15 Oligopoly and Antitrust Policy

If you keep running, the competition will bite you; if you stand still, they will swallow you.

We talked about competition, monopoly, and a blend of the two.

When making decisions, a firm must take into account the expected reaction of other firms, because there are a small number of firms in an industry.

Oligopolistic firms can be collusive or noncollusive.

There is a big difference between monopolistic competition and oligopoly.

Firms take other firms' actions into account.
In monopolistic competition, individual firms tend not to take into account the likely responses of their rivals.
It is difficult to co-exist.
Pricing decisions are strategic in oligopolies.
Collusion is much easier in oligopolies.
Market Structure distinguishes between monopolistic competition and oligopoly by whether or not firms explicitly take into account competitors' reactions to their decisions.

Economists can model and predict the price and output of an industry.

Predicting nonstrategic decision making can be done fairly accurately.
Even if people behave rationally, strategic deci sion making is hard to predict.
Oligopolistic firms are mutually dependent on what others expect the one person to do.

A model of monopolistic competition will tell us how much will be produced and how much will be charged.

Economists' models of oligopoly do not have a definite reaction from other firms.
There are no unique price and output decisions that competitors will not make.

Most industries in the United States have some oligopolistic elements.

Is it true that monopolistic competitors use almost any businessperson whether he or she directly takes into account rivals' likely strategic decision making?

If the market is seen to extend beyond your neighborhood, most retail stores may be quite competitive.

They keep a close eye on their competitors' prices.

There are five or six formal models, but I will focus on two informal models that give you insight into real-world problems.

The contestable market model is one of the two models we'll con sider.
These should show you how pricing works in the real world.

The reason is due to the interdependence of oligopolists.

Since there are few competitors, an oligopolist's plan must always be a contingency or strategic plan.
If my competitors act one way, I'll do X, but if they act another way, I'll do Y.
Strategic interactions have a variety of potential outcomes rather than a single outcome.
oligopolists spend a lot of time guessing what their competitors will do and develop a strategy of how they will act accordingly.
In Chapter 20, we will discuss that game theory has developed interdependent decisions.
The appendix shows how game theory can be applied to decisions.

If oligopolies are able to limit entry by other firms, they will make more money.

Firms follow a uniform pricing policy.

Car telization is the best strategy for an oligopoly since a monopolist makes the most profit that can be squeezed from a market.

It is against the law in the United States to have explicit formal colludes, but there are ways to collude.
There is some relevance to the model.

There are some problems with the model.

Collective interest of the firms in the industry isn't clear because of the different interests of various firms.

If the smaller firms face barriers to entry or the dominant firm has lower cost conditions, this model will not work.

If that were not the case, the smaller firms would pick up an increasing share of the market.

The temporary nature of the market is shown by that market.

Xerox's market share fell as it became more competitive on cost and quality.
Today's market is more competitive than it used to be.

Sometimes the various firms meet at a golf course or at a trade association gathering, and arrive at a collective decision.

Meeting for this purpose is illegal in the United States.
Firms collude in some cases to make a collective decision.

In which firms charge the same price but don't meet to discuss price strategy isn't against the law.

They operate as close to the law as they can.

Many industries allow a price leader to set the price, and the others follow suit.
The steel industry takes that route.
Firms charge the same price or close to it.

You can see it in other industries as well.

Most independent carpenters in small towns charge the same price.
If a carpenter offered to work for less than the others, he or she would not be welcomed at the breakfast restaurant.

The Miami fish market is where sport fishermen sell their catch.

I used to go to the docks to buy fresh fish when I lived in Miami.
The prices were the same at about 20 stands.
The price fluctuated, but at the end of the day the word would spread that the price could be reduced.

I got to know some of the sellers and asked them why they priced like that, when it would be in their interest to set their own price.

Social pressures play an important role in stabilizing prices in an oligopoly.

There is a gap in it.

It is important to remember that technological changes are constantly occurring, and that a successful cartel with high profits will provide incentives for technological change, which can eliminate demand for its monopolized product.

In the U.S. busi nesses, informal collusion happens all the time.

One characteristic of informal collusive behavior is that prices don't change very often.
Prices are sticky because of informal colluding.
It's not the only reason.

Another possible reason is that firms don't collude, but do have certain reactions from other firms that change their perceived demand curves.

They think that the demand curve they face is not straight.
The demand curve is used to explain why firms don't use lower prices to increase sales.

Let's go through the reasoning behind the demand curve.

It will lose business to other firms that have not raised their prices.

The firm assumes that all other firms will match the decrease in price, so it won't gain any additional sales.

The assumptions are made when the demand curve is not straight.

The marginal revenue curve must have a gap when the demand curve is not perfect.
The firm's gap will not be changed.

Firms will change their price if there is a large shift in marginal cost.

The reason behind the kink is the intuitive answer.
If other firms don't go along with a price hike, the firm will lose market share.
Other firms will go along and the firm won't gain market share when the price is lowered.
The firm doesn't want to change its price in either direction.

The kinked demand curve is not a theory of pric ing.

The theory of sticky prices does not explain why the original price is what it is.

The contestable market model is a second model of oligopoly.

The price that an oligopoly will charge in the contestable market model will exceed the cost of production only if new firms cannot exit and enter the market.

The higher the barriers, the higher the price.

Barriers to entry and exit are not based on market structure.
The price an oligopolist sets will be is the same as the competitive price.
If the industry contains only one firm, it could set competitive prices and still be a competitive market if output levels are high.

There is no "oligopolistic model" because of the importance of social pressures.

A monopolist solution can be reached by oligopolies with a stronger ability to collude.
The perfectly competitive solution is Equilibrium of oligopolies with weaker social pressures and less ability to prevent new entry.

An oligopoly's price will be somewhere between the competitive price and the monop olistic price.

The results between these two are given by other models of oligopolies.

Much of what happens in pricing is dependent on the legal structure of the firms.

In Japan, where large firms are allowed to collude, we see Japanese goods that are more expensive than those in the United States.
Before international competition, Japanese televisions were more expensive than their US counterparts.
The pricing strategy U.S. oligopolists would follow is based on the behavior of Japanese firms.

The threat from outside competition is one of the things that limits oligopolies from acting as a Cartel.

The threat will be more effective if the competitor is larger.

Small-town banks have a tendency to collude, offering lower interest to savers and charging higher interest to borrowers than big banks charge, even though their average costs aren't significantly higher.

I am told by small-town banks that my perception is faulty and that I should mind my own business.
If a big bank enters the town and opens a branch office, the interest rates on deposits seem to go up and the interest rates on borrowers seem to go down.
Competition that couldn't come from within the town can be added by the big bank.

Many of the new dynamic companies in our economy do to a particular app and, once they are comfortable using it, not produce products, but rather provide platforms for stick with it even when prices rise.

While the enormous competition between the two companies is holding their fares down, this will not likely happen to people who are still using them.

There are strong pres who are willing to drive people where they want to go for the sake of a merger.
There is an agreement to share the market.
Econo used an app on his phone.

The two companies that have been set up to avoid have designed their apps to look like many of the rules and regulations that will make a merger easier.

Competition for rides is fierce just before a merger as each tries to gain a strategic advantage.

The results of strategic competition are hard to quantify.

The CEO's offhand com investors were predicting that eventually both companies would change the results.
Economists would be able to use their market power to provide high, have developed a tool, game theory, to study this interac profits in the future.
This tool will be explored in a later chapter.

International firms often compete on a national scale.

There are many examples of this outside competition breaking down the cartels.

A long-run demand curve is very elastic, and a group with no barriers to entry faces that.
The price will be close to its marginal cost and average cost.
This is the same predic tion that came from the market theory.

Many of the large, dynamic new companies are platform monopolies, whose product advantages are driven by network externalities--the bigger they are, the more valuable their services are to consumers, and the stronger are their monopoly positions.

A monopoly can better serve customers' needs and this creates a strong push toward it.
Platform monopolies are usually natu ral.
New technologies that change the nature of the market will open the new market to competition.
Strong barriers to entry will provide existing firms with significant market power once a platform is established.
Competition might be fierce at first, but once the dominant firms are established, the competition will decrease.

An industry doesn't fit neatly into one category.

In this section we review the procedures and measures that have been developed to classify actual industries.

Consider the banking indus try if you want to see the problems that arise in classifying industries.

The United States has about 5,000 commercial banks.
A town with only one or two banks will have a monopoly or oligopoly with respect to banks.
There is an argument when we think of international competition.
The inter national market in the United States might be more accurately characterized by monopolistic competition than by a group of firms in international markets.

The classification problem involves deciding what is included in an industry.

There are many firms in the transportation industry.
There are still fewer firms if you define it as the urban transit industry or the commuter rail industry.

The local market has less competition than the global market.

Cross-price elasticities are one of the ways in which economists classify markets in practice.

When two goods have a cross-price elasticity greater than or equal to 3, they can be regarded as belonging to the same market.

Table 15-1 shows subgroupings for one sector, Information, to give you an idea of what's included in each sector.

The four- to six-digit subsector groupings in the United States are what economists talk about when they talk about industry structure.

This is a gathering of people.

If an economist wants to argue that an industry is more competitive than its opponents say it is, he or she will challenge this convention of using a four- to six-digit classification of industry.

The four-firm concentration ratio is the most used concentration ratio.

A four-firm concentration ratio of 60 percent tells you that the top four firms in the industry produce 60 percent of the industry's output.
The closer the industry is to a monopolistic type of market structure, the higher the ratio is.

10 firms in the industry each have 10 percent of the market, which is competitive.

The Herfindahl index weights the largest firms in the industry more heavily than it weights the smallest firms.

The two measures can be different if the con- firms have large market shares.

The four-firm concentration rule of thumb by the U.S. Department of Justice is used to determine whether an industry is sufficiently competitive.

330 Microeconomics does not look more closely at the merger.

The policy may change in the future.

The four-firm concentration ratio doesn't give us a picture of corporations' size.

Many corporations are conglomerates.

A conglomerate might make both shoes and automobiles.

The United States had only 11 firms, each with a 9 percent share of each industry, and concentration ratios are not an index of bigness.

Many people would doubt whether the U.S. economy was unconcentrated, even if both indexes classified it that way.
In determining whether or not conglomer ates affect an industry's performance, little work has been done.

Let's take a look at the market models of oligopoly to see how they relate to the empirical measures of market structure.

The model that fits best with the empirical measurement of market concentration is the one that assumes that the structure of the market is related to the price a firm charges.
oligopolies charge higher prices than monopolistic competitors, who in turn charge higher prices than competitive firms charge.

The empirical estimates of market structure are not given much weight by the contestable market model.

According to the model, markets look highly Q-7.

Structurally look less competitive when using a contestable market approach.

These models give a view of competition that isn't dependent on market structure.

The index is 1,500.

Using the structural approach, we would say that we are not sure what price firms in this industry would charge, but that it seems reasonable to assume that there would be some implicit collusion and that the price would be closer to a monopolist.

The industry would be more likely to have a competitive price if the market had a four-firm concentration ratio of 30 percent.

A market model advocate would argue that barriers to entry are important.

If significant barriers to entry exist in the first case but not in the second, the second case would be more monopolistic than the first.
In the Miami fish market, there were only 20 sellers and no large percentage of the market, and only fishers from the pier were allowed to sell fish there.
Pricing and output decisions would be close to the monopolistic price because of entry limitations.
If you had free entry, you would get closer to decisions.

I emphasized the differences in order to make the distinction clear.

There is a similarity between the two views.
There are a few firms in an industry because of barriers to entry.

There are no barriers to entry when there are many firms.

The two approaches come to the same conclusion in such situations.

Now that we've gone over the four major market structures in theory, and the way in which industries are classified in practice, let's consider government's role in affecting market structure.

Competition policy in the United States and some other countries is called antitrust policy.

It's the government's rules for being a referee.

The United States has seen wide swings in economists' prescriptions regarding such questions, depending on which of the two views of competition has held sway.

There are two examples of the difference.

The trusts were seen as making huge profits, preventing competition, and bully everyone in sight.

The Standard Oil Trust was created by John D.

Rockefeller's monopoly power allowed it to close refineries, raise prices, and limit the production of oil.

The competitive process is regulated by a law.

Standard Oil was sued by the government for violating the Sherman Antitrust Act.

The U.S. Supreme Court's opinion was handed down in 1911.
The outcome of the Standard Oil case was determined by the performance of the company.
The court decided that the ALCOA case was determined by market structure.

The resolution was to break up Standard Oil, which made a distinction between judgement by performance and judgement by academic structure.

There must be a market structure, legal restrictions on smoking a gun, and rarely enough evidence of price-fixing to prove explicit collusion.

There was a plan to prosecute businesses.
There are exceptions to the secret recording of comment during a price-fixing meeting.
The former president of ADM was caught red-handed in 1996 when one of his former officials gave prosecutors tapes of the major supplier of food and grain.

The explicit nature of the FBI's secretly recorded meetings is a key aspect of the law.

When one firm agreed to pay the largest criminal antitrust fine in history, other industries followed suit.

The price of fines has changed since that time.

The largest fines have been paid by banks.

It was not in violation of antitrust law because it had not used unfair business practices to become a monopolist.

U.S. Steel did not have to break up into small companies.

The only producer of aluminum in the United States was ALCOA, which used its knowledge of the market to expand its capacity before anyone else.

It did not use unfair business practices to become a monopolist.
The courts focused on the structure of the market and ruled that ALCOA was in violation of antitrust laws even though it was not guilty of monopoly behavior.

Judgement by structure and judgement by structure and judgement by performance have problems.

Their structure seems unfair on a gut level.

If all the other firms leave the industry, the successful firm will be a monopolist and will be guilty of antitrust violations.

The structure criterion is favored by supporters of the judgment-by-structure criterion.

Practicality is an important reason for this.

Judgment by performance requires that each action of a firm be analyzed on a case by case basis.

The same actions of a firm might be considered inappropriate in different interpretations.
In order for its warranty to hold, an automobile company requires that owners of warranteed vehicles only use the company's parts and service centers.
The answer is dependent on the context of the action.

The problem is that judging each case contextually is not within the courts' power.

The courts can't judge all industries on their performance because there are so many firms and actions.
The courts limit the cases they look at using market share because it is firms' performance that will be judged.

Market structure has difficulties.

It's difficult to determine the relevant geographic market and industry needed to identify the structural competitiveness of any industry, as you saw in the discussion of monopolistic competition.

The political winds have led to antitrust enforcement.

Policy discussions tend to reflect prevailing ideology and politics.
In the 1980s, under Republican president Reagan, the United States undertook less antitrust enforcement; in the 1990s, under Democratic president Clinton, it undertook more; and in the 2000s, under Republican president Bush, it undertook less.
There is a pattern.

Over the past decades, the number of antitrust cases brought before the courts has gone up.

There are three reasons for the decline in antitrust enforcement, they are monopoly actions from occurring, globalization and the rate of technological change.

A century of experience has taught businesses what the law allows.

No enforcement is necessary because the threat of an antitrust case is enough.
When the rate of technological change increased in 2015, a proposed merger between Time Warner Cable and Comcast Cable was abandoned.

The merger is likely to be opposed by the Justice Department on antitrust grounds.

A change in American ideology is one of the reasons.

Big business was seen as a combination of good and bad in the 1980s, compared to the 1950s and 1960s when it was seen as bad.
In the last century, antitrust and competition were thought of in terms of national pol icy.
The concern was about the power of U.S. firms.
The United States was the low-cost producer of many goods and trade barriers made global competition difficult.

The era of globalization began in the 1980s.

The United States was no longer relevant because of technological revolutions in communication and shipping.

The bigger the market, the more competition there is.

Competition is thought of as an international policy issue.

Apple, the U.S.-based company that makes about one-third of all smartphones sold in the United States, faces competition from South Korean firm SAMSUNG, which makes another third of phones sold in the U.S. As big as Apple is, there is less need for antitrust enforcement to ensure competition.
The U.S. market structure is no longer an indicator of monopoly power.

The antitrust enforce ment can be provided by other countries.

Other countries' antitrust agencies have been more aggressive and global companies need to take into account antitrust implications of multiple countries, such as China and the EU.

Even though the search engine passed muster with the U.S. antitrust authorities, European antitrust authorities felt that the search engine favored its comparison service.

The issues in antitrust enforcement are so complicated that it can take years to sort them out, one of the reasons why antitrust enforcement has declined.

By the time a remedy is determined, the technologies involved and the relevant markets have changed and the remedy is no longer relevant.
The case against IBM was brought in the 1980s.
The advent of personal computers made IBM mainframes obsolete and IBM lost its monopoly in computers because of technological change.
It was Microsoft's turn in the 1990s.

The case against Microsoft was decided by the time it was decided.

The mechanics of antitrust enforcement are too slow to operate in the fast-changing business environment.

The need for regulating its monopoly position by charging high tion has not arisen.

There are still issues underlying the concern for monopoly power.

Companies with market power can take advantage of consumers and the public in ways that many would consider unfair.

The government's response to that concern is antitrust laws.
Current antitrust laws aren't enough to address those concerns.

If we want effective antitrust, we need new laws or a major revision of existing laws.

There is a lot of discussion about how to make existing antitrust laws relevant to the new companies that are driving our economy.

The issue is not that these companies are charging high prices.
The concern comes from their other practices, specifically what businesses are doing with the data and information they collect about their customers, and how competition should be encouraged in an economy undergoing an information revolution.

These large platform businesses have developed valuable pictures of each of their users that they can sell and use to design ads to get people to respond just the way they want, taking advantage of consumers' weaknesses and behavioral regularities.

Consumers and competitors can be disadvantaged by this information.
The huge amount of consumer information gathered by existing firms makes it hard for potential new competitors to enter the market since they don't have the data to target ads.

The data allows existing firms to see future competition and to stomp on it, they know which new platforms are popular long before anyone else does.

They have inside information that allows them to buy up potential competitors before they become serious competitors.

Facebook bought a few things.
It was bought by the internet giant, Google.
Facebook created a snap clone, which it tied to Facebook's Messenger, in order to undermine Snapchat's momentum.

The competitive landscape is changed by such actions.

The same issues of structure and performance exist today that existed in the 1890s when the Sherman Act was passed.

The suggested remedies are likely to be different.

Break up the companies is not likely to be the solution since the value of platform businesses to consumers increases with the market share of the business.

The benefit of the service to consumers would be decreased if they were broken up.

Slowly, Antitrust Today move.

New technologies are continually challenging older technologies, so antitrust remedies need to be thought of in a dynamic context.

Increasing competition involves facilitating technological change.

The antitrust laws will likely deal with how to treat the data for firms like Facebook.
One remedy that has been proposed is to let consumers retain ownership over their records, allowing them to move data collected on their behavior to new firms if they want, or to pay to keep the platform from collecting data from them at all.
A person could be given the option of paying a certain amount for each search on the internet, with the guarantee that the search will be erased.
For a fixed fee, a consumer could have all the data that a company has collected on her erased.

It is proposed that platform marketplaces such as Amazon be responsible for the legality of the goods and the conduct of the firms using their platform.

Social network and search companies could be held responsible for the ads that appear on their site.
The oversight committees that have the technical background and expertise to make informed decisions might be able to deal with preferences to their own apps.

None of these solutions are easy, and each has its own problems.

The business of modern business is not simple and antitrust policy has to be simple.

We have come to the end of our discussion of market structure and government policy.

The problem has many dimensions.
Market structure is important, and generally more competition is preferred to less competition.
When industries are experiencing technological change, government-created and pro tected monopolies have not been the optimal solution.
Traditional antitrust policy is neither.
It isn't designed to deal with the technical issues that need to be considered.

There is a small number of individual market shares in firms and firms engage in strategic decision industry, two distinguishing characteristics of an oligopo.

The government's policy toward antitrust is a contestable market theory.

There is a debate about whether markets should be focused on market structure.

The price of an oligopolist will be somewhere between the competitive price and the monopolistic.

Judgement by structure means judging the industries by how many firms they have in the North American Industry Classification and their market shares.

The industry structures are sured by concentration ratios.

The amount of market shares changes in the economy have not eliminated the need for individual firms with the largest shares in an antitrust policy; they have changed the type of industry.

There is a difference between oligopoly and monopolistic b.

The contestable market model has 24 percent of the market.

What 5 is based on this information.

Fisher-Price was once proposed to be acquired by Mattel.

The toy industry was dominated by the company with 11 percent of the market.

If you were an economist for a firm that wanted to amalgamate, you would have 4 percent.

Would you argue that the three-digit or five-digit NAICS is a 5 percent share for Tyco and a 15 percent share for Hasbro?

The infant/preschool toy market had an 8 per 11.

If you were an economist, you'd think that Fisher-Price had a 27 percent share of the Barbie doll, which was making an unsolicited largest.
The other two firms were trying to take over the manufacturer of the G.I.

Do you think dolls are the relevant market?

The basis of judgement for Standard Oil and competition is different.

One industry has a 15.

Show how regulating the price of a Herfindahl index of 1,200 or one with a four-firm monopolist can increase quantity and decrease price.

There are three reasons for fewer antitrust cases.

Questions from Alternative Perspectives 1.

You have learned a lot by dividing the duties of men from those of market power in order to understand how society has responded.

The economist wouldn't b.

He would say that firms 3.
Women use market power because they can.

The study found that companies in the same industry had mergers.

The federal government is less active than it used to be.

Some resulted in losses.

Is this a new approach?

If a firm lowers its price, no one else will.

If the marginal cost goes up to $5, what do you think of American Airlines?

How did Continental's financial troubles affect how other firms would respond to their Northwest?

You work at the Department of Justice.

The one presented in the book was compared to Ms. Ecofame.

Private colleges of the same caliber usually charge Ecofame index, which is calculated by taking the market share and dividing it by the tuition.

What do you think about the top 10 firms in the industry?

The Ecofame ratio had advantages and disadvantages.

The fourth-largest firm in that market was Mattel.

Adam Smith wrote that "Seldom do the market businessmen of the same trade get together but that it leader with 27 percent."

Firms have to make decisions about quantity demanded that will fall by a lot.

They are not in their best interests.
The demand curve is not elastic.

In a market with a Herfindahl index of 1,500, the largest competitors and the oligopolist would see little change in firm, at most, slightly under 38 percent of the quantity demanded with a price decline.

The industry with the least concentration could be 4.
If seven firms each had between 14 and 15 per cartel model, which is the equivalent of a monopoly, and cent of the market, the model would be two extremes.
The indus (2) is a contestable market model that is similar to a competitive border on monopoly.

Standard Oil was decided to have engaged in 5 by the court.

The two-digit industry was guilty of antitrust violations and must be broken.
It was judged on its performance.
The Supreme Court would decide the structure of the market if one firm had the entire 60 percent and all other firms had less than that.

If each of the top individuals were given a free search engine, this industry would be able to flourish.

Four firms had 15 percent of the market and yielded to its other practices, such as its use of the data it collects.

The market approach looks at barriers to entry.