Does competition preserve itself despite government?
C.
Competition is...
1.
Number and size of firms?
2.
The behavior of firms in an industry?
3.
The behavior of prices, costs and profits?
4.
The industry's record of innovation?
D.
What is an "adequately"competitive market?
II.
Competition is a process not a condition
A.
Firms that have downward sloping demand curves restrict output so that price will be above MC
B.
Price>MC tempts others
C.
Sellers "probe" for information about demand
D.
Each seller's demand depends on the activities of other sellers
E.
More a game of chess or poker than a maximization problem.
III.
Restricting competition
A.
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publid, or in some contrivance to raise prices." Adam Smith
B.
Sellers want to agree to compete less - there are incentives.
C.
There are impediments
1.
Transaction costs
a)
Agreements are not enforceable
b)
difficult to devise agreements that are agreeable, enforceable, cover all possibilities.
c)
Incentives exist to circumvent the agreements.
D.
The history of cartels
1.
Prevent entry
2.
Dissipate the potential profits either through illegal sales or cost increases to attract new sales.
E.
Sellers yearn for legal restrictions on competition. Let the government do it.
IV.
Using the government to "preserve" competiton
A.
The politics of special interests.
B.
Is the concern for competitors the same as the concern for competition?
C.
Laws that restrict competitors restricts competition.
D.
Sellers (potential & actual) are prevented from offering more attractive options to buyers.
E.
The government prohibits "predatory" practices.
1.
Selling below cost
a)
Replacement costs are cost. What is the items sold will not be replaced?
b)
The relevant costs are Marginal Costs - not sunk.
c)
What about apportioning joint costs? A single item in a grocery store - which costs are relevant?
d)
Only added costs and revenues are relevant.
2.
Many allegations of "selling below cost" involve apportioning sunk or joint costs.
F.
Minimum price laws
1.
There is the certainty of higher prices to eliminate the possibility of higher prices.
G.
The long purse problem - selling below cost to drive out competitors and then raise prices to recoup the losses.
1.
Are there other potential rivals?
2.
What happens to the assets of the fallen competitors? Can they be brought back into production?
3.
Most long purse sellers have other big producers to contend with (not just the small producers that they can drive from the marketplace.)
H.
Government regulated prices
1.
How do regulators determine the proper price?
2.
Costs? There is an incentive to call everything "cost".
3.
There are no incentives to innovate.
4.
The history of regulated industries.
a)
A disturbing history.
b)
Capture
c)
ICC
d)
Phone companies
e)
Airlines
f)
The history of deregulation shows that competition appears more effective than government commissions in restraining market power.
I.
Anti-Trust Laws
1.
Sherman Antitrust Act 1890
a)
Contracts, combinations, conspiracies in restraint of trade
b)
Attempts to monopolize any part of interstate trade.
c)
!!!!!!!!
d)
The courts said "unreasonable" combinations etc.
2.
Clayton - 1914, dealt with mergers that would "substantially" lessen competition
3.
FTC - a body of experts authorized to prohibit a wide range of "unfair" practices.
J.
Types of mergers
1.
Horizontal
2.
Vertical
3.
Conglomerate
4.
When are these likely to "substantially" lessen competition?
K.
Antitrust policies involve judgement calls that are quite arbitrary.
L.
Restrictions on competitors restrict competition
M.
Pressure for restrictions on competition generally come from producers who want to protect themselves from competition.
N.
Price maintenance agreements
1.
Do manufacturers have an incentive to market their products in a way that will maintain service quality?
V.
Conclusion
A.
Restrictions on competition reduce the range and availability of substitutes available to consumers and make it easier for producers to raise prices.
B.
Competition is a process, not a state of affairs.
C.
If there is a uniform price in an industry, you can infer nothing about the state of competition in that industry. (Wheat sells at a uniform price.)
D.
Never compare a real situation with an ideal but unattainable situation. fn
I. 