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Class 2 Antitrust Winter 2019 Class 2 Antitrust Winter 2019

Class 2 Antitrust Winter 2019 - PowerPoint Presentation

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Class 2 Antitrust Winter 2019 - PPT Presentation

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

2019 january market price january 2019 price market marginal demand competitive firm monopolist pont definition hypothetical product curve consumers

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Slide1

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.

Slide2

January 9, 2019

2

P = 10 – Q

P

Q

Demand Curve

10

10

Demand Curve Idea:

Consumers will buy more at lower prices

Slide3

January 9, 2019

3

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

Slide4

Taking Stock

Competitive QuantityAt P = MCMeaning at 10 - Q = 4PC = 4, QC = 6

January 9, 2019

4

Slide5

Taking 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

January 9, 2019

5

Slide6

January 9, 2019

6

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

Slide7

What Do Monopolists Do?

First AnswerMaximize profitsSame answer, different waySet Marginal Revenue = Marginal CostMR = MC

January 9, 2019

7

Slide8

January 9, 2019

8

Deriving Marginal Revenue

TR = P x Q = (10 – Q) x Q = 10Q – QxQDifferentiate TR with respect to Q:

Slide9

9

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

January 9, 2019

DWL = Deadweight Loss

Slide10

Taking 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

January 9, 2019

10

Slide11

Taking 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

January 9, 2019

11

Slide12

Bottom Line

Monopolies reduce output to boost profitsThat transfers value from consumers to the monopolistThe monopolist declines to make sales that would increase social welfare

January 9, 2019

12

Slide13

Wrinkle

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?

January 9, 2019

13

Slide14

Answer

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

January 9, 2019

14

Slide15

Answer

If …The monopolist fully extracts the social surplus through the membership fee and no DWL arisesDoes this work in reality?

January 9, 2019

15

Slide16

January 9, 2019

16

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

Slide17

Oligopoly: 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?”

January 9, 2019

17

Slide18

Oligopoly: 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.

January 9, 2019

18

Slide19

Oligopoly 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?

January 9, 2019

19

Slide20

Du 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?

January 9, 2019

20

Slide21

Du 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?

January 9, 2019

21

Slide22

Says 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.”

January 9, 2019

22

Slide23

Says 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,

January 9, 2019

23

Slide24

Says 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.”

January 9, 2019

24

Slide25

January 9, 2019

25

Cross-Elasticities

Key Idea

How much does a rise in the price of one good change the quantity consumed of a second good?

Slide26

January 9, 2019

26

Defining Cross Elasticity

The percentage change in quantity of good 1 divided by the percentage change in price of qood 2.Formally:

Slide27

January 9, 2019

27

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?

Slide28

And 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”

January 9, 2019

28

Slide29

And 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.”

January 9, 2019

29

Slide30

Merger 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.”

January 9, 2019

30

Slide31

MG: 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.”

January 9, 2019

31

Slide32

January 9, 2019

32

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.”

Slide33

January 9, 2019

33

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.”

Slide34

MG: 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”)

January 9, 2019

34

Slide35

MG: 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.”

January 9, 2019

35