We will begin with the long-run -- the last 5 overheads from Nov. 20

Monopolistic Competition - Evaluation

A few beneficial transactions do not take place (p > MC). The burden is small because demand is elastic (many substitutes) and entry is easy. Costs are a bit higher as a consequence of differentiation. Because there are so many varieties, firms do not produce enought to take full advantage of even the modest economies of scale. Because the burdens are small, and people value variety, most view the outcomes as acceptable.

Evaluation - oligopoly

Assuming there are no externalities, the market is inefficient. Not all beneficial transactions will occur. Firms will be producing such that p > MC. Ouput is less than socially optimal. Prices are higher. Firms will not be producing at the minimum point on their long-run average cost curve. Inefficiencies are greater the higher the concentration ratio and the higher the barriers to entry. When entry barriers are weak (contestable markets), firms moderate their behavior to forestall competition or else new firms enter, improving performance. Additional resources will be devoted to duplicating product differentiation moves or image advertising without adding anything new for consumers.

Qualifications

If there are external costs associated with production or consumption, then the results under oligopoly may not be so bad. While the perfectly competitive market may produce too much and change too low a price, there is no guarantee that the decline in output and rise in price associated with oligopoly is the correct adjustment. Where oligopoly is due to economies of scale, production is at lower cost under oligopoly than it would be with a larger number of smaller firms. Fear of entry and/or government regulation or anti-trust action may keep firms from fully exploiting their market power.

Results -- price discrimination
Price discrimination allows the firm to sell additional units. Revenues and profits will increase as a result. Because the firm sells more, additional beneficial transactions occur and the dead-weight loss is reduced. If the firm could charge a different price for each unit, then the MR and demand curves would be identical and all beneficial transactions would take place.

Innovation

Competitive firms can't afford the extra costs of research to develop new technologies. Price is only high enough to cover costs of production. Firms rapidly adopt new technologies others develop. Monopolists and strong oligopolists have economic profits they could use to finance research but lack incentive. Moderate oligopoly is most conducive to innovation and developmetn of new technologies. Innovation may be the main form of competition.

Comparison of Market Types

Perfect Competition: Efficient market -- in the absence of externalities, all beneficial transactions take place; production is at minimum cost -- no extra resources used; no product differentiation costs; economic profits = 0 in the long run; does little innovation but new ideas adopted quickly. Monopolistic Competition: Small degree of inefficiency; excess capacity leads to somewhat higher costs; product differentiation by actual characteristics or location, advertising is more informative; economic profit = 0 in the long run; modest innovation. Oligopoly: inefficient market (output restrictions to raise price); inefficiency less where the threat of entry is greater; may be cheaper to produce on a larger scale but firm deosn't necessarily do so; relatively little price competition; economic profits usually > 0 in the long run; relatively high rates of innovation and spending on product differentiation. Monopoly: Very inefficient market; may be cheaper to produce on a large scale (natural monopoly) but doesn't necessarly do so; low rate of innovation and spending on product differentiation. Conclusion: Competitive industries perform well; monopolies and strong oligopolies do not; middles ranges of concentration get mixed evaluations.

Public Policy
Prevent monopolies and strong oligopolies from forming or extending power to new markets. A few monopolies have been broken up into separate companies. Prohibit firms from using market power in anti-social ways that harm consumers. Government regulation only in the case of natural monopoly price regulation. Deregulate where competition now possible. Patents create limited monopoly.

Anti-trust Laws (as amended)

Sherman Act (1890): prohibits collusion and attempts to monopolize an industry. Clayton Act (1914): prohibits some anti-competitive actions such as price discrimination, exclusive dealing, and tying agreements which lessen competition. Prohibits mergers which lessen competition to try to keep monopoly and strong oligopoly from forming. Federal Trade Commission Act (1914): created regulatory agency (FTC); prohibits unfair and deceptive methods of competition and deceptive Hart-Scott- Rodino (1980) extends anti-trust laws to proprietorships and partnerships.

Collusion
Sherman Act prohibits price fixing or any other form of collusion. Collusion is illegal per se (if you do it) regardless of the reasonableness of the price. Remedies are fines and jail sentences for executives. Those companies or agencies which purchased the product may file civil suits for triple damages.

Prevent monopoly

The Sherman Act prohibits attempts to monopolize Having a monopoly is not illegal as it may be due to economic forces (natural monopoly). Unreasonable conduct to gain or keep a monopoly is illegal monopolization. Examples of unreasonable conduct: predatory pricing (pricing below the firm's own AC to run others out of business), using its market power to pressure companies in ways that restrict competition. Remedies: break up of the company into several separate companies, court orders to stop the anti-competitive behavior. Cases: Standard Oil (guilty), US Steel (not guilty)

Microsoft

Has a near monopoly (90%+) of the market for Intel-compatible PC operating systems (and over 80% of the broader market for PC operating systems). Barriers to entry are high because of the large development costs for the operating system itself and because of the additional cost of developing compatible applications software (word processing, spreadsheets). Users do not want to invest in an operating system unless it will support applications important to the customer. Developers do not want to invest in writing or adopting programs for an operating system unless there is a sizeable market for it. Thousands of applications that run on Microsoft Windows are already available and developers will write more because of the large number of computers with Windows already installed.

Middleware

APIs are application programming interfaces -- standardized methods through which a application program can interact with features of an operating system to do tasks such as making print appear on the screen. Microsoft only discloses Windows' APIs to licenses Windows developers. Middleware refers to programs that run in an operating system but which contain their own APIs and allow developers to write applications without regard to the operating system being used. Example: a web browser allows you to view the same web page whether you're using a Mac or a PC. Middleware programs have the potential to erode the applications barrier to entry into the operating system market because they allow programmers to write applications that depend only on the middleware and not the operating system. Users could then chose an alternative operating system without worrying about lack of applications. Two middleware programs concerned Microsoft because of their potential to lower these entry barriers: Netscape Navigator and Java.

Antitrust Action

The US Department of Justice and 20 states and the District of Columbia charged Microsoft with: unlawfully protecting and maintaining its operating system monopoly by engaging in a series of "exclusionary, anti-competitive, and predatory acts" in violation of Section 2 of the Sherman Act. GUILTY unlawfully attempting to monopolize the market for web browsers. The District court found Microsoft guilty but this was overturned at the appellate level. some of Microsoft's actions such as exclusive dealing arrangements violated sction 1 of the Sherman Act (unreasonable restraint of trade). Dropped by the Justice department when the appellate court sent this back to the district court for reconsideration.

Microsoft's violations

Microsoft used a variety of means to pressure other companies not to support or use the middleware it saw as a threat to its operating system monopoly and to use its products that required Windows to run. restricted equipment manufacturers from modifying or deleting any part of windows, including Explorer. Those who fought this were threatened with termination of their contract. integrated Internet Explorer into Windows in a non-removable way while excluding rivals so that Windows would have to be used. engaged in restrictive and exclusionary dealings with Internet access providers, independent software vendors and Apple Computer. Retaliated against or threatened those who continued to handle Netscape Navigator. attempted to mislead and threaten software developers in order to "subvert" Java middleware.

Remedies

The District Court's remedy was to split Microsoft into two companies -- one selling the operating system and one selling middleware and other applications software. The appellate court threw out this remedy (which it viewed as more appropriate to monopoly created by merger) and sent the case back to the District Court (different judge). The Justice Department plus some states negotiated a settlement with Microsoft that regulated what the company can do with regard to middleware programs, and prohibits retaliatory actions. Establishes a panel of three independent enforcement monitors. (See handout for details). Some states do not think this is a good remedy because it does nothing to offset the harm already done and because Microsoft has, in the past, ignore court prohibitions. They are continuing with the suit. Some want the court to require microsoft to license other companies to produce their own versions of the Windows operating system to induce competition in the operating systems market.

Mergers

Horizontal mergers (a firm and a competitor in the same market) are blocked unless firms are very small (based on level and change in Herfindahl index) or failing. Must get prior approval of merger if firms involved are large. Firms may be required to sell some units to maintain competition. Vertical mergers (firm and a supplier or distributor): Usually blocked because they close off part of the market from competitors. Conglomerate mergers are usually OK. A few have been blocked on the grounds the firms were potential competitors (potential entrants).

Stop other anti-competitive actions

Clayton Act prohibits exclusive dealing that lessen competition Occurs when a leading producer gives a distributor the exclusive rights to distribute its product in the area so long as the distributor carries oly this firm's product. Because it blocks other firms' access to markets, it is almost always viewed as lessening competition and hence illegal. Clayton Act prohibits tying agreements which lessen competition. A monopolist or leading firm in one market will sell only if the buyer also buys some other product from this firm. Tends to extend the firm's monopoly from one market to another and is almost always ruled to lessen competition and be illegal. Examples: American can co., block booking of films.