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2022-08-14 14:00:25 -04:00
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</style></head><body><article id="1253df77-88d6-403d-8022-c5ef0d1b1dd7" class="page sans"><header><h1 class="page-title">Unit 4: Imperfect Competition</h1><table class="properties"><tbody><tr class="property-row property-row-created_time"><th><span class="icon property-icon"><svg viewBox="0 0 14 14" style="width:14px;height:14px;display:block;fill:rgba(55, 53, 47, 0.45);flex-shrink:0;-webkit-backface-visibility:hidden" class="typesCreatedAt"><path d="M7.01356 14.0001C8.8042 14.0001 10.5958 13.3107 11.9575 11.9324C14.681 9.21201 14.6808 4.7603 11.9571 2.04013C9.23336 -0.680043 4.77573 -0.680043 2.05199 2.04013C0.727519 3.36277 0 5.13301 0 6.99553C0 8.8764 0.727811 10.6285 2.05199 11.9509C3.43207 13.3106 5.22243 14.0001 7.01356 14.0001ZM3.72947 7.00914V8.461V8.65543H3.92382H5.34563H8.2794H8.4738V8.461V5.52541V3.37947V3.18502H8.2794H6.82747H6.63307V3.37947V6.81467H3.92382H3.72947V7.00914ZM1.83985 6.99553C1.83985 5.61698 2.38099 4.32597 3.36061 3.3477C5.36746 1.34337 8.64803 1.34062 10.6585 3.33944C10.6613 3.34219 10.6639 3.34494 10.6668 3.3477C12.676 5.3546 12.6763 8.63642 10.6668 10.6434C8.65705 12.6504 5.37031 12.6504 3.36061 10.6434C2.38099 9.66506 1.83985 8.37408 1.83985 6.99553Z"></path></svg></span>Created</th><td><time>@January 10, 2022 10:05 AM</time></td></tr><tr class="property-row property-row-multi_select"><th><span class="icon property-icon"><svg viewBox="0 0 14 14" style="width:14px;height:14px;display:block;fill:rgba(55, 53, 47, 0.45);flex-shrink:0;-webkit-backface-visibility:hidden" class="typesMultipleSelect"><path d="M4,3 C4,2.447715 4.447715,2 5,2 L12,2 C12.5523,2 13,2.447716 13,3 C13,3.55228 12.5523,4 12,4 L5,4 C4.447715,4 4,3.55228 4,3 Z M4,7 C4,6.447715 4.447715,6 5,6 L12,6 C12.5523,6 13,6.447716 13,7 C13,7.55228 12.5523,8 12,8 L5,8 C4.447715,8 4,7.55228 4,7 Z M4,11 C4,10.447715 4.447715,10 5,10 L12,10 C12.5523,10 13,10.447716 13,11 C13,11.55228 12.5523,12 12,12 L5,12 C4.447715,12 4,11.55228 4,11 Z M2,4 C1.44771525,4 1,3.55228475 1,3 C1,2.44771525 1.44771525,2 2,2 C2.55228475,2 3,2.44771525 3,3 C3,3.55228475 2.55228475,4 2,4 Z M2,8 C1.44771525,8 1,7.55228475 1,7 C1,6.44771525 1.44771525,6 2,6 C2.55228475,6 3,6.44771525 3,7 C3,7.55228475 2.55228475,8 2,8 Z M2,12 C1.44771525,12 1,11.5522847 1,11 C1,10.4477153 1.44771525,10 2,10 C2.55228475,10 3,10.4477153 3,11 C3,11.5522847 2.55228475,12 2,12 Z"></path></svg></span>Tags</th><td></td></tr></tbody></table></header><div class="page-body"><h1 id="570c07aa-90e8-4a33-b3ca-8bfbe878ae9a" class="">4.1 - Introduction to Imperfectly Competitive Markets</h1><h2 id="c4935c86-a6ca-4d58-9dea-ecc2464f32eb" class="">Market Structures</h2><h3 id="fc6bf161-9735-400b-ba5a-5bf69a18532b" class="">Perfect Competition</h3><ul id="4982387c-c1d6-4638-81f7-d755b8bd3614" class="bulleted-list"><li style="list-style-type:disc">Many firms in competition with each other</li></ul><ul id="424c7880-8005-4fe0-a2e2-d8c4aa782e69" class="bulleted-list"><li style="list-style-type:disc">Goods being sold are <strong>identical</strong>, with no product differentiation</li></ul><ul id="6447b001-5dca-4943-a004-fc08a5a6fa68" class="bulleted-list"><li style="list-style-type:disc">Individual firms have no control over prices, they are called &quot;price takers&quot;</li></ul><ul id="537b2672-19a9-4be6-88f5-21ff6cfa3a27" class="bulleted-list"><li style="list-style-type:disc">Low barrier to entry (solely startup cost)</li></ul><ul id="e8b73fed-a97d-4746-af0c-a320d756e2ac" class="bulleted-list"><li style="list-style-type:disc">Well informed buyers and sellers</li></ul><h3 id="5d9f04ec-fe72-4412-8d83-f94a53a8b7a4" class="">Monopolistic Competition</h3><ul id="efa40c1b-2d2b-4536-aafc-600f2336655f" class="bulleted-list"><li style="list-style-type:disc">Many firms in competition with each other</li></ul><ul id="d5fd2f99-0267-4a37-b9d9-ccb6195f7d67" class="bulleted-list"><li style="list-style-type:disc">There is some amount of differentiation between products</li></ul><ul id="b5a61242-7325-459c-bcae-de70cf18487f" class="bulleted-list"><li style="list-style-type:disc">Individual firms have no control over pri
</p><p id="6219aa71-da0b-4601-9d07-9eff14c298d9" class="">Price-making firms face a <strong>downward-sloping</strong> demand curve, greater than the marginal revenue curve.</p><h2 id="40ca394f-2eb6-46dc-8f97-220704f7c5ed" class="">Why Imperfectly Competitive Firms are Inefficient</h2><h3 id="4baac43c-5b77-403a-9748-c23385fd5d95" class="">Defining Efficiency</h3><ul id="eb199d2d-8826-48e5-8b4a-cf5313f1b64a" class="bulleted-list"><li style="list-style-type:disc"><strong>Allocative Efficiency (</strong><strong><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{P} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span></strong><strong>): </strong>The price of a good should be equal to the value of the resources (land, labor, capital) used to produce it. Also known as the Socially Efficient quantity of output. </li></ul><ul id="641863c8-c72d-488f-b44d-11796c22c3b4" class="bulleted-list"><li style="list-style-type:disc"><strong>Productive Efficiency (</strong><strong><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>min ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{P} = \textrm{min ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">min ATC</span></span></span></span></span></span><span></span></span></strong><strong>): </strong>The least costly production techniques are used. </li></ul><p id="d33c4412-f4ea-4372-b4c2-13560ee83737" class="">In perfect competition, a firm’s <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>MC</mtext><mo>=</mo><mtext>min ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm {P} = \textrm{MC} = \textrm{min ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span
</p></div><div id="0ae38b61-0fd2-4e4f-a84a-7987860f1b27" style="width:50%" class="column"><figure id="f0a34be7-4ead-4563-bb69-e7475b6d94f3" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled.png"><img style="width:336px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled.png"/></a></figure></div></div><div id="db819bba-383c-485d-83e3-00d30626b384" class="column-list"><div id="18d12b61-9f5f-4cfb-afc3-7471eb8f5d6c" style="width:50%" class="column"><figure id="7ceba0a1-5c4d-4815-b3a5-2154708570d7" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%201.png"><img style="width:782px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%201.png"/></a></figure></div><div id="b433543c-81e5-4455-b781-65a931a70622" style="width:50%" class="column"><p id="922f29ea-589a-4950-ae61-51fbbac7e550" class="">With <strong>perfect price discrimination</strong>, the monopolist produces the competitive quantity, but instead of charging a fixed price, charges every individual buyer their WTP.</p><p id="5ac8319f-b814-4666-a199-bf6142ede11d" class="">In this instance, the monopolist captures all CS as profit. The area which was a deadweight loss for a single-price monopoly instead becomes profit for the monopolist.</p></div></div><h2 id="57dfecb4-74f1-4575-b744-0ad5eec896b0" class="">Price Discrimination in the Real World</h2><ul id="effe0776-aa2c-4f99-986f-328e6e6e70e4" class="bulleted-list"><li style="list-style-type:disc">Perfect price discrimination is not realistic in the real world:<ul id="75b374c9-d997-4001-aa1b-7c5f11d91451" class="bulleted-list"><li style="list-style-type:circle">No firm knows every buyer’s WTP</li></ul><ul id="ba916e9b-6960-406f-b79a-6ebb915677b1" class="bulleted-list"><li style="list-style-type:circle">Buyers do not reveal it to sellers</li></ul></li></ul><ul id="510c19aa-b520-49a9-a15c-363130345441" class="bulleted-list"><li style="list-style-type:disc">So, firms divide customers into groups based on some observable trait that is likely related to WTP, such as age.</li></ul><h1 id="42bd63c0-db6d-484a-82aa-cc639b162881" class="">4.4 - Monopolistic Competition</h1><p id="9ec62940-846f-41e9-bab7-c9f0bf111a97" class=""><strong>Monopolistic competition:</strong> many firms sell similar, <em>but not identical</em>, products.</p><h3 id="addf03e3-2714-445b-9177-96ff0abb9b4c" class="">Characteristics</h3><ul id="d16650b6-7b2e-470f-afe9-0dec8b0e7c7d" class="bulleted-list"><li style="list-style-type:disc">Many sellers</li></ul><ul id="ef661380-5eee-419e-91e0-fa0607d60a7f" class="bulleted-list"><li style="list-style-type:disc">Product differentiation</li></ul><ul id="22867c55-43c8-42db-82eb-b1dd8eb04a44" class="bulleted-list"><li style="list-style-type:disc">Free entry and exit</li></ul><h3 id="d20f3656-80bb-48b3-be89-603917b09f30" class="">Examples</h3><ul id="9e9e10a8-1de2-4a52-9e49-fa40e057c950" class="bulleted-list"><li style="list-style-type:disc">apartments</li></ul><ul id="9110380a-3658-4801-a1d6-e4e95ceee2c5" class="bulleted-list"><li style="list-style-type:disc">books</li></ul><ul id="df71a389-8508-4948-a80d-c08607cd6c38" class="bulleted-list"><li style="list-style-type:disc">bottled water</li></ul><ul id="f79ef905-3e3b-46d5-942e-2b2d7a68393b" class="bulleted-list"><li style="list-style-type:disc">clothing</li></ul><ul id="a8e68417-a20e-4c68-bc24-1fe54cee4a12" class="bulleted-list"><li style="list-style-type:disc">fast food</li></ul><ul id="74c92762-c597-4252-8612-ad460db13420" class="bulleted-list"><li style="list-style-type:disc">night clubs</li></ul><h2 id="5175422e-67e2-4c47-b44d-7b35ca6ce377" class="">Comparing Perfect and Monopolistic Competiton</h2><ul id="388ae955-5d57-4ce3-a94e-6a5eeb2db222" class="bulleted-list"><li style="list-style-type:disc"><strong>Number of sellers:</strong> both perfect and monopolistic competition have many sellers</li></ul><ul id="59ef98af-e2b5-4920-b43a-2719b8d28ac8" class="bulleted-list"><li style="list-style-type:disc
A firm’s decisions about <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> or <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> can affect other firms and cause them to react. The firm will consider these reactions when making decisions.</li></ul><ul id="5332bf1f-57ed-4098-8a55-3ce5094d2968" class="bulleted-list"><li style="list-style-type:disc"><strong>Game theory: </strong>the study of how people behave in strategic situations.</li></ul><ul id="47f44a5b-3a69-4de0-b089-7c870ca204ac" class="bulleted-list"><li style="list-style-type:disc"><strong>Collusion:</strong> an agreement among firms in a market about quantities to produce or prices to charge</li></ul><ul id="7eea15e8-dabc-49d6-9045-9b136cec375a" class="bulleted-list"><li style="list-style-type:disc"><strong>Cartel:</strong> a group of firms acting in unison</li></ul><h2 id="21c832ef-63bd-4843-aa25-cefdc4aa4417" class="">Collusion vs. Self-Interest</h2><ul id="22607d04-727e-4b32-8bc0-1db4f452361b" class="bulleted-list"><li style="list-style-type:disc">In a duopoly, both firms would be better off if both stick to the cartel agreement.</li></ul><ul id="6f568e2e-c113-43f4-b445-a9e0ae7b6bd9" class="bulleted-list"><li style="list-style-type:disc">But each firm has an incentive to renege on the agreement.</li></ul><ul id="cda83c43-a581-4c6c-868e-70cb20c79cfa" class="bulleted-list"><li style="list-style-type:disc">Lesson: It is difficult for oligopoly firms to form cartels and honor their agreements.</li></ul><h2 id="e96b8998-431b-4698-8db6-0fa3c3148afc" class="">The Equilibrium for an Oligopoly</h2><ul id="b80bdc4b-f80e-424a-ab23-3c13c1737242" class="bulleted-list"><li style="list-style-type:disc"><strong>Nash equilibrium: </strong>a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen.</li></ul><h2 id="40e1de53-cffa-4107-9889-a5067477ed42" class="">A Comparison of Market Outcomes</h2><p id="d88b18e5-c6e4-4dc2-9715-2d1b76042ced" class="">When firms in an oligopoly individually choose production to maximize profit,</p><ul id="e0acae5b-8c90-4f2e-8684-2424d0af6a8b" class="bulleted-list"><li style="list-style-type:disc">Oligopoly <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="
If <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>&gt;</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P &gt; \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>, increasing output raises profits.</li></ul><ul id="90966929-868b-4791-b6ea-b7eeaed2eafb" class="bulleted-list"><li style="list-style-type:circle"><strong>Price effect:
</strong>Raising output increases market quantity, which reduces price and reduces profit on all units sold.</li></ul></li></ul><ul id="50c5d7ef-20a1-462a-a8ae-791313ebed14" class="bulleted-list"><li style="list-style-type:disc">If output effect &gt; price effect, then the firm increases production.</li></ul><ul id="802d994e-184f-4eee-9b48-6a7707df361b" class="bulleted-list"><li style="list-style-type:disc">If price effect &gt; output effect, then the firm reduces production.</li></ul><h2 id="5cdd8512-889f-4059-a61c-401d3070267a" class="">The Size of the Oligopoly</h2><p id="8138a076-2264-41ce-bf40-35700a10378f" class="">As the number of firms in the market increases,</p><ul id="4bae7bfe-ce66-410b-9c69-1ab82a07ac94" class="bulleted-list"><li style="list-style-type:disc">the price effect becomes smaller</li></ul><ul id="ef74f06d-d821-4dde-b531-d8fd31e1ae3d" class="bulleted-list"><li style="list-style-type:disc">the oligopoly looks more and more like a competitive market</li></ul><ul id="f44c6c88-65bf-4ac5-9f04-614836108c20" class="bulleted-list"><li style="list-style-type:disc"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> approaches <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span></li></ul><ul id="8c99f5e3-5b14-495e-80d1-a2f270e8339c" class="bulleted-list"><li style="list-style-type:disc">the market quantity approaches the socially efficient quantity</li></ul><h2 id="a42816be-e631-4f20-858d-2eaad92464cc" class="">Game Theory</h2><ul id="15a2381c-5a11-4e4c-ad93-8122c1fe1f90" class="bulleted-list"><li style="list-style-type:disc"><strong>Game theory</strong> helps us understand oligopoly and other situations where “players” interact and behave strategically.</li></ul><ul id="ca0fb57b-5c93-4a11-a357-c46ad690a53e" class="bulleted-list"><li style="list-style-type:disc"><strong>Dominant strategy: </strong>a strategy that is best for a player in a game regardless of the strategies chosen by the other players.</li></ul><ul id="2ae9369f-0e29-4a13-af34-2d634446a615" class="bulleted-list"><li style="list-style-type:disc"><strong>Prisoners’ dilemma:</strong> a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial.</li></ul><h2 id="6542e54f-d390-4105-9f7e-b302d7ce3ed0" class="">Oligopolies as a Prisoners’ Dilemma</h2><ul id="73e62def-73f5-4929-a2b7-3961583fc3de" class="bulleted-list"><li style="list-style-type:disc">When oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in a prisoners’ dilemma.</li></ul><ul id="01c7cb68-8c7a-49a2-a5a1-26bb2bfd489d" class="bulleted-list"><li style="list-style-type:disc">Our earlier example:<ul id="e546533c-752e-4fcc-9a
Promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome.</li></ul><h2 id="f68c8d49-1599-4974-8fc3-172858bf0d88" class="">Controversies over Antitrust Policy</h2><ul id="68e433dd-42f8-4d46-b989-0e23072cf6f7" class="bulleted-list"><li style="list-style-type:disc">Most people agree that price-fixing agreements among competitors should be illegal.</li></ul><ul id="c85498c8-68dd-4b66-add4-911c6d9914ef" class="bulleted-list"><li style="list-style-type:disc">Some economists are concerned that policymakers go too far when using antitrust laws to stifle business practices that are not necessarily harmful, and may have legitimate objectives.</li></ul><ul id="c729e417-b511-4c29-9e48-9763eac4867c" class="bulleted-list"><li style="list-style-type:disc">We consider three such practices:<ul id="36b573c5-35b4-4a03-88fc-b33fc2e2dcd4" class="bulleted-list"><li style="list-style-type:circle"><strong>Resale Price Maintenance (“Fair Trade”)</strong><ul id="238aada0-5f0d-4459-8f42-3eff2252fdc3" class="bulleted-list"><li style="list-style-type:square">Occurs when a manufacturer imposes lower limits on the prices retailers can charge.</li></ul><ul id="56eea2fe-1e10-4b23-b8e2-cd6dcd8c7ae6" class="bulleted-list"><li style="list-style-type:square">Is often opposed because it appears to reduce competition at the retail level.</li></ul><ul id="e92faffa-7288-44d8-8530-e779db3fa1dc" class="bulleted-list"><li style="list-style-type:square">Yet, any market power the manufacturer has is at the wholesale level; manufacturers do not gain from restricting competition at the retail level.</li></ul><ul id="3d9c9ff6-18b3-4abb-b0ed-269f1d3b33f9" class="bulleted-list"><li style="list-style-type:square">The practice has a legitimate objective: preventing discount retailers from free-riding on the services provided by full-service retailers.</li></ul></li></ul><ul id="29c48197-6c35-434c-8708-ea520c6681d7" class="bulleted-list"><li style="list-style-type:circle"><strong>Predatory Pricing</strong><ul id="c364645c-f2ee-4532-bccc-a3cd183ceecb" class="bulleted-list"><li style="list-style-type:square">Occurs when a firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later.</li></ul><ul id="e57140ab-6a8b-4dab-95f5-ffa5dd0e2de1" class="bulleted-list"><li style="list-style-type:square">Illegal under antitrust laws, but hard for the courts to determine when a price cut is predatory and when it is competitive &amp; beneficial to consumers.</li></ul><ul id="8eb9bf7c-2b17-48e9-acf5-335d5cbe6e53" class="bulleted-list"><li style="list-style-type:square">Many economists doubt that predatory pricing is a rational strategy:<ul id="a5da78da-d221-41b9-b16b-8aece273967a" class="bulleted-list"><li style="list-style-type:disc">It involves selling at a loss, which is extremely costly for the firm.</li></ul><ul id="2001c601-60b5-487a-ae41-57569eee2867" class="bulleted-list"><li style="list-style-type:disc">It can backfire.</li></ul></li></ul></li></ul><ul id="1d9756e3-a023-42b5-ac99-947d98c3970b" class="bulleted-list"><li style="list-style-type:circle"><strong>Tying</strong><ul id="98699b5a-a805-4687-8912-55bb8a0c8878" class="bulleted-list"><li style="list-style-type:square">Occurs when a manufacturer bundles two products together and sells them for one price (e.g., Microsoft including a browser with its operating system)</li></ul><ul id="264705f8-6455-4242-8cd7-912d42ae6709" class="bulleted-list"><li style="list-style-type:square">Critics argue that tying gives firms more market power by connecting weak products to strong ones.</li></ul><ul id="e011a634-06ac-423b-9ce6-f9676363724f" class="bulleted-list"><li style="list-style-type:square">Others counter that tying cannot change market power: Buyers are not willing to pay more for two goods together than for the goods separately.</li></ul><ul id="ecac8d04-b998-47ad-8c46-e2b98bcce88f" class="bulleted-list"><li style="list-style-type:square">Firms may use tying for price discrimination, which is not illegal, and which sometimes i
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