1. Leave to families 2. Leave to state 3. Administer during lifetime
© 2001 J. Douglass Klein What to do with your wealth? (661) “…the man of Wealth … [must] set an example of modest, unostentatious living, shunning display or extravagance … and … to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer.”
© 2001 J. Douglass Klein Vanderbilt’s 5th Ave. Apartment Butterfield, The American Past
© 2001 J. Douglass Klein One Idea of Government Which side of Bryan’s “two great ideas” does Carnegie fall on? Find examples from pages 660 to the end of “Wealth”.
© 2001 J. Douglass Klein The workers’ opinion Collective Ownership Butterfield, The American Past
© 2001 J. Douglass Klein Trusts and Tariff
© 2001 J. Douglass Klein Two ideas again How are goods produced and distributed in a capitalist society? How are goods produced and distributed in a socialist society? Which is better, and why? People get what they need, and can afford. People get what they need. Period.
© 2001 J. Douglass Klein Affluence Define AFFLUENCE “[T]here are two possible courses to affluence. Wants may be ‘easily satisfied’ either by producing much or desiring little… “Adopting the Zen strategy, a people can enjoy an unparalleled material plenty--with a low standard of living.” Marshall Sahlins, Stone Age Economics, 1972, pp. 1-2
© 2001 J. Douglass Klein Outline The Antitrust Laws Sherman, Clayton, FTC Early enforcement First successes Current status (WSJ handout)
© 2001 J. Douglass Klein Monopoly, Competition, and Efficiency In the 1880s and 1890s, JP Morgan & Co. re-organized, and came to dominate the Boards of: Reading RR, B&O, C&O, Santa Fe, Erie, Northern Pacific, Southern. “The investment bankers reduced the debt structures and rationalized the distribution of routes; they also reduced competition.” (Bryant & Dethloff, A History of American Business, 124)
© 2001 J. Douglass Klein Clark on the Trusts First, we may prosecute with more intelligence the effort to break up the trusts into smaller corporations. Secondly, … abolish customs duties on all articles manufactured by the trusts. Thirdly, … introduce an elaborate system of price regulation. Fourthly, … put all monopolized industries into the hands of the state… Is there no further recourse? …Give to potential competition greater effectiveness. -- J. B. Clark, “How to Regulate Trusts” (1900)
© 2001 J. Douglass Klein The Sherman Antitrust Act Section 1: Contracts, Combinations, and Conspiracies in Restraint of Trade = E.G.: PRICE FIXING; BID RIGGING Explicit evidence (smoking gun) = guilt Per se illegal Section 2: Monopolization and Attempts to Monopolize = DOMINANT MARKET SHARE; UNREASONABLY GAINED Judged under the Rule of Reason
© 2001 J. Douglass Klein The Sherman Antitrust Act Some early cases: 1895 Knight Sugar 1904 Northern Securities 1911 Standard Oil 1911 American Tobacco 1920 U.S. Steel 1945 Alcoa
© 2001 J. Douglass Klein U.S. Steel Martin, Industrial Economics
© 2001 J. Douglass Klein Monopoly, Competition, and Efficiency Auerbach, Competition: The Economics of Industrial Change, 58 In the Chicago School (conservative) view, and in Carnegie’s view, competition takes place on a higher plane than at the single market or industry level. There is competition for investor dollars, and for consumer dollars. No firm is insulated from this level of competition.
© 2001 J. Douglass Klein Microsoft could maximize short-run profits by charging relatively high prices for its products and allowing its market position to dwindle over time -- or it could charge relatively low prices and maintain, or even expand, its market share over time. -- Becker & Murphy, WSJ, 2/26/01 Microsoft could maximize short-run profits by charging relatively high prices for its products and allowing its market position to dwindle over time -- or it could charge relatively low prices and maintain, or even expand, its market share over time. -- Becker & Murphy, WSJ, 2/26/01
© 2001 J. Douglass Klein Predatory Pricing Time Profit Normal A. Hamilton’s view Smith’s view Predatory Pricing US Steel; Alcoa; Microsoft
© 2001 J. Douglass Klein The End – 1 (Monopoly & Antitrust, 1998) Regulators ponder Conrail takeover Two makers of phone gear join forces Intel and the threat of low-cost chips: Despite monopoly position, company seems highly vulnerable Browning-Ferris approached by Allied Waste Industries with proposed merger Is big tobacco reeling? Maybe not; it wins new rounds in court Travelers agreed to invest $1.6 billion in Nikko Securities … latest move to make Travelers into a global powerhouse Ten Asian shipping lines are under investigation for unauthorized price setting United Health to acquire Humana, Inc. $5.5 billion deal thins patients’ choices MCI to sell Internet unit amid chill in merger review The hows and whys of FTC action against Intel Much of Europe eases its rigid labor laws, and temps proliferate Boeing will phase out production of its MD11 wide-body jet after merger NAFTA reality check: trucks, trains, ships face costly delays Trustbuster Joel Klein, once viewed as timid, comes on like a tiger
© 2001 J. Douglass Klein The End – 2 (Monopoly and Antitrust, Winter, 2001) Claritin and Schering-Plough: A Prescription for Profit Market Insight: Microsoft's Future, in Court and the Markets U.S. Court Ruling Lets Cable Giants Widen Their Reach VeriSign May Get Control of.com Registrations Until '07 Democracy's Tricky Radio Signal (Congress's move to kill low-power radio stations) New Directors for Mexico Oil Monopoly United Flight Attendants Threaten To Strike Because of USAir Deal Wall St. Banks Sued Over Initial Offerings Drive by the Phillips auction house to break up the decades-old duopoly of Sotheby's and Christie's. Jurors Find Mitsubishi Guilty Of Aiding a Price-Fixing Scheme for Graphite Electrodes
© 2001 J. Douglass Klein Bryan’s Two Ideas Federalist Whig Republican Democratic Washington Hamilton Webster McKinley Reagan “W” Jefferson Calhoun Jackson Bryan FDR Kennedy Few; wealthy, business, aristocracy; Protection; “What’s good for GM is good for the country;” laissez faire toward business; Capital gains tax cuts; free trade; Trickle-down Many, masses, farmers, workers, consumers, the poor; Free trade (for consumers); regulation of railroads; antitrust; Welfare programs; Labor law; Tax credits for children; Protection (for workers)
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