Managerial economics Business strategy Chapter 13 A Manager’ s Guide to Government in the Marketplace Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 13 A Manager’s Guide to Government in the Marketplace
Overview I. Market failure a Market power Externalities Public goods a Incomplete Information Rent seeking III. Government Policy and International Markets a Quotas Tariffs ■ Regulations Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Market Failure Market Power Externalities Public Goods Incomplete Information II. Rent Seeking III. Government Policy and International Markets Quotas Tariffs Regulations
Market power Firms with market power produce sociall Dead weight inefficient output levels MC ■ Too little output Price exceeds mc ■ Deadweight loss Dollar value of society's welfare loss Q MR Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Market Power • Firms with market power produce socially inefficient output levels. Too little output Price exceeds MC Deadweight loss • Dollar value of society’s welfare loss MR PM QM Deadweight Loss MC D Q P
Antitrust policies Administered by the doj and ftc Market Concentration Herfindahl-Hirshman Index: HHI=10.0002 w2 Industries in which the HHI exceed 1800 are generally deemed highly concentrated The doj or FTC may, in this case, attempt to block a merger if it would increase the hhi by more than 100 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Antitrust Policies • Administered by the DOJ and FTC • Market Concentration Herfindahl-Hirshman Index: HHI = 10,000 S wi 2 Industries in which the HHI exceed 1800 are generally deemed “highly concentrated”. The DOJ or FTC may, in this case, attempt to block a merger if it would increase the HHI by more than 100
Sherman act (1890) Sections 1 and 2 prohibits price-fixing market sharing and other collusive practices designed to monopolize, or attempt to monopolize? a market Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Sherman Act (1890) • Sections 1 and 2 prohibits price-fixing, market sharing and other collusive practices designed to “monopolize, or attempt to monopolize” a market
Clayton Act(1914) and tying arrangements where the Fo Section 3 Prohibits exclusive deali effect may be to substantially lessen competition Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Clayton Act (1914) • Section 3 Prohibits exclusive dealing and tying arrangements where the effect may be to “substantially lessen competition
Externalities A cost borne by people who neither produce nor consume the good Example: Pollution a Caused by the absence of well-defined property rights Government regulations may induce the socially efficient level of output by forcing firms to internalize pollution costs The Clean air Act of 1970 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Externalities • A cost borne by people who neither produce nor consume the good. • Example: Pollution Caused by the absence of well-defined property rights. • Government regulations may induce the socially efficient level of output by forcing firms to internalize pollution costs The Clean Air Act of 1970
Public goods a good that is nonrival and nonexclusionary in consumption a Nonrival: A good which when consumed by one person does not preclude other people from also consuming the good Example: Radio signals, national defense Nonexclusionary: No one is excluded from consuming the good once it is provided Example: Clean air Free rider> problem a Individuals have little incentive to buy a public good because of their nonrival nonexclusionary nature Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Public Goods • A good that is nonrival and nonexclusionary in consumption. Nonrival: A good which when consumed by one person does not preclude other people from also consuming the good. • Example: Radio signals, national defense Nonexclusionary: No one is excluded from consuming the good once it is provided. • Example: Clean air • “Free Rider” Problem Individuals have little incentive to buy a public good because of their nonrival & nonexclusionary nature
Public goods Total demand for streetlights MC of streetlights Individual Consumer Surplus 18 Individual demand for streetlights 12 Streetlights Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Public Goods Streetlights $ Total demand for streetlights Individual Consumer Surplus 90 54 30 18 0 12 30 MC of streetlights Individual demand for streetlights
Incomplete Information Government serves as a provider of nformation to combat the inefficiencies caused by incomplete and/or asymmetric information Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Incomplete Information • Government serves as a provider of information to combat the inefficiencies caused by incomplete and/or asymmetric information
