1. introduction to price fixing: legal and economic foundations antitrust law fall 2014 yale law...

1. Introduction to Price Fixing:Legal and Economic Foundations

Antitrust LawFall 2014 Yale Law School

Dale Collins

SLIDES FOR CLASS

Antitrust LawFall 2014 Yale Law SchoolDale Collins

www.appliedantitrust.com

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Demand Curve

Price

Quantity

Demand curve

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3

Revenues

Price

Quantityq

p

Demand curve

Revenues




4

Profits and Costs

Price

Quantity

Demand curve

Marginal cost curve

q

p

Profits

Costs




5

Profits and Costs

Price

Quantity

Demand curve

Marginal cost curve

q

p

Profits

Costs

Profits

Quantity*q

*

MR > MC MR < MC

MR = MC

Firm can make more profits by increasing q, since incremental revenue gains exceed incremental costs

Firm can make more profits by decreasing q, since incremental costs exceed incremental revenue gains

*q




Competitive Firms Competitive firms take prices as given

→ Individual output decisions do not affect the market-clearing pricePrice

Quantity

Demand curve

Marginal cost curve

qc

cpProfits

Costs

(Perceived) marginal revenue curve (MR = p)

When price does not change as the firm expands output, the firm will produce every unit for which p MC

p MC p MC

Increasing q increases profits

Increasing q decreases profits

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Monopolist Firm A monopolist choice of output q affects the market-clearing price p

7

Price

Quantity

Demand curve

Marginal cost curve

mq

mp

Profits

Costs

Marginal revenue curve

When price decreases as the firm expands output, MR is less than p since in order to sell an additional unit the firm has to decrease the price for all units.




Moving to the Competitive Outcome Why a monopoly does not want to price at the competitive price

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Price

Quantity

Demand curve

Marginal cost curve

Incrementallosses from lower prices on old sales

Incrementalcosts ofnew sales

mq

cq

mp

cp

Incrementalprofits from new sales

Incremental profit = Incremental revenues from new sales at lower price – incremental losses on old sales at lower price – incremental costs of new sales at lower price




Gains from Cartelization Why firms in a competitive market have an incentive to form a cartel

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Price

Quantity

Marginal cost curve

Profits gained from old sales at higher prices

Avoided costs from reduced sales

mq

cq

mp

cp

Any q in this region yields higher aggregate profits than the competitive equilibrium

Demand curve

cq

Foregoneprofits from reduced sales




Obstacles to Cartel Formation The law

Cartel agreements are unenforceable (contract law) Cartel agreements are illegal (antitrust law)

Lack of sufficient market dominance Too few competitors join the cartel Too easy for new competitors to enter the market

Too much cheating on the cartel rule (incentive incompatibility) Not enough market transparency to tell if there is cheating

Failure to agree on distribution of monopoly rents

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Too Much Cheating Single-period cartel game

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45, 45 0, 50

50, 0 25, 25Competitive

Competitive

Monopoly

MonopolyFirm 2

Firm

1

Firms split monopoly profits of 90

Competitive firm takes total competitive profits of 50 against firm charging monopoly price

Firms split competitive profits of 50




Failure to Agree on Distribution of Rents Infinitely repeated games

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Price

Quantity

Marginal cost curve

IncrementalProfits

IncrementalCosts

mq

cq

mp

cp

Folk theorem: Any q in this region is an equilibrium in an infinitely repeated game

Demand curve




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Public Policy of Price Fixing

Quantity

MC

Aggregate demand curve

pc

qc

Price

Quantityqm

pm

MC

MRAggregate demand curve

Price

Perfectly Competitive Market

Consumer surplus

Perfect Monopoly Market

Producer surplus (monopoly rents)

Dead-weight loss

1. Shift in wealth from consumers to producers2. 2. Deadweight loss3. May retard innovation


1. introduction to price fixing: legal and economic foundations antitrust law fall 2014 yale law...

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