Economics Exam 2 - Competitions And Public Policy

Front 1

Merger

Back 1

When two formerly separate firms cobine to form a single firm for practical purposes, often combine with aquisitions

Front 2

What can merging lead to

Back 2

Reduction in competition
clashes and bad decisions

Front 3

High percentage of mergers during

Back 3

1990s

Front 4

Aquisition

Back 4

when one firm purchases another for practical purposes, often combined with mergers

Front 5

Anti-Trust Laws

Back 5

laws that give government the power to block certain mergers and in some cases break up large firms into smaller ones

Front 6

Companies broken up by Anti-trust laws

Back 6

Hoffman La Roche, BASF

Front 7

4 firm concentration ratio

Back 7

what percentage of share of total sales in the industry are accounted for by the 4 largest firms

Front 8

How to calculate 4 firm concentration ratio

Back 8

add total number of market shares of 4 largest firms

Front 9

Market Share

Back 9

the percentage of total sales in the market

Front 10

HHI Herfindahl-Hirschmann Index

Back 10

take the market share of each firm in the industry, square each one and add them

Front 11

Assets of HHI

Back 11

gives greater weight to large firms
over 1800 - challenged by FIC
lower than 100 - accepted
in between 1000 and 1800 - case-by-case basis

Front 12

Weakness of HHI and 4 firm concentration

Back 12

assumption that the market is well defined
assumption that all indstries are similar enough that a broad measure of concentration is ok

Front 13

Restrictive practices

Back 13

practices that reduce competition but do not involve outright agreements between firms to raise price - controversial

Front 14

Minimum Resale agreement

Back 14

an illegal agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price
They can "suggest"

Front 15

Exclusive Dealign

Back 15

an agreement that a dealer will sell only products from one manufacturer
illegal and legal

Front 16

Tie-In-Sales

Back 16

A situation where a customer is allowed to buy one product only if the customer also buys another product (bundling)
• May be illegal

Front 17

o Predatory Pricing

Back 17

when an existing firm uses sharp but temporary price cuts to discourage competition

Front 18

Effects of predatory pricing

Back 18

drives firms out of market
hard to distinguish between predatory pricing and market competition

Front 19

• Natural Monopoly

Back 19

arises when average costs are declining over the range of production that satisfies market demand

Front 20

How to regulate a natural monopoly

Back 20

leave it alone, divide the company, set price/quantity
o Market competition won’t work – government may need to step in

Front 21

• Cost Plus Regulation

Back 21

when regulators permitted a regulated firm to cover its costs and to make a normal level of profit

Front 22

• Price Cap Regulation

Back 22

(1980s-1990s) when the regulator sets a price that a firm cannot exceed over the next few years
o Common to require prices that declines through the years

Front 23

• Deregulation

Back 23

removing government controls over setting prices and quantities in certain industries – airlines, RR, trucking, bus travel, natural gas, bank interest rates

Front 24

o Deregulation Experiment

Back 24

1970s – price and quantity regulations in a number of industries were eliminated
o After deregulation – firms are more innovative and offer flexible arrangements to customers and cut costs
o Airlines – now 2/3 seats full compared to 1/2

Front 25

• Regulatory Capture

Back 25

problem with price regulation when the firms supposedly being regulated end up playing a large role in setting the regulations that they will follow
• 1982 – AT&T splits up due to government action

Front 26

• Nationalization

Back 26

when government takes ownership of firms

Front 27

• Privatization

Back 27

when a government owned firm becomes private

o Brit Oil, British Steel in mid 90s
o Britain led to global wave of privatization
o Privatization raises money for government
o “Government should steer not row”

Front 28

Factors that increase level of competition

Back 28

Globalization
New communications

Front 29

Agricultural Production- Competition

Back 29

producers must adopt cheapter methods of production - does this mean more pollution, less healthy and ethical concerns?

Front 30

Agricultural Production- Concentration

Back 30

large scale production
number of farms decrease, size increases

Front 31

EOS

Back 31

Economies of Scale are larger producers

Front 32

Positives of EOS

Back 32

Lower costs
lower prices
conservative
no FDA

Front 33

Negatives of EOS

Back 33

less choice
unhealthy fod
liberal