Introduction Market Power Randal C Picker James Parker Hall Distinguished Service Professor of Law Ludwig amp Hilde Wolf Teaching Scholar The Law School The University of Chicago Copyright 200019 Randal C Picker All Rights Reserved ID: 760327
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Class 2Antitrust Winter 2019Introduction: Market Power
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
Ludwig & Hilde Wolf Teaching Scholar
The Law School
The University of Chicago
Copyright © 2000-19 Randal C. Picker. All Rights Reserved.
Slide2January 9, 2019
2
P = 10 – Q
P
Q
Demand Curve
10
10
Demand Curve Idea:
Consumers will buy more at lower prices
Slide3January 9, 2019
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P = 10 – Q
P
Q
Demand Curve
10
10
Competitive Outcome:
Price = Marginal Cost
Marginal Cost
Consumer Surplus
Total Revs (TR)/Total Costs (TC)
Q
C
P
C
MC = 4
Slide4Taking Stock
Competitive QuantityAt P = MCMeaning at 10 - Q = 4PC = 4, QC = 6
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Slide5Taking Stock
Amount of Consumer SurplusJust area of red triangle = ½ * base * heightMeaning ½ * 6 * 6 = 18This is the extra social value generated by the competitive process
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Why Are Monopolies Bad?
The Simple Answer
Reduced Output
A monopolist will produce less than would be produced under competitive conditions
The output reduction makes society worse off
Slide7What Do Monopolists Do?
First AnswerMaximize profitsSame answer, different waySet Marginal Revenue = Marginal CostMR = MC
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Deriving Marginal Revenue
TR = P x Q = (10 – Q) x Q = 10Q – QxQDifferentiate TR with respect to Q:
Slide99
P = 10 – Q
P
Q
Demand Curve
10
10
Monopoly Outcome:
Marginal Revenue = Marginal Cost
Marginal Cost
Q
C
P
C
MC = 4
MR = 10 – 2Q
Q
M
P
M
CS
Profits
DWL
TC
Marginal Revenue
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DWL = Deadweight Loss
Slide10Taking Stock
Monopoly OutcomesMR = MC 10 – 2Q = 4 so QM = 3 and PM = 7Consumer surplus = ½ * 3 * 3 = 4.5Profits = 3 * (7 – 4) = 9DWL = 4.5
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Slide11Taking Stock
Comparing the Competitive Outcome and the Monopoly OutcomeComp: SWF = 18Monop: SWF = 13.518 split into three components and the 4.5 DWL is the difference in SWF between the two situations
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Slide12Bottom Line
Monopolies reduce output to boost profitsThat transfers value from consumers to the monopolistThe monopolist declines to make sales that would increase social welfare
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Slide13Wrinkle
Two-Part PricingRequire consumers to pay a membership fee to access the goodSet that price = 18 (17.99 if you like) and then set the price of the good at 4How do we assess that?
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Slide14Answer
If …Demand curve really is that of a representative consumer and all consumers are identical, this will workOnce in the door consumers will face the correct social price for the good—marginal cost—and will buy the competitive amount
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Slide15Answer
If …The monopolist fully extracts the social surplus through the membership fee and no DWL arisesDoes this work in reality?
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Slide16January 9, 2019
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P = 10 – Q
P
Q
Demand Curve
10
10
Oligopoly:
Small N cases
What happens?
Marginal Cost
Q
C
P
C
MC = 4
Q
M
P
M
Slide17Oligopoly: What happens?
We don’t know, but …Try two alternativesNot agreements, but independent thinking and decisionsAlt 1: “We know the equilibrium will end up with each firm at the same price. Which price would each firm want?”
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Slide18Oligopoly: What happens?
Alt 2: Nash Equilibrium in prices (Bertrand competition) Look for prices such that firm 1 keeps it price given the price of firm 2, and firm 2 keeps its price given the price of firm 1Start with, as in the prior example, each firm at the monopoly price (7). Given that firm 2 has a price of 7, would firm 1 want to set a price of 7 as well?Consider three prices: above 7; 7; below 7.
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Slide19Oligopoly Takeaways
Don’t know what will happenThe firms make the most money if they can sustain the monopoly priceHow many firms do we need competing such that we move to the competitive price?The Bertrand competition model says 2.What is your N?
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Slide20Du Pont (US 1956)
Key QuestionsHow does du Pont’s position in cellophane arise?Does that matter?What does it tell us about whether du Pont has market power or how it is exercising that market power?
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Slide21Du Pont (US 1956)
Key FactsCellophane “market” is 75% du Pont and 25% Sylvania with the latter’s position limited by patent licensesCellophane is 20% of flexible packaging materials “market”Does du Pont have market power?
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Slide22Says the Court
Substitutes?“Determination of the competitive market for commodities depends on how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another.”
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Slide23Says the Court
Cross-Elasticity of Demand?“What is called for is an appraisal of the ‘cross-elasticity’ of demand in the trade. See Note, 54 Col. L. Rev. 580. The varying circumstances of each case determine the result. In considering what is the relevant market for determining the control of price and competition,
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Slide24Says the Court
Cross-Elasticity of Demand?“no more definite rule can be declared than that commodities reasonably interchangeable by consumers for the same purposes make up that ‘part of the trade or commerce,’ monopolization of which may be illegal.”
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Cross-Elasticities
Key Idea
How much does a rise in the price of one good change the quantity consumed of a second good?
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Defining Cross Elasticity
The percentage change in quantity of good 1 divided by the percentage change in price of qood 2.Formally:
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Examples
Increase of price of McDonald’s hamburger:
How many more hamburgers are sold by Burger King?
How much more chicken is sold by KFC?
How many more meals are sold by
Alinea
?
How many more pairs of shoes are sold?
Slide28And in du Pont Itself
Conclusion“That market is composed of products that have reasonable interchangeability for the purposes for which they are produced—price, use and qualities considered. While the application of the tests remains uncertain, it seems to us that du Pont should not be found to monopolize cellophane”
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Slide29And in du Pont Itself
Conclusion“should not be found to monopolize cellophane when that product has the competition and interchangeability with other wrappings that this record shows.”
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Slide30Merger Guidelines: Mergers and Markets
Don’t necessarily need to define the market“The Agencies’ analysis need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.”
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Slide31MG: Mergers and Markets
Substitutes and Market Definition“Market definition focuses solely on demand substitution factors, i.e., on customers’ ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service.”
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Slide32January 9, 2019
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MG: Market Definition: The HMT
The Hypothetical Monopolist Test
“The Agencies employ the
hypothetical monopolist test
to evaluate whether groups of products in candidate markets are sufficiently broad to constitute relevant antitrust markets. The Agencies use the hypothetical monopolist test to
identify a set of products that are reasonably interchangeable
with a product sold by one of the merging firms.”
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MG: Market Definition: HMT
The Hypothetical Monopolist Test
“The hypothetical monopolist test requires that a product market contain
enough substitute products
so that it could be subject to post-merger exercise of market power significantly exceeding that existing absent the merger.”
Slide34MG: Market Definition and SSNIP
Defining SSNIP“Specifically, the test requires that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products (“hypothetical monopolist”) likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”)
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Slide35MG: Market Definition and SSNIP
Defining SSNIP“on at least one product in the market, including at least one product sold by one of the merging firms.”
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