© 2001 J. Douglass Klein Competition and Profits q P Marg. Cost Av. Cost Market Price 1 Market Price 2 Market Price 3

© 2001 J. Douglass Klein

Competition and Profits

q

PMarg. Cost

Av. Cost

Market Price 1

Market Price 2

Market Price 3


Monopoly and Profits

q

PMarg. Cost

Av. Cost

D

EEntire market demand

Marginal revenue

B

C

A

Welfare loss, or Allocative Inefficiency is shown by the gap between Willingness-to-Pay (B) and Marginal Cost (A)


Monopsony (one buyer takes advantage of many sellers)

q

P

Market Supply

D

Monopsonist demand = M.B.

B

A

Welfare loss, or Allocative Inefficiency is shown by the gap between Willingness-to-Pay (B) and Marginal Cost (A)

Marginal Expense of Input (MEI)

P(monops)

P(comp)


The Bugaboo of Trusts - 1889Page 145-146

“capital, like water, has again found its level.”

“Such is the law, such has been the law, and such promises to be the law for the future; for, so far, no device has yet been devised that has permanently thwarted its operation.

“Given freedom of competition, and all combinations or trusts that attempt to extract from the consumer more than a legitimate return upon capital and services, write the charter of their own defeat.”


The Bugaboo of Trusts - 1889Page 146

“Given freedom of competition…”

Page 148

“Provided capital is free to embark in competing lines.”

Page 149

“Only let them [the people of America] hold firmly to the doctrine of free competition. Keep the field open.”

Page 150

“so long as all are free to compete”


The Bugaboo of Trusts - 1889

Exactly what does Carnegie have to say about the protective tariff in his essay on Trusts?


Carnegie on Wealth

“Formerly articles were manufactured at the domestic hearth… The master and his apprentices worked side by side … There was, substantially, social equality…. The inevitable result of such a mode of manufacture was crude articles at high prices.” (p. 654)


Carnegie on Wealth

“To-day the world obtains commodities of excellent quality at prices which even the generation preceding this would have deemed incredible… The price which society pays for the law of competition… is great, but the advantages are greater still.” (p. 654)

“We accept and welcome… as conditions to which we must accommodate ourselves, great inequality of environment, the concentration of business, industrial and commercial in the hands of a few….” (p. 654-55)


Carnegie on Wealth

1. What was Carnegie’s “Gospel of Wealth”?

2. Do you agree with it? (Why?)

Use Carnegie, and the Economist articles, and anything else you choose.

Post in pairs to WEALTH.


What to do with your wealth?

1. Leave to families

2. Leave to state

3. Administer during lifetime


What to do with your wealth? (661)

“…the man of Wealth … [must] set an example of modest, unostentatious living, shunning display or extravagance … and … to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer.”


Vanderbilt’s 5th Ave. ApartmentButterfield, The American Past


One Idea of Government

Which side of Bryan’s “two great ideas” does Carnegie fall on?

Find examples from pages 660 to the end of “Wealth”.


The workers’ opinion

Collective Ownership

Butterfield, The American Past


Trusts and Tariff


Two ideas again

How are goods produced and distributed in a capitalist society?

How are goods produced and distributed in a socialist society?

Which is better, and why?

People get what they need,

and can afford.

People get what they need.

Period.


Affluence

Define AFFLUENCE

“[T]here are two possible courses to affluence. Wants may be ‘easily satisfied’ either by producing much or desiring little…

“Adopting the Zen strategy, a people can enjoy an unparalleled material plenty--with a low standard of living.”Marshall Sahlins, Stone Age Economics, 1972, pp. 1-2


Outline

The Antitrust LawsSherman, Clayton, FTCEarly enforcementFirst successesCurrent status (WSJ handout)


Monopoly, Competition, and Efficiency

In the 1880s and 1890s, JP Morgan & Co. re-organized, and came to dominate the Boards of:Reading RR, B&O, C&O, Santa Fe, Erie, Northern Pacific, Southern.

“The investment bankers reduced the debt structures and rationalized the distribution of routes; they also reduced competition.” (Bryant & Dethloff, A History of American Business, 124)


Clark on the Trusts

• First, we may prosecute with more intelligence the effort to break up the trusts into smaller corporations. • Secondly, … abolish customs duties on all articles manufactured by the trusts. • Thirdly, … introduce an elaborate system of price regulation. • Fourthly, … put all monopolized industries into the hands of the state…• Is there no further recourse? …Give to potential competition greater effectiveness.

-- J. B. Clark, “How to Regulate Trusts” (1900)


The Sherman Antitrust Act - 1890

Section 1: Contracts, Combinations, and Conspiracies in Restraint of Trade= E.G.: PRICE FIXING; BID RIGGINGExplicit evidence (smoking gun) = guilt Per se illegal

Section 2: Monopolization and Attempts to Monopolize= DOMINANT MARKET SHARE; UNREASONABLY GAINEDJudged under the Rule of Reason


The Sherman Antitrust Act - 1890

Some early cases:

1895 Knight Sugar

1904 Northern Securities

1911 Standard Oil

1911 American Tobacco

1920 U.S. Steel

1945 Alcoa


U.S. Steel

Martin, Industrial Economics


Monopoly, Competition, and Efficiency

Auerbach,Competition: The Economics of Industrial Change, 58

In the Chicago School (conservative) view, and in Carnegie’s view, competition takes place on a higher plane than at the single market or industry level. There is competition for investor dollars, and for consumer dollars. No firm is insulated from this level of competition.

In the Chicago School (conservative) view, and in Carnegie’s view, competition takes place on a higher plane than at the single market or industry level. There is competition for investor dollars, and for consumer dollars. No firm is insulated from this level of competition.


Microsoft could maximize short-run profits by charging relatively high prices for its products and allowing its market position to dwindle over time -- or it could charge relatively low prices and maintain, or even expand, its market share over time.

-- Becker & Murphy, WSJ, 2/26/01

Microsoft could maximize short-run profits by charging relatively high prices for its products and allowing its market position to dwindle over time -- or it could charge relatively low prices and maintain, or even expand, its market share over time.

-- Becker & Murphy, WSJ, 2/26/01


Predatory Pricing

Time

Profit

Normal

A. Hamilton’s view

Smith’s view

PredatoryPricing

US Steel; Alcoa; Microsoft


The End – 1 (Monopoly & Antitrust, 1998)Regulators ponder Conrail takeover

Two makers of phone gear join forces

Intel and the threat of low-cost chips: Despite monopoly position, company seems highly vulnerable

Browning-Ferris approached by Allied Waste Industries with proposed merger

Is big tobacco reeling? Maybe not; it wins new rounds in court

Travelers agreed to invest $1.6 billion in Nikko Securities … latest move to make Travelers into a global powerhouse

Ten Asian shipping lines are under investigation for unauthorized price setting

United Health to acquire Humana, Inc. $5.5 billion deal thins patients’ choices

MCI to sell Internet unit amid chill in merger review

The hows and whys of FTC action against Intel

Much of Europe eases its rigid labor laws, and temps proliferate

Boeing will phase out production of its MD11 wide-body jet after merger

NAFTA reality check: trucks, trains, ships face costly delays

Trustbuster Joel Klein, once viewed as timid, comes on like a tiger


The End – 2 (Monopoly and Antitrust, Winter, 2001)

Claritin and Schering-Plough: A Prescription for Profit

Market Insight: Microsoft's Future, in Court and the Markets

U.S. Court Ruling Lets Cable Giants Widen Their Reach

VeriSign May Get Control of .com Registrations Until '07

Democracy's Tricky Radio Signal (Congress's move to kill low-power radio stations)

New Directors for Mexico Oil Monopoly

United Flight Attendants Threaten To Strike Because of USAir Deal

Wall St. Banks Sued Over Initial Offerings

Drive by the Phillips auction house to break up the decades-old duopoly of Sotheby's and Christie's.

Jurors Find Mitsubishi Guilty Of Aiding a Price-Fixing Scheme for Graphite Electrodes


Bryan’s Two Ideas

Federalist

Whig

Republican

Democratic

WashingtonHamiltonWebsterMcKinleyReagan“W”

JeffersonCalhounJacksonBryanFDRKennedy

Few; wealthy, business, aristocracy; Protection;“What’s good for GM is good for the country;” laissez faire toward business;Capital gains tax cuts; free trade;Trickle-down

Many, masses, farmers, workers, consumers, the poor;Free trade (for consumers); regulation of railroads; antitrust; Welfare programs; Labor law;Tax credits for children; Protection (for workers)

Documents

© 2001 J. Douglass Klein Competition and Profits q P Marg. Cost Av. Cost Market Price 1 Market Price 2 Market Price 3