Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Managerial Economics &
Business Strategy
Chapter 13
A Manager’s Guide to
Government in the Marketplace
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Overview
I,Market Failure
? Market Power
? Externalities
? Public Goods
? Incomplete Information
II,Rent Seeking
III,Government Policy and International Markets
? Quotas
? Tariffs
? Regulations
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Market Power
? Firms with market
power produce socially
inefficient output levels,
? Too little output
? Price exceeds MC
? Deadweight loss
? Dollar value of society’s
welfare loss
MR
PM
QM
Deadweight
Loss
MC
D
Q
P
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Antitrust Policies
? Administered by the DOJ and FTC
? Market Concentration
? Herfindahl-Hirshman Index,HHI = 10,000 S wi2
? Industries in which the HHI exceed 1800 are generally
deemed,highly concentrated”,
? The DOJ or FTC may,in this case,attempt to block a
merger if it would increase the HHI by more than 100,
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Sherman Act (1890)
? Sections 1 and 2 prohibits price-fixing,
market sharing and other collusive
practices designed to,monopolize,or
attempt to monopolize” a market,
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Clayton Act (1914)
? Section 3 Prohibits exclusive dealing
and tying arrangements where the
effect may be to,substantially lessen
competition.”
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Externalities
? A cost borne by people who neither produce
nor consume the good,
? Example,Pollution
? Caused by the absence of well-defined property
rights,
? Government regulations may induce the
socially efficient level of output by forcing
firms to internalize pollution costs
? The Clean Air Act of 1970
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Public Goods
? A good that is nonrival and nonexclusionary in
consumption,
? Nonrival,A good which when consumed by one
person does not preclude other people from also
consuming the good,
? Example,Radio signals,national defense
? Nonexclusionary,No one is excluded from consuming
the good once it is provided,
? Example,Clean air
?,Free Rider” Problem
? Individuals have little incentive to buy a public good
because of their nonrival & nonexclusionary nature,
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Public Goods
Streetlights
$
Total demand for streetlights
Individual
Consumer
Surplus
90
54
30
18
0 12 30
MC of streetlights
Individual demand
for streetlights
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Incomplete Information
? Government serves as a provider of
information to combat the inefficiencies
caused by incomplete and/or asymmetric
information
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Government Policies Designed
to Mitigate Incomplete
Information
? OSHA
? SEC
? Certification
? Truth in lending
? Truth in advertising
? Contract enforcement
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Rent Seeking
? Government policies will generally benefit
some parties at the expense of others,
? Lobbyists spend large sums of money in an
attempt to affect these policies,
? This process is known as rent-seeking,
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
An Example,Seeking
Monopoly Rights
? Firm’s monetary incentive to
lobby for monopoly rights,A
? Consumers’ monetary
incentive to lobby against
monopoly,A+B,
? Firm’s incentive is smaller
than consumers’ incentives
? But consumers’ incentives
are spread among many
different individuals
? As a result,firms often
succeed in their lobbying
efforts,
QM QC
PM
PC
P
Q
MC
D
MR
Consumer
Surplus
A B
A = Monopoly Profits
B = Deadweight Loss
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Quotas and Tariffs
Quota
? Limit on the number of units of a product that a foreign
competitor can bring into the country,
? Reduces competition,thus resulting in higher prices,lower consumer
surplus,and higher profits for domestic firms,
Tariffs
? Lump sum tariff,a fixed fee paid by foreign firms to enter
the domestic market,
? Excise tariff,a per unit fee on each imported product,
? Causes a shift in the MC curve by the amount of the tariff
which in turn decreases the supply of all foreign firms,
Michael R,Baye,Managerial Economics and Business Strategy,3e,?The McGraw-Hill Companies,Inc.,1999
Summary
? Market power,externalities,public goods,
and incomplete information create a
potential role for government in the
marketplace
? Government’s presence creates rent-seeking
incentives,which may undermine its ability
to improve matters