Monopoly - Pearsoncmg

Report
R. GLENN
HUBBARD
O’BRIEN
ANTHONY PATRICK
Economics
FOURTH EDITION
CHAPTER
15
Monopoly and
Antitrust Policy
Chapter Outline and
Learning Objectives
15.1 Is Any Firm Ever Really a
Monopoly?
15.2 Where Do Monopolies
Come From?
15.3 How Does a Monopoly
Choose Price and Output?
15.4 Does Monopoly Reduce
Economic Efficiency?
15.5 Government Policy toward
Monopoly
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Is Cable Television a Monopoly?
• The first cable systems were established in the 1940s offering just a few
channels, and by 1970, only about 7 percent of households had cable
television.
• In the late 1970s, Congress loosened regulations on rebroadcasting distant
stations and charging for premium channels, but the city government requires
a firm to obtain a license to enter a local cable television market.
• Although few firms in the United States are monopolies, Time Warner Cable
had a monopoly until 2008 because it was the only provider of cable TV in the
Manhattan borough of New York City.
• It’s very difficult for a firm to remain the only provider of a good or service
because usually in a market system, whenever a firm earns economic profits,
other firms will enter its market.
• AN INSIDE LOOK AT POLICY on page 510 discusses the entry of Verizon
into the market for cable TV in upstate New York to compete with Time
Warner Cable.
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Economics in Your Life
Why Can’t I Watch the NFL Network?
Are you a fan of the National Football League? Would you like to see more
NFL-related programming on television?
If so, you’re not alone.
The NFL concluded that there was so much demand for more football
programming that it began its own football network, the NFL Network.
Unfortunately for many football fans, the NFL Network is not available to
many households that have cable television, including, as of August 2011,
Time Warner Cable that serves the majority of cable customers in New York,
the largest television market in the United States.
See if you can answer these questions by the end of the chapter:
Why are some of the largest cable TV systems unwilling to include the NFL
Network in their channel lineups?
Why are some systems requiring customers who want the NFL Network to
upgrade to more expensive channel packages?
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The economic model of monopoly provides a benchmark for the extreme where
a firm is the only one in its market and, therefore, faces no competition from
other firms supplying its product.
The monopoly model is also useful in analyzing situations in which firms agree
to collude, or not compete, and act together as if they were a monopoly.
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Is Any Firm Ever Really a Monopoly?
15.1 LEARNING OBJECTIVE
Define monopoly.
Monopoly A firm that is the only seller of a good or service that does not have
a close substitute.
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Making
Is Google a Monopoly?
the
Connection
The federal government
can take legal action against a firm under
the antitrust laws if it believes that the firm
has created a monopoly.
In 2011, Microsoft filed a complaint with
the European Commission that Google
was using its dominant position as an
Internet search engine to create an
effective monopoly by excluding competitors, and the U.S. Federal Trade
Commission (FTC) indicated that it was investigating whether Google had violated
the antitrust laws.
Google argues that its dominant market share is due to the higher quality of its
search engine, not any attempts the company has made to reduce the access of
other search engines to online content.
While Google is not the only Internet search option available, many economists
consider a firm to have a monopoly if other firms are unable to compete away its
profits in the long run.
MyEconLab Your Turn:
Test your understanding by doing related problems 1.7 and 1.8 at the end of this chapter.
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Where Do Monopolies Come From?
15.2 LEARNING OBJECTIVE
Explain the four main reasons monopolies arise.
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Barriers to entry may be high enough to keep out competing firms for four
main reasons:
1. A government blocks the entry of more than one firm into a market.
2. One firm has control of a key resource necessary to produce a good.
3. There are important network externalities in supplying the good or service.
4. Economies of scale are so large that one firm has a natural monopoly.
Government Action Blocks Entry
In the United States, governments block entry in two main ways:
1. By granting a patent or copyright to an individual or a firm, giving it the
exclusive right to produce a product
2. By granting a firm a public franchise, making it the exclusive legal provider
of a good or service
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Patents, Copyrights, and Public Franchises
Patent The exclusive right to a product for a period of 20 years from the date the
patent is filed with the government.
Pharmaceutical firms apply for patents about 10 years before they begin to sell a
new prescription drug, after which most earn economic profits for 20 years.
After the patent has expired, other firms are free to legally produce chemically
identical drugs called generic drugs, whose competition will eliminate the
increasing profits the original firm had been earning during the time remaining on
the patent, which is usually about 10 years.
Copyright A government-granted exclusive right to produce and sell a creation.
After a creator’s death, his or her heirs retain this exclusive right for 70 years.
Public franchise A government designation that a firm is the only legal provider
of a good or service.
Public enterprises, through which governments may decide to provide certain
services directly to consumers rather than rely on private firms, are more common
in Europe than in the United States.
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Making
the
The End of the Christmas Plant Monopoly
Connection
For many years, the Paul Ecke Ranch in Encinitas,
California had a monopoly on poinsettias, whose
striking red and green colors that blossom in the
winter make them ideal for Christmas decorating.
After discovering a new technique for growing the
wildflower that was kept secret for decades, the
Ecke family was able to maintain a monopoly on its
commercial production without acquiring a patent,
until a university researcher discovered the
technique and published it in an academic journal.
As a result, many new firms quickly entered the
industry and the price of poinsettias plummeted.
MyEconLab Your Turn:
Test your understanding by doing related problem 2.10 at the end of this chapter.
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Control of a Key Resource
Most resources, including raw materials such as oil or iron ore, are widely
available from a variety of suppliers, but before World War II, the Aluminum
Company of America (Alcoa) and the International Nickel Company of Canada
were two monopolies based on control of a key resource.
Network Externalities
Network externalities A situation in which the usefulness of a product
increases with the number of consumers who use it.
From a firm’s point of view, network externalities can set off a virtuous cycle:
If a firm can attract enough customers initially, it can attract additional
customers because the value of its product has been increased by more people
using it, which attracts even more customers, and so on.
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Making
the
Are Diamond Profits Forever?
The De Beers Diamond Monopoly
Connection
The most famous monopoly based
on control of a raw material is the De Beers diamond
mining and marketing company of South Africa,
which became one of the most profitable and longestlived monopolies in history by carefully controlling the
supply of diamonds to keep prices high.
As competition in the diamond business gradually
increased over the years, De Beers abandoned its
strategy of attempting to control the worldwide supply
of diamonds, concentrating instead on differentiating
its diamonds by marking each one with a microscopic
brand—a “Forevermark.”
Other firms have followed suit by branding their
diamonds.
Whether consumers will pay attention to brands on diamonds remains to be seen,
although through 2011, the branding strategy had helped De Beers to maintain a
35 to 40 percent share of the diamond market.
MyEconLab Your Turn:
Test your understanding by doing related problem 2.11 at the end of this chapter.
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Natural monopoly A situation in which economies of scale are so large that one
firm can supply the entire market at a lower average total cost than can two or
more firms.
Figure 15.1 Average Total Cost Curve for a Natural Monopoly
With a natural monopoly,
the average total cost curve
is still falling when it crosses
the demand curve (point A).
If only one firm is producing
electric power in the market,
and it produces where the
average cost curve
intersects the demand curve,
average total cost will equal
$0.04 per kilowatt-hour of
electricity produced.
If the market is divided
between two firms,
each producing 15 billion
kilowatt-hours,
the average cost of producing electricity rises to $0.06 per kilowatt-hour (point B).
In this case, if one firm expands production, it can move down the average total cost curve,
lower its price, and drive the other firm out of business.
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Solved Problem 15.2
Is the OpenTable Web Site a Natural Monopoly?
OpenTable is a Web site and smartphone application that allows people to make restaurant
reservations online, charging participating restaurants a fee for each reservation.
Business writer James Stewart argued that the site is a natural monopoly because “users are
attracted to the site with the largest number of listings, and restaurants are attracted to the
site with the largest number of users.”
a. Assuming that Stewart is correct, draw a graph showing the market for online restaurant
reservation sites.
Be sure that the graph contains the demand for online restaurant reservations and
OpenTable’s average total cost curve.
Explain why OpenTable would have lower average costs than would a new site that
enters the market to compete against it.
b. Does the number of years OpenTable has been operating affect how you evaluate
Stewart’s claim that the business is a natural monopoly?
Briefly explain.
Solving the Problem
Step 1: Review the chapter material.
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Solved Problem 15.2
Is the OpenTable Web Site a Natural Monopoly?
Step 2: Answer part a. by drawing a natural monopoly graph and explaining why
OpenTable would have lower average costs than new entrants to the market.
If Stewart is correct that OpenTable is actually a natural monopoly, the relationship between
market demand and its average total costs should look like Figure 15.1.
Make sure your average total cost curve is still declining when it crosses the demand curve.
The market for online reservations is
a natural monopoly because if one
firm can supply Q1 online reservations
at an average total cost of ATC1,
then dividing the business equally
between two firms each supplying
Q2 online reservations would raise
average total cost to ATC2.
OpenTable’s fixed costs for servers,
software programming, and marketing
are very large relative to its variable
costs, but its marginal cost of
accommodating one more visitor to its
site will be extremely small.
Therefore, economies of scale in this market
are likely to be so large that a firm that enters and attracts a small number of visitors to its site
will have much higher average costs than OpenTable.
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Solved Problem 15.2
Is the OpenTable Web Site a Natural Monopoly?
Step 3: Answer part b. by discussing whether how long OpenTable has been in
business is relevant to assessing whether it is a natural monopoly.
If a firm is a natural monopoly, it is unlikely that firms will be able to successfully enter
its market.
A firm that is the first to enter a new market may not initially attract potential competitors
because it can take time for them to decide whether it would be profitable to enter the
industry, particularly one that might require a substantial initial investment.
The longer OpenTable continues to operate without significant competition, the more likely
the firm actually is a natural monopoly and that other restaurant owners will see it as such.
Keep in mind that competition is good when it leads to lower costs, lower prices, and better
products, but when cost conditions in certain markets are such that competition is likely to
lead to higher costs and higher prices, these markets are natural monopolies that are best
served by one firm.
Advances in technology or innovative marketing may make it possible for other firms to
successfully compete with OpenTable.
MyEconLab Your Turn:
For more practice, do related problem 2.12 at the end of this chapter.
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How Does a Monopoly Choose Price and Output?
15.3 LEARNING OBJECTIVE
Explain how a monopoly chooses price and output.
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A monopoly differs from other firms in that a monopoly’s demand curve is the
same as the demand curve for the product.
Marginal Revenue Once Again
Recall that firms in perfectly competitive markets are price takers because they
face horizontal demand curves.
All other firms, including monopolies, are price makers because they face a
downward-sloping demand curve as well as a downward-sloping marginal
revenue curve.
Remember that when a firm cuts the price of a product, one good thing happens,
and one bad thing happens:
•
The good thing. It sells more units of the product.
•
The bad thing. It receives less revenue from each unit than it would have
received at the higher price.
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Figure 15.2 Calculating a Monopoly’s Revenue
Time Warner Cable faces a
downward-sloping demand curve for
subscriptions to basic cable.
To sell more subscriptions, it must
cut the price.
When this happens, it gains revenue
from selling more subscriptions but
loses revenue from selling them at a
lower price than it could have.
The firm’s marginal revenue is the
change in revenue from selling
another subscription.
We can calculate marginal revenue
by subtracting the revenue lost as a
result of a price cut from the revenue
gained.
The table shows that Time Warner’s
marginal revenue is less than the
price for every subscription sold after
the first subscription.
Therefore, Time Warner’s marginal
revenue curve will be below its
demand curve.
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Figure 15.3 Profit-Maximizing Price and Output for a Monopoly
Panel (a) shows that to maximize profit, Time Warner should sell subscriptions up to the
point where the marginal revenue from selling the last subscription equals its marginal cost
(point A). In this case, the marginal revenue from selling the sixth subscription and the
marginal cost are both $27. Time Warner maximizes profit by selling 6 subscriptions per
month and charging a price of $42 (point B).
In panel (b), the green box represents Time Warner’s profit. The box has a height equal to
$12, which is the price of $42 minus the average total cost of $30, and a base equal to the
quantity of 6 cable subscriptions. Time Warner’s profit therefore equals $12 × 6 = $72.
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Solved Problem 15.3
Finding the Profit-Maximizing Price and Output for a Monopolist
Suppose that Comcast has a cable monopoly in Philadelphia.
Total Revenue
Marginal Revenue
(MR = ΔTR/ΔQ)
Price
Quantity
Total Cost
$27
3
$56
26
4
73
25
5
91
24
6
110
23
7
130
22
8
151
Marginal Cost
(MC = ΔTC/ΔQ)
The table above gives Comcast’s demand and costs per month for subscriptions to basic
cable (for simplicity, we once again keep the number of subscribers artificially small).
a. Fill in the missing values in the table.
b. If Comcast wants to maximize profits, what price should it charge,
and how many cable subscriptions per month should it sell?
How much profit will Comcast make?
Briefly explain.
c. Suppose the local government imposes a $25-per-month tax on cable companies.
Now what price should Comcast charge, how many subscriptions should it sell,
and what will its profits be?
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Solved Problem 15.3
Finding the Profit-Maximizing Price and Output for a Monopolist
Suppose that Comcast has a cable monopoly in Philadelphia.
Total Revenue
Marginal Revenue
(MR = ΔTR/ΔQ)
Total Cost
Marginal Cost
(MC = ΔTC/ΔQ)
Price
Quantity
$27
3
$81
–
$56
–
26
4
104
$23
73
$17
25
5
125
21
91
18
24
6
144
19
110
19
23
7
161
17
130
20
22
8
176
15
151
21
Solving the Problem
Step 1: Review the chapter material.
Step 2: Answer part a. by filling in the missing values in the table.
To calculate marginal revenue and marginal cost, you must divide the change in total revenue
or total cost by the change in quantity.
We don’t have enough information from the table to fill in the values for marginal revenue and
marginal cost in the first row.
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Solved Problem 15.3
Finding the Profit-Maximizing Price and Output for a Monopolist
Suppose that Comcast has a cable monopoly in Philadelphia.
Total Revenue
Marginal Revenue
(MR = ΔTR/ΔQ)
Total Cost
Marginal Cost
(MC = ΔTC/ΔQ)
Price
Quantity
$27
3
$81
–
$56
–
26
4
104
$23
73
$17
25
5
125
21
91
18
24
6
144
19
110
19
23
7
161
17
130
20
22
8
176
15
151
21
Step 3: Answer part b. by determining the profit-maximizing quantity and price.
The information in the table tells us that Comcast will maximize profits by selling 6
subscriptions at a price of $24 each, where marginal cost equals marginal revenue.
Comcast’s profits are equal to the difference between its total revenue and its total cost:
Profit = $144 − $110 = $34 per month.
Step 4: Answer part c. by analyzing the impact of the tax.
The $25 tax is a fixed cost that doesn’t affect Comcast’s marginal revenue, marginal cost, or
profit-maximizing level of output. So, Comcast will still sell 6 subscriptions per month at a
price of $24, but its profits will fall by the amount of the tax, from $34 per month to $9.
MyEconLab Your Turn:
For more practice, do related problems 3.4 and 3.5 at the end of this chapter.
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If other factors remain unchanged, monopolists can continue to earn economic
profits, even in the long run, without facing competition; new firms will not enter
the market.
Don’t Let This Happen to You
Don’t Assume That Charging a Higher Price Is Always More Profitable for a Monopolist
In addition to marginal revenue and marginal cost, a monopolist must pay attention to consumer
demand to determine whether the price is maximizing profit.
MyEconLab Your Turn:
Test your understanding by doing related problem 3.8 at the end of this chapter.
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Does Monopoly Reduce Economic Efficiency?
15.4 LEARNING OBJECTIVE
Use a graph to illustrate how a monopoly affects economic efficiency.
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Equilibrium in a perfectly competitive market results in the greatest amount of
economic surplus, or total benefit to society, from the production of a good or
service.
Comparing Monopoly and Perfect Competition
A monopoly will produce less and charge a higher price than would a perfectly
competitive industry producing the same good.
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Figure 15.4 What Happens If a Perfectly Competitive Industry Becomes a Monopoly?
In panel (a), the market for tablet computers is perfectly competitive, and price and quantity
are determined by the intersection of the demand and supply curves.
In panel (b), the perfectly competitive tablet computer industry becomes a monopoly.
As a result:
1. The industry supply curve becomes the monopolist’s marginal cost curve.
2. The monopolist reduces output to where marginal revenue equals marginal cost, QM.
3. The monopolist raises the price from PC to PM.
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Measuring the Efficiency Losses from Monopoly
Recall that consumer surplus measures the net benefit received by consumers
from purchasing a good or service, and that producer surplus measures the net
benefit to producers from selling a good or service.
The sum of consumer surplus plus producer surplus equals economic surplus,
a reduction in which is called deadweight loss and represents the loss of
economic efficiency.
We can summarize the effects of monopoly as follows:
1. Monopoly causes a reduction in consumer surplus.
2. Monopoly causes an increase in producer surplus.
3. Monopoly causes a deadweight loss, which represents a reduction in
economic efficiency.
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Figure 15.5 The Inefficiency of Monopoly
A monopoly charges
a higher price, PM,
and produces a
smaller quantity, QM,
than a perfectly
competitive industry,
which charges price PC
and produces QC.
The higher price reduces
consumer surplus by
the area equal to the
rectangle A and the
triangle B.
Some of the reduction in
consumer surplus is
captured by the monopoly
as producer surplus,
and some becomes
deadweight loss,
which is the area equal
to triangles B and C.
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How Large Are the Efficiency Losses Due to Monopoly?
Market power The ability of a firm to charge a price greater than marginal cost.
The only firms that do not have market power are firms in perfectly competitive
markets, which must charge a price equal to marginal cost.
Because few markets are perfectly competitive, some loss of economic efficiency
occurs in the market for nearly every good or service, yet this loss is small since
true monopolies are rare.
Competition keeps price much closer to marginal cost in most industries.
The closer price is to marginal cost, the smaller the size of the deadweight loss.
Market Power and Technological Change
Firms are often forced to rely on their profits to finance the research and
development needed for new products, but smaller firms develop a number of
new products themselves as well.
Government policymakers continue to struggle with the issue of whether, on
balance, large firms with market power are good or bad for the economy.
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Government Policy toward Monopoly
15.5 LEARNING OBJECTIVE
Discuss government policies toward monopoly.
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Collusion An agreement among firms to charge the same price or otherwise
not to compete.
In the United States, antitrust laws are designed to prevent monopolies and
collusion.
Antitrust Laws and Antitrust Enforcement
Congress passed the Sherman Act in 1890 to promote competition and prevent
the formation of monopolies.
The act targeted firms in several industries that had combined together to form
“trusts,” the most notorious of which was the Standard Oil Trust, organized by
John D. Rockefeller.
In a trust, the firms were operated independently but gave voting control to a
board of trustees, which enforced collusive agreements for the firms to charge
the same price and not to compete for each other’s customers.
Antitrust laws Laws aimed at eliminating collusion and promoting competition
among firms.
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To address several loopholes in the Sherman Act, Congress passed the
Clayton Act, under which a merger was illegal if its effect was “substantially to
lessen competition, or to tend to create a monopoly,” and the Federal Trade
Commission Act, which set up the Federal Trade Commission (FTC) to police
unfair business practices.
Currently, both the Antitrust Division of the U.S. Department of Justice and the
FTC are responsible for merger policy.
Table 15.1 Important U.S. Antitrust Laws
Law
Date
Enacted
Sherman Act
1890
Prohibited “restraint of trade,” including price fixing
and collusion. Also outlawed monopolization.
Clayton Act
1914
Prohibited firms from buying stock in competitors
and from having directors serve on the boards of
competing firms.
Federal Trade
Commission Act
1914
Established the Federal Trade Commission (FTC)
to help administer antitrust laws.
Robinson-Patman
Act
1936
Prohibited firms from charging buyers different
prices if the result would reduce competition.
Cellar-Kefauver Act
1950
Toughened restrictions on mergers by prohibiting
any mergers that would reduce competition.
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Purpose
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Mergers: The Trade-off between Market Power and Efficiency
Horizontal merger A merger between firms in the same industry.
Vertical merger A merger between firms at different stages of production
of a good.
Two factors can complicate regulating horizontal mergers:
1. The “market” that firms are in is not always clear.
2. There is the possibility that the newly merged firm might be more efficient
than the merging firms were individually.
In practice, the government defines the relevant market on the basis of whether
there are close substitutes for the products being made by the merging firms.
Even if a merged firm is more efficient and has lower costs, that may not offset
the increased market power of the firm enough to increase consumer surplus
and economic efficiency.
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Figure 15.6 A Merger That Makes Consumers Better Off
The figure shows the result of all the
firms in a perfectly competitive industry
merging to form a monopoly.
If costs are unaffected by the merger,
the result is the same as in Figure 15.5:
Price rises from PC to PM, quantity falls
from QC to QM, consumer surplus
declines, and a loss of economic
efficiency results.
If, however, the monopoly has lower
costs than the perfectly competitive
firms, as shown by the marginal cost
curve shifting to MC after the merger,
it is possible that the price will actually
decline from PC to PMerge and that
output will increase from QC to QMerge
following the merger.
Although the newly merged firm has a great deal of market power, because it is
more efficient, consumers are better off and economic efficiency is improved.
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The Department of Justice and FTC Merger Guidelines
Economic analysis shaped antitrust policy after Donald Turner became the first
Ph.D. economist to head the Antitrust Division of the Department of Justice in
1965 and the Economics Section of the Antitrust Division was established
in 1973.
By 1982, economists played a major role in the development of merger
guidelines by the Department of Justice and the FTC.
Modified in 2010, the guidelines have three main parts:
1. Market definition
2. Measure of concentration
3. Merger standards
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Market Definition A market consists of all firms making products that
consumers view as close substitutes, which can be identified by looking at the
effect of a price increase.
Beginning with a narrow definition of the industry, we identify the relevant
market involved in a proposed merger if profits increase after a price increase.
If profits decrease, we consider a broader definition, continuing the process
until a market has been identified.
Measure of Concentration A market is concentrated if a relatively small
number of firms have a large share of total sales in the market.
The higher a market’s concentration, the likelier a merger between firms in the
industry will increase market power.
The Herfindahl-Hirschman Index (HHI) of concentration squares the market
shares of each firm in the industry and adds up their values.
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The following are some examples of calculating HHI:
• 1 firm, with 100 percent market share (a monopoly):
HHI = 1002 = 10,000
• 2 firms, each with a 50 percent market share:
HHI = 502 + 502 = 5,000
• 4 firms, with market shares of 30 percent, 30 percent, 20 percent, and 20
percent:
HHI = 302 + 302 + 202 + 202 = 2,600
• 10 firms, each with market shares of 10 percent:
HHI = 10 × (102) = 1,000
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Merger Standards The Department of Justice and the FTC use the HHI
calculation for a market to evaluate proposed horizontal mergers according
to these standards:
• Postmerger HHI below 1,500. These markets are not concentrated,
so mergers in them are not challenged.
• Postmerger HHI between 1,500 and 2,500. These markets are moderately
concentrated. Mergers that raise the HHI by less than 100 probably will not be
challenged. Mergers that raise the HHI by more than 100 may be challenged.
• Postmerger HHI above 2,500. These markets are highly concentrated.
Mergers that increase the HHI by less than 100 points will not be challenged.
Mergers that increase the HHI by 100 to 200 points may be challenged.
Mergers that increase the HHI by more than 200 points will likely be
challenged.
Increases in economic efficiency will be taken into account and can lead to
approval of a merger that otherwise would be opposed, but the burden of
showing that the efficiencies exist lies with the merging firms.
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Making
the
Should AT&T Have Been Allowed to Merge
with T-Mobile?
Connection
The two main ways that a
merger between two large firms can increase
the combined firm’s profits are by (1) increasing
market power so as to increase prices, which
the federal government may see as violating
the antitrust laws, and (2) lowering costs
through increased efficiency, which firms
typically emphasize.
AT&T argued that the combined company, which would become the largest
wireless firm in the United States, could operate at lower cost than could the
companies operating separately.
AT&T was proposing a horizontal merger that would sharply increase both
concentration in the wireless industry and HHI points, but because the Antitrust
Division didn’t believe that cost savings would offset the increased market power
the newly merged firm would acquire, it filed a lawsuit to stop the merger.
AT&T’s attempt to merge with T-Mobile was shaping up as a classic antitrust case
of reduced price competition more than offsetting increased efficiency.
MyEconLab Your Turn:
Test your understanding by doing related problem 5.15 at the end of this chapter.
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Figure 15.7 Regulating a Natural Monopoly
A natural monopoly that
is not subject to
government regulation
will charge a price equal
to PM and produce QM.
If government regulators
want to achieve
economic efficiency,
they will set the regulated
price equal to PE,
and the monopoly will
produce QE.
Unfortunately, PE is
below average cost,
and the monopoly will
suffer a loss,
shown by the shaded rectangle.
Because the monopoly will not continue to produce in the long run if it suffers a loss,
government regulators set a price equal to average cost, which is PR in the figure.
The resulting production, QR, will be below the efficient level.
Local or state regulatory commissions usually set the prices for natural
monopolies.
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Economics in Your Life
Why Can’t I Watch the NFL Network?
At the beginning of the chapter, we asked why some cable systems don’t carry
the NFL Network.
You might think that the cable systems would want to televise one of the most
popular sports in the nation.
In most cities, a cable system may be the sole source of many programs,
preventing its customers from switching to a competing cable system (although
some consumers have the option of switching to satellite television).
As a result, a cable system can increase its profits by, for example, not offering
popular programming such as the NFL Network as part of its normal
programming package, requiring instead that consumers upgrade to digital
programming at a higher price.
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AN
INSIDE
LOOK
AT POLICY
The End of the Cable TV Monopoly?
Competition lowers the price of cable TV and increases economic efficiency.
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