1 ECONOMICS 3200B Fall 2013 Professor Lazar N205J Schulich [email protected] 416-736-5068.

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ECONOMICS 3200B

Fall 2013

Professor LazarN205J [email protected]

mailto:[email protected]

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ECONOMICS 3200BLecture 1Ch. 19, 20

September 10, 2013

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Course Requirements

• Three tests

• October 8 @ 19:00; NOVEMBER 19 @ 19:00; Exam period in December

• 30%, 30%, 40%

• Format: 3 questions of 6 – short essays

• Open book: No cell phones, no tablets, no other wireless communication devices

• No excuses for missing first two tests

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Other Ground Rules

• No taping of lectures

• No cell phones in class, including text messaging!

• Responsible for all chapters in text except chapter 18

• Listen before you write

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Office Hours

• Mondays: 14:30-17:30

• N205J, Schulich

• Phone: 736-5068

• Email: [email protected]

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Objectives

• Focus of the course: Examine real-world competitive behavior, and highlight the theoretical limitations of traditional microeconomic theories

• Study different market structures – Consider how these structures develop and evolve over time

– Implications for competitive behavior

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Disclosure: Personal Bias

• Theoretical underpinnings of competition policy and competition law have not yet incorporated the work of Michael Porter

• Porter’s work, which builds upon that of Schumpeter emphasizes that companies strive to create a competitive advantage – Those that succeed outperform their competitors and are most likely to

dominate their markets

– The laggards eventually exit the industry

• Competition policy tends to inhibit companies from freely developing competitive advantages because the successful companies are likely to be constrained in their ability to exploit their advantages – The long-run consequences of this are much more significant than the

supposed loses in consumer welfare resulting from a reduction in the number of unsuccessful “competitors”

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Disclosure: Personal Bias

• According to Schumpeter, the competitive gales of creative destruction, the product of entrepreneurs, drive the capitalist system forward and produce the dramatic improvements in standards of living.

• If one were to compare the top 25-100 companies on the Fortune 500 list in 1970 and the list in 2013, one would find that there has been a dramatic turnover in the list – All of these changes have taken place and will take place without the

intervention of competition policy

– Consider: Kodak, Xerox, Microsoft, Sony, Zenth, Sears, TWA, AIG, Bank of America, Barnes & Noble, HMV, Eaton’s, GM, US Steel, Motorola, Nokia, RIM, Dell, RCA

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Creative Destruction

Schumpeter on capitalism• “This process of creative destruction is the essential fact

about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

• “The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or more generally an untried technological possibility for producing a new commodity or producing an old one in a new way.”

• “The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process.”

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Top 30 Global Companies (Market Value, (US$ Billions)

20121. Apple (559)2. Exxon Mobil (409)3. Petro China (279)4. Microsoft (271)5. IBM (242)6. Industrial & Commercial Bank of

China (236)7. Royal Dutch Shell (222)8. China Mobile (221)9. GE (212)10. Chevron (212)11. Wal-Mart (208)12. Nestle (207)13. Berkshire Hathaway (201)14. China Construction Bank (193)15. AT&T(185)

16. Proctor & Gamble (185)17. Samsung Electronics (182)18. Johnson & Johnson (181)19. Wells Fargo (180)20. BHP Billiton (180)21. JP Morgan Chase (176)22 Petrobas (171)23. Pfizer (171)24. Coca Cola (168)25. Google (165)26. HSBC (161)27. Philip Morris (153)28. Novartis (152)29. Roche (151)30. Toyota Motors(150)Total Market Value: $6.4 T

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Other Notable Companies

• Gazprom (31); Vodafone (36); Anheuser-Busch InBev (40); Sinopec (54); Amazon.com (60); Saudi Basic Industries (63); LVMH (64); SAP (66); Royal Bank of Canada (67); Comcast (71); Home Depot (78); Rosneft (79); Taiwan Semiconductor (82); Sberbank of Russia (86); Honda Motor (90); AMX (94); Visa (103); Inditex (112); UPS (116); H&M (129); Ping An Insurance (131); Lukoil (132); Nike (138); Reliance Industries (143); eBay (145); Hyundai Motor (156); Tata Consultancy Services (158); Barrick Gold (161); Teva Pharmaceutical (163); Hutchinson Whampoa (167); Starbucks (172); Hon Hai Precision (174); GM (183); Costco Wholesale (190); Potash Corp’n (192); Target (195)

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Largest Canadian Companies (Market Value)

20061. Royal Bank2. Manulife Financial3. Bank of Nova Scotia4. TD Bank5. EnCana6. Suncor Energy7. Bank of Montreal8. CIBC9. Husky Energy10. Canadian Natural Resources11. RIM12. Thomson13. Barrick Gold14. Sun Life Financial15. CNR

16. Brookfield Asset Management17. BCE18. Rogers Communications19. Alcan20. Goldcorp21. Talisman Energy 22. Petro Canada23. Potash of Saskatchewan24. Telus25. Trans Canada26. Teck Cominco27. Nexen28. Power Corp29. Cameco30. Nortel

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20111. Royal Bank ($54 B)2. EnCana (41)3. RIM (41)4. Imperial Oil (40)5. TD (39)6. Barrick Gold (33)7. Bank of Nova Scotia (33)8. Potash of Saskatchewan (31)9. Canadian Natural Resources (29)10. Suncor (28)11. Goldcorp (28)12. Manulife Financial (26)13. Husky Energy (23)14. CNR (22)15. BCE (20)

16. Bank of Montreal (19)17. TransCanada (19)18. CIBC (19)19. Rogers (18)20. Great West Life (18)21. Petro Canada (17)22. Power Financial (15)23. Talisman Energy (15)24. Enbridge (14)25. Sun Life Financial (14)26. Kinross Gold (14)27. Canadian Oil Sands (13)28. Nexen (12)29. Telus (11)30. Brookfield Asset Management (11)Total Market Value: $716 B

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20131. Royal Bank ($88 B)2. TD Bank (76)3. Bank of Nova Scotia (69)4. Suncor Energy (49)5. CNR (44)6. Bank of Montreal (40)7. Enbridge (38)8. Potash of Saskatchewan (38)9. BCE (37)10. Trans Canada (35)11. Imperial Oil (34)12. Canadian Natural Resources (33)13. CIBC (31)14. Husky Energy (30)15. Thomson Reuters (29)

16. Manulife (29)17. Great-West Life (27)18. Rogers (25)19. Brookfield Asset management (24)20. Telus (24)21. CPR (24)22. Valeant Pharmaceuticals (24)23. Cenovus Energy (23)24. Goldcorp (23)25. Power Financial (22)26. BarrickGold (20)27. Sun Life Financial (18)28. Teck Resources (17)29. Magna (15)30. Crescent Point Energy Trust (14)Total Market Value: $1 T

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Competition Law/Policy

• Canadian Competition Act

• S. 1.1 – Purpose: Maintain and encourage competition in Canada in order

to• promote the efficiency and adaptability of the Canadian economy,

• expand opportunities for Canadian participation in world markets,

• ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and

• provide consumers with competitive prices and product choices

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• S. 61: Price maintenance (Resale price maintenance)

• (1) No person who is engaged in the business of producing or supplying a product, who extends credit by way of credit cards or is otherwise engaged in a business that relates to credit cards, or who has the exclusive rights and privileges conferred by a patent, trade-mark, copyright, registered industrial design or registered integrated circuit topography, shall, directly or indirectly,– (a) by agreement, threat, promise or any like means, attempt to influence

upward, or to discourage the reduction of, the price at which any other person engaged in business in Canada supplies or offers to supply or advertises a product within Canada; or

– (b) refuse to supply a product to or otherwise discriminate against any other person engaged in business in Canada because of the low pricing policy of that other person.

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• S. 78: Abuse of dominant position – (a) squeezing, by a vertically integrated supplier, of the margin available to an

unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer’s entry into, or expansion in, a market;

– (b) acquisition by a supplier of a customer who would otherwise be available to a competitor of the supplier, or acquisition by a customer of a supplier who would otherwise be available to a competitor of the customer, for the purpose of impeding or preventing the competitor’s entry into, or eliminating the competitor from, a market;

– (c) freight equalization on the plant of a competitor for the purpose of impeding or preventing the competitor’s entry into, or eliminating the competitor from, a market;

– (d) use of fighting brands introduced selectively on a temporary basis to discipline or eliminate a competitor;

– (e) pre-emption of scarce facilities or resources required by a competitor for the operation of a business, with the object of withholding the facilities or resources from a market;

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• S. 78: Abuse of dominant position – (f) buying up of products to prevent the erosion of existing price levels;

– (g) adoption of product specifications that are incompatible with products produced by any other person and are designed to prevent his entry into, or to eliminate him from, a market;

– (h) requiring or inducing a supplier to sell only or primarily to certain customers, or to refrain from selling to a competitor, with the object of preventing a competitor’s entry into, or expansion in, a market;

– (i) selling articles at a price lower than the acquisition cost for the purpose of disciplining or eliminating a competitor

– (4) In determining, for the purposes of subsection (1), whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal shall consider whether the practice is a result of superior competitive performance

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• Schumpeter recognized: companies that have succeeded in creating a competitive advantage and gaining some degree of market power face a choice: – Defend the advantage through defensive tactics, many of which would be

similar to the anti-competitive acts described in the “Abuse of Dominant Position” section of the Competition Act, and thus become fat and lazy and an easy target for competitors; or

– Continue to innovate and take risks in order to create new competitive advantages to maintain its market power – remain lean and hungry.

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• Consider the fate of the following:– Eaton’s, Woolworths, Montgomery Ward, Kresge, Sears Roebuck and

Wal-Mart, Target, Inditex, H&M, Costco, Zara

– IBM and Microsoft, Microsoft and Google, Intel, Cisco, Oracle, Dell

– Nokia, RIM, Apple and Google

– Barnes & Noble and Amazon

– Record labels – Universal, EMI, Sony, BMG, Warner

– Stelco, U.S. Steel

– PanAm, TWA, Eastern Airlines, CP Air

– Xerox, Polaroid, Kodak, RCA

– Chrysler, GM, Volvo, Jaguar, Saab

– Groupon

– Newspapers, magazines

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• Part VIII: Matters Reviewable by Tribunal• Restrictive Trade Practices• S. 75: Refusal to deal

– (e) the refusal to deal is having or is likely to have an adverse effect on competition in a market

• S. 77: Exclusive dealing, tied selling and market restriction• (2) Where, on application by the Commissioner or a person granted leave under section

103.1, the Tribunal finds that exclusive dealing or tied selling, because it is engaged in by a major supplier of a product in a market or because it is widespread in a market, is likely to

– (a) impede entry into or expansion of a firm in a market,– (b) impede introduction of a product into or expansion of sales of a product in a

market, or– (c) have any other exclusionary effect in a market,

– with the result that competition is or is likely to be lessened substantially, the Tribunal may make an order directed to all or any of the suppliers against whom an order is sought

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• (4) The Tribunal shall not make an order under this section where, in its opinion,– (a) exclusive dealing or market restriction is or will be engaged in

only for a reasonable period of time to facilitate entry of a new supplier of a product into a market or of a new product into a market,

– (b) tied selling that is engaged in is reasonable having regard to the technological relationship between or among the products to which it applies, or

– and no order made under this section applies in respect of exclusive dealing, market restriction or tied selling between or among companies, partnerships and sole proprietorships that are affiliated

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• Cannot encourage competition – only the desire to succeed and gain a competitive advantage encourages competition

• Cannot “promote the efficiency and adaptability of the Canadian economy” – only the actions of senior management can do this, and these actions will succeed only if senior management is properly motivated and wise enough to recognize the advantages of being lean and hungry

• Goal should be to promote dynamic efficiency with the resulting improvements in productivity, competitiveness and standards of living

• Schumpeter: there is no reason to fear the creation of monopolies, unless of course they are the creation of government – The creation of monopolies through the creation and successful execution

of competitive strategies produces the long-term gains from the economy and provides the basis for aggressive competition that sets the stage for the process of creative destruction

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• S. 50: Illegal trade practices

• Price discrimination or predatory pricing having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have that effect– an indictable offence and liable to imprisonment for a term not

exceeding two years

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• What is meant by “lessening” competition?

• Defining market– Product scope

– Geographic scope

1 ECONOMICS 3200B Fall 2013 Professor Lazar N205J Schulich [email protected] 416-736-5068.

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