Cover......Page 1
Title......Page 4
Copyright......Page 5
Brief Contents......Page 6
Contents......Page 8
Preface......Page 18
PART 1 Introduction and Theory......Page 26
Models......Page 27
Price Theory......Page 28
Transaction Costs......Page 30
Organization......Page 31
Market Structures......Page 32
Information, Advertising, and Disclosure......Page 34
Government Policies and Their Effects......Page 35
CHAPTER 2 The Firm and Costs......Page 36
The Objective of a Firm......Page 37
Ownership and Control......Page 38
Reasons for Mergers and Acquisitions......Page 45
Merger Activity in the United States......Page 48
Merger Activities in Other Countries......Page 50
Empirical Evidence on the Efficiency and Profitability of Mergers......Page 51
Types of Costs......Page 54
Cost Concepts......Page 58
Reasons for Economies of Scale......Page 61
Total Costs Determine Scale Economies......Page 63
A Measure of Scale Economies......Page 64
Economies of Scale in Total Manufacturing Costs......Page 65
Survivorship Studies......Page 67
Cost Concepts for Multiproduct Firms......Page 68
Economies of Scope......Page 69
Specialization in Manufacturing......Page 70
EXAMPLE 2.5 The Baking Industry......Page 71
EXAMPLE 2.6 Electricity Minimum Efficient Scaleand Scope......Page 72
Problems......Page 73
Suggested Readings......Page 74
APPENDIX 2A Cost Concepts for a MultiproductFirm......Page 75
EXAMPLE 2.1 Value of Limited Liability......Page 40
EXAMPLE 2.2 Conflicts of Interest BetweenManagers and Shareholders......Page 43
EXAMPLE 2.3 Specialization of Labor......Page 62
EXAMPLE 2.4 Indiana Libraries......Page 66
PART 2 Market Structures......Page 80
CHAPTER 3 Competition......Page 81
Assumptions......Page 82
The Behavior of a Single Firm......Page 83
The Competitive Market......Page 86
Elasticities of Demand and Supply......Page 90
The Residual Demand Curve of Price Takers......Page 91
EXAMPLE 3.1 Are Farmers Price Takers?......Page 94
Welfare......Page 95
Restrictions on Entry......Page 98
Definition of Barriers to Entry......Page 101
Identifying Barriers to Entry......Page 104
The Size of Entry Barriers by Industry......Page 105
Externalities......Page 107
Limitations of Perfect Competition......Page 109
The Many Meanings of Competition......Page 110
Problems......Page 111
EXAMPLE 3.2 Restrictions on Entry AcrossCountries......Page 99
EXAMPLE 3.3 FTC Opposes Internet BansThat Harm Competition......Page 100
EXAMPLE 3.4 Increasing Congestion......Page 108
CHAPTER 4 Monopolies, Monopsonies,and Dominant Firms......Page 113
Profit Maximization......Page 114
EXAMPLE 4.1 Monopoly Newspaper Ad Prices......Page 118
Monopoly Behavior over Time......Page 119
The Deadweight Loss of Monopoly......Page 120
Rent-Seeking Behavior......Page 121
Monopoly Profits and Deadweight Loss Vary with the Elasticity of Demand......Page 122
Creating and Maintaining a Monopoly......Page 124
EXAMPLE 4.2 Monopolizing by Merging......Page 125
Government-Created Monopolies......Page 127
Natural Monopoly......Page 129
Is Any Firm That Earns a Positive Profit a Monopoly?......Page 130
EXAMPLE 4.6 EU Allows Merger to Eliminate Losses......Page 131
Monopsony......Page 132
Dominant Firm with a Competitive Fringe......Page 135
EXAMPLE 4.8 Price Umbrella......Page 136
The No-Entry Model......Page 137
The Dominant Firm–Competitive Fringe Equilibrium......Page 140
A Model with Free, Instantaneous Entry......Page 141
Summary......Page 144
Problems......Page 145
Suggested Readings......Page 146
EXAMPLE 4.4 Preventing Imitation—Cat Got YourTongue?......Page 126
EXAMPLE 4.5 Protecting a Monopoly......Page 128
EXAMPLE 4.7 Priest Monopsony......Page 134
EXAMPLE 4.9 China Tobacco Monopoly toBecome a Dominant Firm......Page 142
CHAPTER 5 Cartels......Page 147
Why Cartels Form......Page 148
Creating and Enforcing the Cartel......Page 150
Factors That Facilitate the Formation of Cartels......Page 152
Enforcing a Cartel Agreement......Page 161
Cartels and Price Wars......Page 169
Consumers Gain as Cartels Fail......Page 172
EXAMPLE 5.7 The Social Costs of Cartelization......Page 175
EXAMPLE 5.8 Prosecuting Global Cartels......Page 177
Suggested Readings......Page 179
APPENDIX 5A The Effects of Cartel Size......Page 180
EXAMPLE 5.1 An Electrifying Conspiracy......Page 153
EXAMPLE 5.2 The Viability of CommodityCartels......Page 157
EXAMPLE 5.3 Concrete Example of GovernmentAided Collusion......Page 163
EXAMPLE 5.4 Relieving the Headache of Runninga Cartel......Page 165
EXAMPLE 5.5 Vitamins Cartel......Page 167
EXAMPLE 5.6 How Consumers Were Railroaded......Page 170
CHAPTER 6 Oligopoly......Page 182
Game Theory......Page 184
Single-Period Oligopoly Models......Page 185
The Cournot Model......Page 186
EXAMPLE 6.3 Mergers in a Cournot Economy......Page 196
The Stackelberg Leader-Follower Model......Page 201
Multiperiod Games......Page 205
Single-Period Prisoners’ Dilemma Game......Page 206
Infinitely Repeated Prisoners’ Dilemma Game......Page 208
Types of Equilibria in Multiperiod Games......Page 211
Experimental Evidence on Oligopoly Models......Page 214
Summary......Page 216
Problems......Page 217
Suggested Readings......Page 218
APPENDIX 6A A Mathematical Derivation ofCournot and Stackelberg Equilibria......Page 219
APPENDIX 6B Mixed Strategies......Page 223
EXAMPLE 6.1 Do Birds of a Feather Cournot-Flock Together?......Page 191
EXAMPLE 6.2 Oligopoly Welfare Losses......Page 194
EXAMPLE 6.4 Roller Coaster Gasoline Pricing......Page 202
EXAMPLE 6.5 Copying Pricing......Page 209
EXAMPLE 6.6 Car Wars......Page 210
CHAPTER 7 Product Differentiation andMonopolistic Competition......Page 225
Differentiated Products......Page 227
The Effect of Differentiation on a Firm’s Demand Curve......Page 228
Preferences for Characteristics of Products......Page 230
A Representative Consumer Model with Undifferentiated Products......Page 231
A Representative Consumer Model with Differentiated Products......Page 239
Conclusions About Representative Consumer Models......Page 244
Location Models......Page 245
Hotelling’s Location Model......Page 246
Salop’s Circle Model......Page 248
Hybrid Models......Page 255
Estimation of Differentiated Goods Models......Page 256
EXAMPLE 7.6 Value of Minivans......Page 258
Suggested Readings......Page 259
APPENDIX 7A Welfare in a Monopolistic CompetitionModel with Homogeneous Products......Page 260
APPENDIX 7B Welfare in a Monopolistic CompetitionModel with Differentiated Products......Page 265
EXAMPLE 7.1 All Water Is Not the Same......Page 229
EXAMPLE 7.2 Entry Lowers Prices......Page 236
EXAMPLE 7.3 The Jeans Market......Page 241
EXAMPLE 7.4 A Serial Problem......Page 254
EXAMPLE 7.5 Combining Beers......Page 257
CHAPTER 8 Industry Structure andPerformance......Page 269
Theories of Price Markups and Profits......Page 270
Measures of Market Performance......Page 271
Rates of Return......Page 272
Price-Cost Margins......Page 279
Measures of Market Structure......Page 280
The Relationship of Structure to Performance......Page 284
Theory......Page 293
Empirical Research......Page 297
Modern Approaches to Measuring Performance......Page 299
Static Studies......Page 300
Summary......Page 306
Problems......Page 307
APPENDIX 8A Relationship Between theHerfindahl-Hirschman Index (HHI) and thePrice-Cost Margin......Page 308
APPENDIX 8B Identifying Market Power......Page 309
EXAMPLE 8.1 Supermarkets and Concentration......Page 298
EXAMPLE 8.2 How Sweet It Is......Page 303
PART 3 Business Practices: Strategies and Conduct......Page 314
CHAPTER 9 Price Discrimination......Page 315
Nonuniform Pricing......Page 316
Profit Motive for Price Discrimination......Page 318
Resales......Page 319
Types of Price Discrimination......Page 321
Perfect Price Discrimination......Page 324
Each Consumer Buys More Than One Unit......Page 325
Different Prices to Different Groups......Page 326
Other Methods of Third-Degree Price Discrimination......Page 330
Welfare Effects of Price Discrimination......Page 331
EXAMPLE 9.6 Does Competition Always LowerPrice?......Page 333
Suggested Readings......Page 334
APPENDIX 9A An Example of Price Discrimination:Agricultural Marketing Orders......Page 335
EXAMPLE 9.1 Coupons......Page 317
EXAMPLE 9.2 Thank You, Doctor......Page 320
EXAMPLE 9.3 Halting Drug Resales from Canada......Page 322
EXAMPLE 9.4 Vertical Integration as a Means ofPrice Discrimination: Alcoa Shows Its TrueMetal......Page 323
EXAMPLE 9.5 A Discriminating Labor Union......Page 327
Nonlinear Pricing......Page 338
EXAMPLE 10.1 Football Tariffs......Page 339
Two Two-Part Tariffs......Page 341
General Justifications for Tie-in Sales......Page 344
Tie-in Sales as a Method of Price Discrimination......Page 346
Package Tie-in Sales of Independent Products......Page 347
Interrelated Demands......Page 355
Minimum Quantities and Quantity Discounts......Page 361
Premium for Priority......Page 362
Summary......Page 363
Problems......Page 365
APPENDIX 10A The Optimal Two-Part Tariff......Page 366
APPENDIX 10B Nonlinear Pricing with an Example......Page 369
EXAMPLE 10.3 Stuck Holding the Bag......Page 345
EXAMPLE 10.4 Tied to TV......Page 350
EXAMPLE 10.5 Not Too Suite—Mixed Bundling......Page 354
EXAMPLE 10.6 Price Discriminating on eBay......Page 364
Strategic Behavior Defined......Page 375
Noncooperative Strategic Behavior......Page 376
Predatory Pricing......Page 377
Limit Pricing......Page 385
Investments to Lower Production Costs......Page 392
Raising Rivals’ Costs......Page 396
Welfare Implications and the Role of the Courts......Page 403
Practices That Facilitate Collusion......Page 404
Summary......Page 411
Problems......Page 412
Suggested Readings......Page 413
APPENDIX 11A: The Strategic Use of Tie-in Salesand Product Compatibility to Create or MaintainMarket Power with Applications to Networks......Page 414
EXAMPLE 11.1 Supreme Court Says AllegedPredation Must Be Credible......Page 379
EXAMPLE 11.2 Evidence of Predatory Pricing inTobacco......Page 383
EXAMPLE 11.3 The Shrinking Share of DominantFirms......Page 390
EXAMPLE 11.4 And Only a Smile Remained......Page 391
EXAMPLE 11.5 Strategic Behavior and RapidTechnological Change: The Microsoft Case......Page 399
EXAMPLE 11.6 Value of Preventing Entry......Page 402
EXAMPLE 11.7 The FTC versus Ethyl et al.......Page 407
EXAMPLE 11.8 Information Exchanges: TheHardwood Case......Page 408
CHAPTER 12 Vertical Integration andVertical Restrictions......Page 420
The Reasons for and Against Vertical Integration......Page 421
Integration to Lower Transaction Costs......Page 425
Integration to Assure Supply......Page 428
EXAMPLE 12.3 Own Your Own Steel Mill......Page 429
Integration to Increase Monopoly Profits......Page 430
The Life Cycle of a Firm......Page 437
Vertical Restrictions......Page 439
Vertical Restrictions Used to Solve Problems in Distribution......Page 440
The Effects of Vertical Restrictions......Page 450
Banning Vertical Restrictions......Page 455
Franchising......Page 456
Evidence on Vertical Integration......Page 458
Evidence on Vertical Restrictions......Page 460
Summary......Page 462
Suggested Readings......Page 463
EXAMPLE 12.1 Outsourcing......Page 422
EXAMPLE 12.2 Preventing Holdups......Page 423
EXAMPLE 12.4 Double Markup......Page 444
EXAMPLE 12.5 Blockbuster’s Solution to theDouble Marginalization Problem......Page 445
EXAMPLE 12.6 Free Riding on the Web......Page 447
EXAMPLE 12.7 Brewing Trouble: RestrictingVertical Integration in Alcoholic BeverageIndustries......Page 451
PART 4 Information, Advertising, and Disclosure......Page 464
CHAPTER 13 Information......Page 465
Why Information Is Limited......Page 466
The Market for “Lemons”......Page 468
Solving the Problem: Equal Information......Page 471
Evidence on Lemons Markets......Page 475
Limited Information About Price......Page 477
EXAMPLE 13.5 Price Dispersion and SearchCosts in the Talmud......Page 478
★The Tourists-and-Natives Model......Page 482
How Information Lowers Prices......Page 488
An Example: Grocery Store Information Programs......Page 490
Summary......Page 492
Suggested Readings......Page 493
APPENDIX 13A Market Shares in the Tourists-and-Natives Model......Page 494
EXAMPLE 13.1 Genetically Modified Organisms:Do Consumers Not Care or Not Read?......Page 467
EXAMPLE 13.2 Understanding ConsumerInformation......Page 469
EXAMPLE 13.3 Counterfeit Halal Meat......Page 472
EXAMPLE 13.4 Certifying Thoroughbreds......Page 476
EXAMPLE 13.6 Price Dispersion......Page 483
EXAMPLE 13.7 Tourist Cameras......Page 489
CHAPTER 14 Advertising and Disclosure......Page 496
Promotions......Page 499
EXAMPLE 14.1 Branding and Labeling......Page 500
Informational Versus Persuasive Advertising......Page 501
Profit-Maximizing Advertising......Page 502
EXAMPLE 14.3 Milk Advertising......Page 505
Advertising to Solve the Lemons Problem......Page 506
When Advertising Is Excessive......Page 508
Limits to Lying......Page 514
Antifraud Laws......Page 516
Disclosure Laws......Page 517
Problems......Page 519
Suggested Readings......Page 520
APPENDIX 14A Profit-Maximizing Advertising......Page 521
EXAMPLE 14.2 Celebrity Endorsements......Page 503
EXAMPLE 14.4 Social Gain from Price Advertising......Page 507
EXAMPLE 14.5 Welfare Effects of RestrictingAlcohol Ads......Page 512
EXAMPLE 14.6 Restaurants Make the Grade......Page 518
PART 5 Dynamic Models and Market Clearing......Page 522
How Long Should a Durable Good Last?......Page 523
Competitive Firm’s Choice of Durability......Page 524
The Monopoly’s Choice of Durability......Page 525
Costly Installation and Maintenance......Page 528
Resale Market......Page 530
★Consumers’ Expectations Constrain the Monopoly......Page 532
EXAMPLE 15.6 Lowering the Resale Value ofUsed Textbooks......Page 545
Suggested Readings......Page 546
APPENDIX 15A Multiperiod Durable Goods Monopoly......Page 547
EXAMPLE 15.1 United Shoe......Page 529
EXAMPLE 15.2 The Importance of Used Goods......Page 533
EXAMPLE 15.3 The Alcoa Case: SecondhandEconomics......Page 535
EXAMPLE 15.4 Leasing Under Adverse Selection......Page 537
EXAMPLE 15.5 Sales Versus Rentals......Page 544
CHAPTER 16 Patents and TechnologicalChange......Page 550
Patents......Page 551
Copyrights......Page 553
Trademarks......Page 554
Incentives for Inventions Are Needed......Page 555
Imitation Discourages Research......Page 557
Patents Encourage Disclosure......Page 561
★Patents, Prizes, Research Contracts, and Joint Ventures......Page 564
Determining the Optimal Number of Firms......Page 566
No Government Incentives......Page 567
Government-Financed Research......Page 568
EXAMPLE 16.4 Joint Public-Private R&D......Page 569
Relaxing Antitrust Laws: Joint Ventures......Page 572
Patents......Page 573
Patent Holders May Manufacture or License......Page 579
Eliminating Patents......Page 583
Market Structure Without a Patent Race......Page 585
Optimal Timing of Innovations......Page 586
Monopolies in Patent Races......Page 589
Summary......Page 591
Problems......Page 592
Suggested Readings......Page 593
EXAMPLE 16.1 Piracy......Page 559
EXAMPLE 16.2 Patents Versus Trade Secrets......Page 562
EXAMPLE 16.3 Monkey See, Monkey Do......Page 563
EXAMPLE 16.5 Prizes......Page 570
EXAMPLE 16.6 Mickey Mouse Legislation......Page 577
EXAMPLE 16.7 European Patents......Page 580
EXAMPLE 16.8 Patent Thicket......Page 590
CHAPTER 17 How Markets Clear: Theory and Facts......Page 594
Monopoly......Page 595
Empirical Evidence on the Role of Price in Allocating Goods......Page 596
The Rigidity of Prices......Page 597
Movements in Prices and Price-Cost Margins over the Business Cycle......Page 603
EXAMPLE 17.2 How Much Is That Turkey in the Window?......Page 604
Extensions to the Simple Theory: The Introduction of Time......Page 605
Fixed Costs of Changing Price......Page 608
Implications of an Unchanging Price for Inventories......Page 609
Asymmetric Information and Moral Hazard......Page 611
Toward a General Theory of Allocation......Page 612
Produce-to-Order Versus Produce-to-Stock......Page 616
Transmission of Shocks in Industries with Fixed Prices......Page 617
Problems......Page 618
EXAMPLE 17.1 Price Rigidity—It’s the Real Thing......Page 602
EXAMPLE 17.3 The Cost of Changing Prices......Page 610
EXAMPLE 17.4 Creating Futures Markets......Page 613
EXAMPLE 17.5 Oh Say Does That Star-SpangledBanner Yet Fly?......Page 615
PART 6 Government Policies and Their Effects......Page 620
Reasons for Trade Between Countries......Page 621
Comparative Advantage......Page 622
Free Riding, International Price Differences, and Gray Markets......Page 623
Dumping......Page 628
Tariffs, Subsidies, and Quotas......Page 633
Competition......Page 634
Creating and Battling Monopolies......Page 636
EXAMPLE 18.4 Being Taken for a Ride: Japanese Cars......Page 643
Industries with Positive Externalities......Page 647
Empirical Evidence on Intervention in International Trade......Page 648
Problems......Page 652
APPENDIX 18A Derivation of the Optimal Subsidy......Page 654
EXAMPLE 18.1 Gray Markets......Page 625
EXAMPLE 18.2 Timber Wars and Retaliation......Page 637
EXAMPLE 18.3 Foreign Doctors......Page 641
EXAMPLE 18.5 Wide-Body Aircraft......Page 650
EXAMPLE 18.6 Steeling from U.S. Consumers......Page 651
CHAPTER 19 Antitrust Laws and Policy......Page 656
Antitrust Statutes......Page 657
Enforcement......Page 658
Goals of the Antitrust Laws......Page 659
Who May Sue?......Page 662
Economic Theory of Damages......Page 664
The Use of U.S. Antitrust Laws......Page 665
Market Power......Page 667
Market Definition......Page 669
Cooperation Among Competitors......Page 673
Price-Fixing and Output Agreements......Page 674
Not All Agreements Among Competitors Are Illegal......Page 676
Information Exchanges Among Competitors......Page 678
Oligopoly Behavior......Page 680
Mergers......Page 682
Exclusionary Actions and Other Strategic Behavior......Page 686
Competitive Behavior Deemed Undesirable by the Court......Page 687
Vertical Arrangements Between Firms......Page 693
Price Discrimination Under Robinson-Patman......Page 699
Tie-in Sales......Page 700
Effects of Antitrust Laws on the Organization of Unregulated and Regulated Firms......Page 702
Summary......Page 704
Problems......Page 705
Suggested Readings......Page 706
EXAMPLE 19.1 Using the Government to Create Market Power: Misuse of the Orange Book......Page 660
EXAMPLE 19.2 Conflict Between European and U.S. Antitrust Authorities: GE-Honeywell......Page 663
EXAMPLE 19.3 The Merger Guidelines......Page 670
EXAMPLE 19.4 Antitrust Laws in Other Countries......Page 675
EXAMPLE 19.5 Colleges and Antitrust: Does YourSchool Belong to a Cartel?......Page 679
EXAMPLE 19.6 The FTC Plays with Toys ‘R’ Us......Page 698
CHAPTER 20 Regulation and Deregulation......Page 707
Market Inefficiencies......Page 711
Capture Theory and Interest-Group Theory......Page 712
Making Monopolies More Competitive......Page 716
Privatizing......Page 717
Franchise Bidding......Page 719
Price Controls......Page 721
★Rate-of-Return Regulation......Page 732
Quality Effects......Page 737
Making Competitive Industries More Monopolistic......Page 739
Limiting Entry......Page 741
Agricultural Regulations: Price Supports and Quantity Controls......Page 743
Deregulation......Page 746
Airlines......Page 749
Ground Transportation......Page 755
Problems......Page 759
Suggested Readings......Page 760
EXAMPLE 20.1 Pizza Protection......Page 710
EXAMPLE 20.2 Cross-Subsidization......Page 713
EXAMPLE 20.3 Legal Monopolies......Page 714
EXAMPLE 20.4 Public, Monopolistic, and Competitive Refuse Collection......Page 718
EXAMPLE 20.5 Rent Control......Page 740
EXAMPLE 20.6 Brewing Trouble......Page 742
EXAMPLE 20.7 Deregulating Electricity: California in Shock......Page 751
EXAMPLE 20.8 International and U.S. Deregulation in Telecommunications......Page 753
EXAMPLE 20.9 European Deregulation of Airlines......Page 756
Bibliography......Page 762
Glossary......Page 805
Chapter 4......Page 812
Chapter 6......Page 813
Chapter 7......Page 814
Chapter 10......Page 815
Chapter 13......Page 816
Chapter 15......Page 817
Chapter 18......Page 818
Chapter 20......Page 819
Legal Case Index......Page 820
Author Index......Page 823
Subject Index......Page 833