Slide 12005 South-Western Publishing
• Corporations are legal entities which exist only because governments allow them to exist.
• Governments impose many restrictions on firms: mergers, patents, licensing, or subsidies.
• The stated intention of governments is set restrictions that promote social welfare, but they sometimes benefit particular groups or individuals.
Government RegulationChapter 17
Slide 2
Market Structure, Conduct, and Performance
Fundamental Market and Environmental Conditions
MARKET STRUCTURE
MARKET CONDUCT
MARKET PERFORMANCE
FeedbackEffects
FeedbackEffects
Slide 3
Good Market Performance Depends on:
1. Efficient resource allocation2. Technologically progressive3. Promote full employment4. Equitable distribution of income5. Resource conservation6. Satisfactory product performance and
safety characteristics.
Slide 4
Market Conduct
1. Pricing behavior2. Product policy 3. Sales promotion and advertising
strategies4. R&D and innovation strategies 5. Legal tactics with regard to entry
Slide 5
Market Structure
1. Seller and buyer concentration
2. Actual or imagined Product differentiation.
3. Entry conditions.
4. Vertical Integration
5. Diversification or conglomeration
6. Contestability
Slide 6
Types of Barriers to Entry
1. Product differentiation• Advertising, patent control, distributional control
2. Absolute cost advantages• Superior techniques, control of inputs, superior access to
financing
3. Scale Economies• Capital intensive technology, high start-up costs
4. Limited access to distribution channels
open
closed
Slide 7
Fundamental Market and Environmental Conditions
SUPPLY
1. Location of ownership of raw materials
2. Product durability
3. Technology
4. Labor organization
DEMAND
1.Price elasticity
2.Cross price elasticity
3.Growth prospects
4.Type of product
5.Method of purchase
Slide 8
• A market is a group of economic agents that interact in a buyer-seller relationship. The nature of that relationship is affected by the number and size distribution of the buyers and sellers.
• A popular measure of seller concentration is the percentage of an industry comprised of the top 4 firms.
• Similarly, the top 4 buyers is a popular measure of buyer concentration.
Determining Industry Structure
Slide 9
Market Concentration Ratios• The size distribution of firms is measured by the
percentage of the top four firms (or buyers)
» .22
» .18
» .10
» .08
» … shares of market listed in descending order
• Similar concentration of occur for 8-firm, 20-firm, and 50-firm ratios
• The Bureau of Census provides data on industries by SIC (Standard Industrial Classification) or its equivalent
58% of market is controlled by top 4 firms
Slide 10
Industry Classifications
• 2-digit sectors: 32 Manufacturing sector
• 3-digit sub-sectors:
» 322 Paper Manufacturing Sub-sector
• 4-digit industry groups:» 3221 3221 Pulp, Paper, and Paperboard Mills
• 5-digit industry in North America:» 32212 Paper Mills
• 6-digit industry in US, Canada, or Mexico:» 322121 Paper Mills in the US except newsprint
Industrial and firm classifications» North American Industrial Classification System (NAICS) of
the US Department of Commerce replaced SIC’s in 1997.
http://www.census.gov/epcd/naics/naicstb1.txtTo compare NAICS to SIC see:
Slide 11
Incomplete Measures of Concentration
• Providing all the market shares can reveal too much
» Partial measures use only some of the market shares
• 4, 8, 20 & 50 firm Concentration Ratios» Share of top 4 firms, as in 4CR = 60
» Problem of two industries
A has shares of 60, 10, 5 & 5
B has shares of 20, 20, 20 & 20• The knowledge of each share is hidden in partial measures of
concentration in an industry
Both are4CR=80
Slide 12
Other Market Concentration Measures• Complete Measures
» Know the market shares of all firms
» Herfindahl-Hirschman Index: HHI = si2
• Example: Baby Food» 70% for Gerber» 16% for Beech-Nut» 14% for Heinz
• So the 4CR = 100%• And the HHI = (70)2 + (16)2 + (14)2 = 5352• The maximum HHI is (100)2 = 10,000 for a pure monopoly• With 100 firms, each with 1% of the market, HHI=100
Slide 13
Antitrust: Government Regulation of Market Conduct and Structure
• In trusts, the voting rights to the several firms are conveyed to a legal trust to manage the group of firms as if it were one firm. This tends to create monopolization of an industry.
• The Sherman Antitrust Act (1890) outlawed monopolies per se and attempted monopolization.
Slide 14
The Clayton Act• The Clayton Act (1914) extended the list of
conduct that was anti-competitive:a. price discrimination. (section 2)b. tying contracts force customers to buy
added products with one product. (section 3)c. purchasing shares of competing firms as an
anti-merger section. (section 7)d. corporate directorship interlocks occur
when the same people are in directorships of competing firms. (section 8)
• The Federal Trade Commission was established in 1914 to prohibit unfair methods of competition.
Slide 15
Robinson-Patman Act of 1936Section 2(a) prohibits price discrimination which
"substantially lessen competition". Section (2b) provides a cost justification for price
discrimination. Section (2c) prohibits some kinds of brokerage
commissions.Sections (2d-2e) prohibits discounts to buyers not
afforded to other customers.
• The Hart-Scott-Rodino Antitrust Improvement Act (1976) requires notification by large firms to the Justice Department of impending mergers.
Slide 16
Antitrust Prohibitions of Selected Business Decisions
• Collusion to fix prices (airlines and grocery stores have been penalized)
• Mergers that substantially lessen competition (mergers raise 4CR and the HHI)» If HHI > 1,800, mergers are usually challenged» If 1,000 < HHI < 1,8000, mergers challenged if raise the HHI by more than
100 points» If HHI < 1,000, most mergers are not challenged
• Monopolization (attempted monopolization is a violation of the Sherman Antitrust Act)
• Wholesale Price Discrimination (forms of price discrimination that injured other competitors, not necessarily customers) » Penguin Books sold books at lower prices to Barnes & Noble than to other
bookstores• Refusals to Deal (when not based on legitimate business
justifications)
Slide 17
Palladium Metal-Casting Industry
• The Palladium Metal-Casting numerical example uses a simple monopoly model (pages 780-781)» P = 15,000 - .3 Q and TC = 100,000,000 +6Q +.05Q2
» Solution: P=$8,574 & ROI = 7.2%• Adding an additional fixed cost ($150 million to
reduce smoke) lowers profit and ROI (return on investment) without changing the price.» Solution: same price and ROI = 5.4%
• If the operating controls raise variable costs, then the output and price changes in the directions you would expect: higher prices and lower output.» Solution: P = $9,378 & ROI = 3%
Slide 18
The Deregulation Movement
• Airline and trucking have been deregulated.
• They are no longer "infant industries".• Deregulation of long-distance occurred
due in large part to technological changes in transmitting phone messages by microwave.
Slide 19
Government Protection of Business
• Governments historically have helped some companies by restricting or eliminating competition.
• Examples» Licensing of professions (or businesses)» Patents of ideas or processes restricts
use of the idea» Import quotas
Slide 20
Trade Restrictions on US Sugar Markets• Ignoring tariffs, lets
look only at quotas.• D & S are domestic
demand and supply• At world price Pw,
the US grows 6.14 and imports the rest to 19.18 (imports of 13.04)
• With a quota on of imports, price rises to Pquota, and quantity consumed declines and local production grows
Quantity in billions of pounds
SD
Pw
6.14 12.10 18.06 19.18
Pquota
imports
imports before quota
A B C D
E F G H
Slide 21
Welfare Impacts of Quotas• Consumers
» Pay more after quotas.» Consumer surplus declines by areas A+B+C+D
• Domestic Producers of Sugar» Receive more after quotas» Producer surplus rises by area A
• Foreign Producers of Sugar» Receive more after quotas» Foreign producer surplus is area C
• No one gets areas B + D, this is called excess burden or deadweight social loss
