Key Concepts and Summary
Key Terms
when one purchases another laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones a situation in which multiple products are sold as one an early tool to measure the degree of power in an industry; measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms when regulators permit a regulated to cover its costs and to make a normal level of profit an agreement that a dealer will sell only products from one manufacturer the percentage of the total sales in the industry that are accounted for by the largest four firms Herfindahl-Hirschman Index (HHI) approach to measuring concentration by adding the square of the of each firm in the industry market share the percentage of total sales in the market merger when two formerly separate firms combine to become a single firm price cap regulation when the regulator sets a price that a firm cannot exceed over the next few years regulatory capture when the supposedly regulated firms end up playing a large role in setting the regulations that they will follow and as a result, they “capture” the people usually through the promise of a job in that “regulated” industry once their term in government has ended restrictive practices practices that reduce competition but that do not involve outright agreements between firms to raise prices or to reduce the quantity produced tying sales a situation where a customer is allowed to buy one product only if the customer also buys another product
Key Concepts and Summary
11.1 Corporate Mergers
A corporate involves two private firms joining together. An refers to one buying another . In either case, two formerly independent firms become one . seek to ensure active competition in markets, sometimes by preventing large firms from forming through mergers and acquisitions, sometimes by regulating business practices that might restrict competition, and sometimes by breaking up large firms into smaller competitors. A is one way of measuring the extent of competition in a . We calculate it by adding the shares—that is, the percentage of total sales—of the four largest firms in the . A Herfindahl-Hirschman Index (HHI) is another way of measuring the extent of competition in a . We calculate it by taking the shares of all firms in the market, squaring them, and then summing the total. The forces of globalization and new communications and information technology have increased the level of competition that many firms face by increasing the amount of competition from other regions and countries.
11.2 Regulating Anticompetitive Behavior
Antitrust authorities block firms from openly colluding to form a that will reduce output and raise prices. Companies sometimes attempt to find other ways around these restrictions and, consequently, many antitrust cases involve that can reduce competition in certain circumstances, like tie-in sales, , and .
11.3 Regulating Natural Monopolies
In the case of a , competition will not work well and so, rather than allowing an unregulated to raise and reduce output, the government may wish to regulate and/or output. Common examples of regulation are public utilities, the regulated firms that often provide electricity and water . refers to government regulating a which sets the that a can charge over a period of time by looking at the ’s accounting costs and then adding a normal rate of profit. refers to government regulation of a firm where the government sets a price level several years in advance. In this case, the firm can either earn high profits if it manages to produce at lower costs or sell a higher quantity than expected or suffer low profits or losses if costs are high or it sells less than expected.
11.4 The Great Deregulation Experiment
The U.S. economy experienced a wave of in the late 1970s and early 1980s, when the government eliminated a number of regulations that had set prices and quantities produced in a number of industries. Major accounting scandals in the early 2000s and, more recently, the Great have spurred new regulation to prevent similar occurrences in the future. occurs when the regulated industries end up having a strong influence over what regulations exist.
Self-Check Questions
1 . Is it true that a between two firms that are not already in the top four by size can affect both the and the Herfindahl-Hirschman Index? Explain briefly. 2 . Is it true that the puts more emphasis on one or two very large firms, while the Herfindahl-Hirschman Index puts more emphasis on all the firms in the entire ? Explain briefly. 3 . Some years ago, two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the in this case was “the for intercity bus .” Another possible definition was “the for intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights.” Which definition do you think the bus companies preferred, and why? 4 . As a result of and new information and communications , would you expect that the definitions of markets that antitrust authorities use will become broader or narrower? 5 . Why would a choose to use one or more of the anticompetitive practices described in Regulating Anticompetitive Behavior? 6 . Urban transit systems, especially those with rail systems, typically experience significant in operation. Consider the transit system data in . Note that the quantity is in millions of riders. : Quantity 1 2 3 4 5 6 7 8 9 10 10 9 8 7 6 5 4 3 2 1 10 8 6 4 2 0 –2 –4 –6 –8 Costs: 9 6 5 3 2 3 4 5 7 10 Average Cost 9 7.5 6.7 5.8 5 4.7 4.6 4.6 4.9 5.4 TABLE 11.4 Draw the , , , and average cost curves. Do they have the normal
Text from Principles of Microeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
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