Term
| What is the hallmark of competition? |
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Definition
| The absence of market power |
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Term
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Definition
| Market structure and behavior of firms |
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Term
| What conditions are conducive to competition? |
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Definition
Many relatively small sellers and buyers Homogeneous products Free entry and exit Full information |
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Term
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Definition
The relationship between price and quantity PURCHASED. |
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Term
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Definition
The relationship between the price and quantity PRODUCED. |
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Term
What are some features of firm supply? |
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Definition
Firms produce and sell to MAXIMIZE PROFIT. Competitive firms are price takers---they accept the market price as given and produces where price equals marginal cost. |
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Term
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Definition
The horizontal summation of the firm supply curves. |
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Term
| What events must occur for a competitive market to be in equilibrium? |
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Definition
Supply equals demand Profit is nil There is neither entry nor exit |
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Term
| What is consumer surplus? |
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Definition
The difference between the value of a good and the price paid for it. Represented by the area under the demand curve and above the price paid. |
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Term
| What is producer surplus? |
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Definition
The difference between the price received by a firm and opportunity cost of producing that output. Represented by the area below the price and above the supply curve. |
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Term
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Definition
The sum of producer and consumer surplus. It is the economic rationale for antitrust policy. |
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Term
What is the economic definition of a monopoly? |
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Definition
The monopolist restricts output in order to raise price and MAXIMIZE PROFIT. |
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Term
| How does a monopolist maximize profit? |
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Definition
By producing a quantity where marginal revenue equals marginal cost. A monopolist controls price by controlling output. |
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Term
| Name 5 sources of monopoly. |
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Definition
Control of inputs IP Superior efficiency Superior product Gov't regulation |
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Term
| What is the economic objection to monopoly? |
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Definition
| When a monopolist products where marginal revenue equals marginal cost, consumer surplus is reduced leading to a reduction in social welfare. |
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Term
| What are the 2 substantive provisions of the Sherman Act of 1890? |
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Definition
§1: Every contract, combination or conspiracy to restrict trade or commerce is illegal. §2: Every person who participates to monopolize any part of trade shall be deemed guilty of a felony. |
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Term
| What is a major criticism of the Sherman Act? |
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Definition
Its lack of precision. It was too vague and was unfair to many business that were exposed to risk. It also gave judges too much leeway. |
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Term
| What are the 3 substantive provisions of the Clayton Act? |
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Definition
§2: It is illegal to discriminate in price where the effect will lessen competition. §3: Sales made on the condition where the buyer will not deal with the rival of a seller are unlawful. §7: No person shall acquire the stock or share capital where the effect may lessen competition. |
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Term
Does §2 of the Sherman Act forbit the structural condition of a monopoly? |
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Definition
| NO, but it does forbid the process of becoming a monopoly. |
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Term
Give 3 reasons for not condeming a structural monopoly. |
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Definition
Natural monopoly Superior efficiency Patents |
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Term
| What leads to a natural monopoly? |
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Definition
It is technologically determined. Additional firms will cause production costs to rise and exit will occur until monopoly results. Typically, anti-trust policy doesn't work. |
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Term
What are some features of US v. Standard Oil (1911)? |
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Definition
Extracted concessions from railroad Monopolized pipelines Predatory pricing Industrial espionage Geographic allocation Result: Guilty of anti-trust law due to unreasonable behavior as it controlled 90% of market |
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Term
| What are some features of US v. American Tobacco (1911)? |
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Definition
Result of merger of 5 firms that accounted for 95% of cigarette production. Expanded into snuff and cigars Price wars Acquired rivals and closed them |
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Term
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Definition
Combined 180 independent steel producers Price fixing Controlled 80-95% of domestic production Market share fell as others entered Not guilty of monopolization |
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Term
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Definition
Court considered 3 different market definitions Hand chose definition which pegged virgin production at 90% Structural monopoly: Increased production 800%, with no entry Promoted new uses for aluminum, but made sure it could supply |
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Term
| US v. United Shoe Machinery (1953) |
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Definition
United had 75% of market due to: Original formation Surperior products and services Leasing only machines Leases discouraged switching and served as a barrier to entry Guilty of illegal monopolization |
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Term
| List XXX general characteristics of a monopoly that can be charged under §2 of Sherman |
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Definition
Market share greater than 70-75% Exclusionary practice |
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Term
| Name the 2 prongs of the Grinnell Test |
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Definition
The possession of monopoly power in the relevant market The willful acquistion or maintenance of that power (exclusionary behavior) |
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Term
| List the 3 essential elements of 'abuse of dominance' in the EU |
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Definition
Firm must be "dominant" Conduct must be "abuse" Conduct must affect trade between members If any element is missing, Article 82 does not apply. |
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Term
| Name 6 prohibited practices by a dominant firm |
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Definition
Refusal to deal Discriminatory pricing Predatory pricing Tying Exclusive supply contracts Refusal of accdess to essential facilities |
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Term
| What is a key concept in defining markets? |
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Definition
| Substitutability as defined by the cross-elasticity of demand, i.e. substitute and complementary products |
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Term
| Name 2 relevant antitrust markets. |
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Definition
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Term
| What is the key concept of monopoly power? |
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Definition
1. The ability to control price by adjusting output 2. The ability to raise price above competitive level thereby increasing profits |
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Term
| How does the Supreme Court define an entry barrier? |
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Definition
| The power to control price OR exclude competition. For a monopoly to endure, there must be entry barriers. |
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Term
| How does the Supreme Court define an illegal monopolization attempt? |
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Definition
Predatory or anticompetitive conduct Intent to monopolize Dangerous probability of achieving monopoly power |
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Term
| How does one determine the existence of a dangerous probability? |
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Definition
| Defendant's market share (usually >50%) is close the actual monopoly threshold and if left unchecked, will lead to actual monopolization |
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Term
| List some exclusionary practices |
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Definition
Vertical restrictions limiting competitor access to markets Denial of request for access Product design Predatory and exploitative pricing Misuse of governmental and standards processes Improper coordination with competitors Product disparagement |
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