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33 Cards in this Set
- Front
- Back
Merger
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When two formerly separate firms cobine to form a single firm for practical purposes, often combine with aquisitions
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What can merging lead to
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Reduction in competition
clashes and bad decisions |
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High percentage of mergers during
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1990s
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Aquisition
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when one firm purchases another for practical purposes, often combined with mergers
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Anti-Trust Laws
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laws that give government the power to block certain mergers and in some cases break up large firms into smaller ones
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Companies broken up by Anti-trust laws
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Hoffman La Roche, BASF
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4 firm concentration ratio
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what percentage of share of total sales in the industry are accounted for by the 4 largest firms
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How to calculate 4 firm concentration ratio
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add total number of market shares of 4 largest firms
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Market Share
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the percentage of total sales in the market
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HHI Herfindahl-Hirschmann Index
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take the market share of each firm in the industry, square each one and add them
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Assets of HHI
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gives greater weight to large firms
over 1800 - challenged by FIC lower than 100 - accepted in between 1000 and 1800 - case-by-case basis |
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Weakness of HHI and 4 firm concentration
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assumption that the market is well defined
assumption that all indstries are similar enough that a broad measure of concentration is ok |
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Restrictive practices
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practices that reduce competition but do not involve outright agreements between firms to raise price - controversial
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Minimum Resale agreement
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an illegal agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price
They can "suggest" |
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Exclusive Dealign
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an agreement that a dealer will sell only products from one manufacturer
illegal and legal |
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Tie-In-Sales
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A situation where a customer is allowed to buy one product only if the customer also buys another product (bundling)
• May be illegal |
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o Predatory Pricing
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when an existing firm uses sharp but temporary price cuts to discourage competition
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Effects of predatory pricing
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drives firms out of market
hard to distinguish between predatory pricing and market competition |
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• Natural Monopoly
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arises when average costs are declining over the range of production that satisfies market demand
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How to regulate a natural monopoly
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leave it alone, divide the company, set price/quantity
o Market competition won’t work – government may need to step in |
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• Cost Plus Regulation
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when regulators permitted a regulated firm to cover its costs and to make a normal level of profit
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• Price Cap Regulation
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(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 |
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• Deregulation
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removing government controls over setting prices and quantities in certain industries – airlines, RR, trucking, bus travel, natural gas, bank interest rates
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o Deregulation Experiment
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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 |
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• Regulatory Capture
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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 |
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• Nationalization
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when government takes ownership of firms
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• Privatization
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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” |
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Factors that increase level of competition
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Globalization
New communications |
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Agricultural Production- Competition
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producers must adopt cheapter methods of production - does this mean more pollution, less healthy and ethical concerns?
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Agricultural Production- Concentration
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large scale production
number of farms decrease, size increases |
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EOS
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Economies of Scale are larger producers
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Positives of EOS
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Lower costs
lower prices conservative no FDA |
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Negatives of EOS
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less choice
unhealthy fod liberal |