Antitrust Outline
Spring 2008
– Basic Economic Conceptsà
o Demandà
§ Is an indication of the quantity of a particular good or service that buyers will purchase in a given time period at a particular price, all other factors remaining stable
§ Cross Elasticityà
· The percentage change in the quantity of product A that is purchased, divided by the percentage change in the price of product B.
o Purposeà To measure the interaction in the quantity purchased of two products when there is a price change in one of them
o Usesà One of the important uses is determining the relevant product market for analysis of the effects on competition, since if a price change in one product affects the quantity purchased of another, it may be that these two products are really substitutes for each other and can be considered as part of the same product market
§ The Interrelation of Price and Quantity
· As the price of a product falls, more and more people will be willing to buy it, thus the lower the price the more people who will buy
· This interrelation played out in graphical form is what we call a demand curve
· Always decreasing when moving from left to right, the lower the price, the more you will sell
o Demand Curve: From left to right is falls
§ Remember: This is a snapshot, a moment in time, demand curves always change, people may no longer want certain items (income, tastes, trends)
o Marginal Cost Curve (Supply Curve)à
§ The Interrelation of Price and Quantity: Seller’s Side
§ Sellersà Two Kinds of Costs
· (1) Fixed Costsà you incur them as soon as you enter the market, they are the same no matter how much you produce of an item
o When producing an item you never take into account Fixed Costs
· (2) Variable Costsà the more you produce the higher your costs are (Raw Materials, Utilities)
· Marginal Cost Curve (Supply Curve)
o Marginal cost is the incremental increase in cost due to the production of one more unit
o Wherever the two curves meet, that is the number you sell
o You would never produce more because you would be selling at a loss (losing money)
o Sellers will never produce more than the competitive quantity
o Costsà
§ Opportunity Costsà
· For the economist, the cost of producing product A is the value of goods which the resources used in producing product A could have produced when put to their best alternative use
§ Fixed Costsà
· Costs that do not vary over the short-run
· You incur them as soon as you enter the market
· They are the same no matter how much you produce of an item
o When producing an item you never take into account Fixed Costs
§ Variable Costsà
· The more you produce the higher your costs are (Raw Materials, Utilities)
o Most Technical issue we will cover: Marginal Revenueà
§ Marginal Revenue
· Total Revenue: Price of Product x # of units sold
o First it will rise and then it will fall
o As the number of units increases revenue will rise to a certain point, then after a certain point it will begin to fall
· Marginal Revenueà Is the change in revenue with the change in output
o Marginal revenue is always under the demand curve and falling
o You will sell until you no longer get no net benefit, thus you will sell until marginal cost meets marginal revenue
§ That point is the monopoly quantityà Point where marginal cost and revenue intersect
· Monopoly quantity is always less than the competition quantity
– Simple Horizontal Restraintsà Introduction to Price Theory, Competition and Monopoly
o The Sherman Anti-Trust Act
§ States two things:
· §1à
o “Every contract, combination or conspiracy, in restraint of trade or commerce is illegal”
· §2à
o “Attempts to monopolize shall be illegal”
§ This law said that the federal courts of America, that there is no federal common law, thus this statute allows you to develop federal common law in conformance with the two sections of the Sherman Act
§ Courts did not know how to handle this directive, and therefore, the early opinions were attempts determined which acts should be permitted and which was against public policy
· Needless to say, this produced wide ranging opinions which were unable to be harmonized
o A corollary is that this field is really not statutory
§ Since 1890, the field of Economics has become prominent, and in doing so the field has developed many economic theories, which courts try to incorporate various theories into their anti-trust decisions
§ Intellectual debate on what anti-trust meansà
· (1) Protecting the Consumer
· (2) Protecting small businesses from big businesses (Small men and worthy dealers argument)
o Chicago School of Economics (Posner, Bork)à
§ These ideas come to dominate anti-trust law
§ Three Thesis:
· (1) Only legitimate goal is to Protect Consumers
· (2) Cases should be decided by applying the most rigorous economic analysis
· (3) To the extent possible, claims of economic theory should be backed up by empirical studies
§ Once you buy into the idea that antitrust is all about the consumer, there becomes only one concrete rule in anti-trustà
· YOU SHALL NOT DO ANYTHING ANTI-COMPETITIVE:
o No agreements shall be uncompetitive
o If you have a large market share, you shall not do anything to raise prices
o Clayton Actà
§ Governs Mergers and Acquisitions and their relation to antitrust
o Cases in anti-trust apply principles of economics, not rules of law
o The question to always act is do these arrangements raise the prices for th
A seller will sell where the demand curve intersects with the marginal cost curve…this point is called the competitive quantity
§ In a Monopoly:
· You can make more money selling fewer units at a higher price
· Why is this bad?
o Hurts consumers, value that normally goes to consumers goes to the monopoly
§ To the economist this is not a problem, because you view society as a whole
· All that matters maximizing wealth in society
§ But to individuals this is bad
o Most important problem: Dead Weight Lossà
§ The loss which results from a monopoly, all product that could have been sold above marginal cost which is not produced anyway
o Defending or attempting to take away monopolies has costs as well (Litigation Costs for example)
– Perfect Competition
o Definedà A market economy will be perfectly competitive if the following conditions hold:
§ (1) Sellers and buyers are so numerous that no one’s actions can have a perceptible impact on the market price, and there is no collusion among buyers or sellers
§ (2) Consumers register their subjective preferences among various goods and services, through market transactions at fully known market prices
§ (3) All relevant prices are known to each producer
§ (4) Every producer has equal access to all input markets and there are no artificial barriers to the production of any product
o Problem: Efficient Scale of Production
§ Airline Companies as an example (Boeing and Airbus)
· The market for buying airliners can really only support 2 sellers
§ Some market will only be able to support a very small number of players
o Problem: Not Everyone Has Equal Access to Relevant Input
§ Caviar market as an example: Russia has a stranglehold on the elite caviar market
o Problem: Not all deals are done in public, many transactions are negotiated and completed in private
§ Airbags Example: Prices to various automakers are hidden, not found in the public domain
o The more information available the closer to perfect competition that market will be
§ If you are entering a market, sometimes the biggest problem to overcome is brand name or the goodwill created by a name
· Ex. Harvard Law Schoolà Cannot top this reputation
