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Competition Policy
N/A
38
Economics
Graduate
12/14/2008

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Cards

Term
What is the hallmark of competition?
Definition
The absence of market power
Term
How is competition used?
Definition
Market structure and behavior of firms
Term
What conditions are conducive to competition?
Definition

Many relatively small sellers and buyers

Homogeneous products

Free entry and exit

Full information

Term

What is demand?

Definition

The relationship between price and quantity PURCHASED.

Term
What is supply?
Definition

The relationship between the price and quantity PRODUCED.

 

Term

What are some features of firm supply?

Definition

Firms produce and sell to MAXIMIZE PROFIT.

Competitive firms are price takers---they accept the market price as given and produces where price equals marginal cost.

Term
What is industry supply?
Definition

The horizontal summation of the firm supply curves.

Term
What events must occur for a competitive market to be in equilibrium?
Definition

Supply equals demand

Profit is nil

There is neither entry nor exit

Term
What is consumer surplus?
Definition

The difference between the value of a good and the price paid for it.

 

Represented by the area under the demand curve and above the price paid.

Term
What is producer surplus?
Definition

The difference between the price received by a firm and opportunity cost of producing that output.

 

Represented by the area below the price and above the supply curve.

Term

What is social welfare?

Definition

The sum of producer and consumer surplus.

 

It is the economic rationale for antitrust policy.

Term

What is the economic definition of a monopoly?

Definition

The monopolist restricts output in order to raise price and MAXIMIZE PROFIT.

 

Term
How does a monopolist maximize profit?
Definition

By producing a quantity where marginal revenue equals marginal cost.

 

A monopolist controls price by controlling output.

Term
Name 5 sources of monopoly.
Definition

Control of inputs

IP

Superior efficiency

Superior product

Gov't regulation

Term
What is the economic objection to monopoly?
Definition
When a monopolist products where marginal revenue equals marginal cost, consumer surplus is reduced leading to a reduction in social welfare.
Term
What are the 2 substantive provisions of the Sherman Act of 1890?
Definition

§1: Every contract, combination or conspiracy to restrict trade or commerce is illegal.

 

§2: Every person who participates to monopolize any part of trade shall be deemed guilty of a felony.

Term
What is a major criticism of the Sherman Act?
Definition

Its lack of precision.  It was too vague and was unfair to many business that were exposed to risk.  It also gave judges too much leeway.

Term
What are the 3 substantive provisions of the Clayton Act?
Definition

§2: It is illegal to discriminate in price where the effect will lessen competition.

 

§3: Sales made on the condition where the buyer will not deal with the rival of a seller are unlawful.

 

§7: No person shall acquire the stock or share capital where the effect may lessen competition.

Term

Does §2 of the Sherman Act forbit the structural condition of a monopoly?

Definition
NO, but it does forbid the process of becoming a monopoly.
Term

Give 3 reasons for not condeming a structural monopoly.

Definition

Natural monopoly

Superior efficiency

Patents

Term
What leads to a natural monopoly?
Definition

It is technologically determined.  Additional firms will cause production costs to rise and exit will occur until monopoly results.

 

Typically, anti-trust policy doesn't work.

Term

What are some features of US v. Standard Oil (1911)?

Definition

Extracted concessions from railroad

Monopolized pipelines

Predatory pricing

Industrial espionage

Geographic allocation

 

Result: Guilty of anti-trust law due to unreasonable behavior as it controlled 90% of market

Term
What are some features of US v. American Tobacco (1911)?
Definition

Result of merger of 5 firms that accounted for 95% of cigarette production.

 

Expanded into snuff and cigars

Price wars

Acquired rivals and closed them

Term
US v. US Steel (1920)
Definition

Combined 180 independent steel producers

Price fixing

Controlled 80-95% of domestic production

Market share fell as others entered

 

Not guilty of monopolization

Term
US v. Alcoa (1945)
Definition

Court considered 3 different market definitions

Hand chose definition which pegged virgin production at 90%

 

Structural monopoly: Increased production 800%, with no entry

Promoted new uses for aluminum, but made sure it could supply

Term
US v. United Shoe Machinery (1953)
Definition

United had 75% of market due to:

Original formation

Surperior products and services

Leasing only machines

 

Leases discouraged switching and served as a barrier to entry

 

Guilty of illegal monopolization

Term
List XXX general characteristics of a monopoly that can be charged under §2 of Sherman
Definition

Market share greater than 70-75%

Exclusionary practice

Term
Name the 2 prongs of the Grinnell Test
Definition

The possession of monopoly power in the relevant market

 

The willful acquistion or maintenance of that power (exclusionary behavior)

Term
List the 3 essential elements of 'abuse of dominance' in the EU
Definition

Firm must be "dominant"

Conduct must be "abuse"

Conduct must affect trade between members

 

If any element is missing, Article 82 does not apply.

Term
Name 6 prohibited practices by a dominant firm
Definition

Refusal to deal

Discriminatory pricing

Predatory pricing

Tying

Exclusive supply contracts

Refusal of accdess to essential facilities

Term
What is a key concept in defining markets?
Definition
Substitutability as defined by the cross-elasticity of demand, i.e. substitute and complementary products
Term
Name 2 relevant antitrust markets.
Definition

Product

Geographic

Term
What is the key concept of monopoly power?
Definition

1. The ability to control price by adjusting output

2.  The ability to raise price above competitive level thereby increasing profits

Term
How does the Supreme Court define an entry barrier?
Definition
The power to control price OR exclude competition.  For a monopoly to endure, there must be entry barriers.
Term
How does the Supreme Court define an illegal monopolization attempt?
Definition

Predatory or anticompetitive conduct

Intent to monopolize

Dangerous probability of achieving monopoly power

Term
How does one determine the existence of a dangerous probability?
Definition
Defendant's market share (usually >50%) is close the actual monopoly threshold and if left unchecked, will lead to actual monopolization
Term
List some exclusionary practices
Definition

Vertical restrictions limiting competitor access to markets

Denial of request for access

Product design

Predatory and exploitative pricing

Misuse of governmental and standards processes

Improper coordination with competitors

Product disparagement

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