INTRODUCTION TO THE ECONOMICS OF ANTITRUST. ASSUMPTIONS OF CLASSICAL ECONOMICS PEOPLE ACT RATIONALLY...

INTRODUCTION TO THE ECONOMICS

OF ANTITRUST

ASSUMPTIONS OF CLASSICAL ECONOMICS

• PEOPLE ACT RATIONALLY TO MAXIMIZE THEIR OWN INTERESTS

ASSUMPTIONS OF CLASSICAL ECONOMICS

• PEOPLE ACT RATIONALLY TO MAXIMIZE THEIR OWN INTERESTS

• RESOURCES MOVE TO MOST VALUABLE USE IF VOLUNTARY EXCHANGE PERMITTED

““VALUE”VALUE”

MEASURED BY AGGREGATE CONSUMER WILLINGNESS TO

PAY FOR THINGS

““EFFICIENCY”EFFICIENCY”

EXPLOITING ECONOMIC RESOURCES TO MAXIMIZE

“VALUE”

PROBLEMS WITH ASSUMPTIONS

• DEFINITION OF “VALUE”

• PEOPLE OFTEN IRRATIONAL

PROBLEMS WITH ASSUMPTIONS

• DEFINITION OF “VALUE”

–CONSUMER CULTURE

–DEPENDS ON INCOME DISTRIBUTION

–MORE $ = MORE VOTES

PROBLEMS WITH ASSUMPTIONS

• PEOPLE OFTEN IRRATIONAL

–OFTEN APPEAR TO ACT AGAINST SELF-INTEREST

–OFTEN PERCEIVE SELVES ACTING AGAINST SELF-INTEREST

DEMAND CURVE:

GENERALLY BUY MORE OF GOOD THE LESS IT COSTS

DEMAND CURVE:GENERALLY BUY MORE OF GOOD

THE LESS IT COSTS

• SUBSTITUTION EFFECT

• INCOME EFFECT

DEMAND CURVE:GENERALLY BUY MORE OF GOOD

THE LESS IT COSTS

• SUBSTITUTION EFFECT: AS GOOD BECOMES CHEAPER, BUY IT INSTEAD OF ALTERNATIVES

• INCOME EFFECT

DEMAND CURVE:GENERALLY BUY MORE OF GOOD

THE LESS IT COSTS

• SUBSTITUTION EFFECT

• INCOME EFFECT: AS GOOD BECOMES CHEAPER, PURCHASING POWER INCREASES, SO BUY MORE

DEMANDDemand

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DEMAND CURVE:GENERALLY BY MORE OF GOOD

THE LESS IT COSTS

EXCEPTIONS:

• INFERIOR GOODS

• LUXURY GOODS

DEMAND CURVE:GENERALLY BY MORE OF GOOD

THE LESS IT COSTSEXCEPTIONS:

• INFERIOR GOODS: GOODS YOU BUY MORE OF, THE LESS $ YOU HAVE

• LUXURY GOODS

DEMAND CURVE:GENERALLY BY MORE OF GOOD

THE LESS IT COSTSEXCEPTIONS:

• INFERIOR GOODS

• LUXURY GOODS: GOODS YOU BUY BECAUSE OF THE HIGH PRICE

FACTORS AFFECTING DEMAND

• PERSONAL TASTE• INCOME

• PRICE OF COMPLEMENTARY GOODS

• PRICE OF SUBSTITUTES

FACTORS AFFECTING DEMAND

• PERSONAL TASTE

• INCOME• PRICE OF COMPLEMENTARY GOODS

• PRICE OF SUBSTITUTES

FACTORS AFFECTING DEMAND

• PERSONAL TASTE

• INCOME

• PRICE OF COMPLEMENTARY GOODS

• PRICE OF SUBSTITUTES

FACTORS AFFECTING DEMAND

• PERSONAL TASTE

• INCOME

• PRICE OF COMPLEMENTARY GOODS

• PRICE OF SUBSTITUTES

DEMANDDemand

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DEMANDDemand

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DEMANDDemand

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TYPES OF PRODUCER COSTS

• FIXED v.VARIABLE COSTS

• TOTAL v. AVERAGE COSTS

• MARGINAL COST

FIXED v. VARIABLE COSTS

• FIXED COSTS: DO NOT VARY IN SHORT RUN

• VARIABLE COSTS

FIXED v. VARIABLE COSTS

• FIXED COSTS: DO NOT VARY IN SHORT RUN

• VARIABLE COSTS: VARY WITH LEVEL OF PRODUCTION

TOTAL v. AVERAGE COST

• TOTAL COST: ALL COSTS ASSOCIATED WITH PRODUCT LINE

• AVERAGE COST

TOTAL v. AVERAGE COST

• TOTAL COST: ALL COSTS ASSOCIATED WITH PRODUCT LINE

• AVERAGE COST: MEAN COST PER ITEM PRODUCED

TOTAL v. AVERAGE COST

• TOTAL COST: ALL COSTS ASSOCIATED WITH PRODUCT LINE

• AVERAGE COST: MEAN COST PER ITEM PRODUCED– AVERAGE TOTAL COST

– AVERAGE VARIABLE COST

MARGINAL COST =

ADDITIONAL COST OF PRODUCING

ONE MORE UNIT

ALL COSTS INCLUDE “NORMAL” PROFIT

SUPPLY CURVE =MARGINAL COST CURVE

FOR INDUSTRY AS A WHOLE

SUPPLY & DEMANDDemand

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FACTORS AFFECTING FACTORS AFFECTING SUPPLY CURVESUPPLY CURVE

• TECHNOLOGICAL CHANGE

FACTORS AFFECTING FACTORS AFFECTING SUPPLY CURVESUPPLY CURVE

• TECHNOLOGICAL CHANGE

• INPUT PRICES

SUPPLY & DEMANDDemand

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PRODUCERS’ GOAL

MARGINAL REVENUE =

MARGINAL COST

PRODUCERS’ GOAL

IN COMPETITIVE MARKET

MARGINAL REVENUE =

PRICE =

MARGINAL COST

SUPPLY & DEMANDDemand

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OPTIMUM CONDITIONS FOR COMPETITIVE EQUILIBRIUM• FUNGIBLE PRODUCT

• SUPPLIERS CAN’T AFFECT EACH OTHERS PRICING/OUTPUT

• MOBILITY/EQUALITY OF RESOURCE AVAILABILITY

• GOOD INFORMATION/LOW TRANSACTION COSTS

OPTIMUM CONDITIONS FOR COMPETITIVE EQUILIBRIUM• FUNGIBLE PRODUCT

• SUPPLIERS CAN’T AFFECT EACH OTHERS PRICING/OUTPUT

• MOBILITY/EQUALITY OF RESOURCE AVAILABILITY

• GOOD INFORMATION/LOW TRANSACTION COSTS

OPTIMUM CONDITIONS FOR COMPETITIVE EQUILIBRIUM• FUNGIBLE PRODUCT

• SUPPLIERS CAN’T AFFECT EACH OTHERS PRICING/OUTPUT

• MOBILITY/EQUALITY OF RESOURCE AVAILABILITY

• GOOD INFORMATION/LOW TRANSACTION COSTS

OPTIMUM CONDITIONS FOR COMPETITIVE EQUILIBRIUM• FUNGIBLE PRODUCT

• SUPPLIERS CAN’T AFFECT EACH OTHERS PRICING/OUTPUT

• MOBILITY/EQUALITY OF RESOURCE AVAILABILITY

• GOOD INFORMATION/LOW TRANSACTION COSTS

OPTIMUM CONDITIONS FOR COMPETITIVE EQUILIBRIUM• FUNGIBLE PRODUCT

• SUPPLIERS CAN’T AFFECT EACH OTHERS PRICING/OUTPUT

• MOBILITY/EQUALITY OF RESOURCE AVAILABILITY

• GOOD INFORMATION/LOW TRANSACTION COSTS

SUPPLY AND DEMANDDemand

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SUPPLY & DEMANDDemand

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SUPPLY & DEMANDDemand

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MC

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ELASTICITY(SENSITIVITY TO PRICE CHANGES)

% CHANGE IN OUTPUT NECESSITATED BY 1% CHANGE IN

PRICE

ELASTICITY > 1DEMAND IS ELASTIC

•CONSUMERS RESPONSIVE TO PRICE CHANGES

•GOOD SUBSTITUTES EXIST

ELASTICITY < 1DEMAND IS INELASTIC

•CONSUMERS UNRESPONSIVE TO PRICE CHANGES

•FEW GOOD SUBSTITUTES

TOTAL REVENUE/DEMAND

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TR

Q P TR MRI MC TC Pft 4 21 84 15 7 28 565 19 95 11 7 35 606 17 102 7 7 42 607 15 105 3 7 49 568 13 104 -1 7 56 489 11 99 -5 7 63 3610 9 90 -9 7 70 2011 7 77 -13 7 77 012 5 60 -17 7 84 -24

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MRI

MC

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MRI

MC

Q P TR MRI MC TC Pft 4 21 84 15 7 28 565 19 95 11 7 35 606 17 102 7 7 42 607 15 105 3 7 49 568 13 104 -1 7 56 489 11 99 -5 7 63 3610 9 90 -9 7 70 2011 7 77 -13 7 77 012 5 60 -17 7 84 -24

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MC

MONOPOLY: PROBLEMS

• HIGH PRICES

• LOWER OUTPUT

• WEALTH TRANSFER (?)

• DEADWEIGHT LOSS

BARRIERS TO ENTRY

• LIMITED ACCESS TO KEY RESOURCES

• GOVERNMENT REGULATION

• HIGH FIXED COSTS

• BRAND LOYALTY

MONOPOLY: PROBLEMS

• HIGH PRICES

• LOWER OUTPUT

• WEALTH TRANSFER (?)

• DEADWEIGHT LOSS

• PREDATORY CONDUCT

• RENT-SEEKING BEHAVIOR

MARKET DEFINITION:TIPS

• FOCUS: DEFENDANT’S PRODUCT

MARKET DEFINITION:TIPS

• FOCUS: DEFENDANT’S PRODUCT

• ADD OTHERS NECESSARY TO GET MARKET POWER

MARKET DEFINITION:TIPS

• FOCUS: DEFENDANT’S PRODUCT

• ADD OTHERS NECESSARY TO GET MARKET POWER

• PRODUCT & GEOGRAPHIC MARKETS

MARKET DEFINITION:TIPS

• FOCUS: DEFENDANT’S PRODUCT

• ADD OTHERS NECESSARY TO GET MARKET POWER

• PRODUCT & GEOGRAPHIC MARKETS

• TRY SEVERAL ALTERNATIVES

MARKET DEFINITION:TIPS

• FOCUS: DEFENDANT’S PRODUCT

• ADD OTHERS NECESSARY TO GET MARKET POWER

• PRODUCT & GEOGRAPHIC MARKETS

• TRY SEVERAL ALTERNATIVES

• ART NOT SCIENCE

MARKET DEFINITION: FACTORS

LOGIC DATA

CONSUMERFOCUS

PRODUCERFOCUS

MARKET DEFINITION: FACTORS

LOGIC DATA

CONSUMERFOCUS

FUNCTION

PRODUCERFOCUS

MARKET DEFINITION: FACTORS

LOGIC DATA

CONSUMERFOCUS

FUNCTION MARKETPERFORMANCE

PRODUCERFOCUS

MARKET DEFINITION: FACTORS

LOGIC DATA

CONSUMERFOCUS

FUNCTION MARKETPERFORMANCE

PRODUCERFOCUS

SUPPLY-SIDESUBSTITUTES

MARKET DEFINITION: FACTORS

LOGIC DATA

CONSUMERFOCUS

FUNCTION MARKETPERFORMANCE

PRODUCERFOCUS

SUPPLY-SIDESUBSTITUTES

DEFENDANTBEHAVIOR