Public Policy in Private Markets

Introduction

Welcome to ResEc 453

Introduction

What is this course about?

How will this course work?

Course Overview

Public Policy in Private Markets

Basic Conditions: Technologies, Price Elasticity, Available substitutes, Type of Good, Location, Raw Materials

Market Structure: # of Sellers and buyers, product differentiation, barriers

of entry and exit, vertical integration

Conduct: Pricing strategies, product introduction, advertising, R & D,

mergers, collusion

Performance: Profits, market share, production efficiency

Government Policies: Antitrust policy,

regulation, taxes & subsidies, trade

regulations, price controls, wage

regulations, investment incentives,

macroeconomic policies

Public Policy in Private Markets

Basic Conditions: Technologies, Price Elasticity, Available substitutes, Type of Good, Location, Raw Materials

Market Structure: # of Sellers and buyers, product differentiation, barriers

of entry and exit, vertical integration

Conduct: Pricing strategies, product introduction, advertising, R & D,

mergers, collusion

Performance: Profits, market share, production efficiency

Government Policies: Antitrust policy, regulation, taxes &

subsidies, trade regulations, price

controls, wage regulations, investment

incentives, macroeconomic policies

Public Policy in Private Markets

IO: Market imperfections create market power Monopoly Oligopoly Product differentiation Costly entry Transportation costs Imperfect information Heterogeneous technology Advertising Network externalities

Is this market power significant?

Is it being abused?

Public Policy in Private Markets

Why do we care about market power? (use your i>clicker)

A. It is bad for firms because this is a measure of inefficiency

B. It is good for consumers because products made by firms with market power are of higher quality

C. It is good for society because better products are manufactured by firms with market power

D. It is inefficient for society because there is a deadweight loss with respect to the benchmark of perfect competition

Public Policy in Private Markets

Other types of (extensive) regulation Car safety Food safety/quality Agricultural products: price floors, trade

restrictions Minimum wage Mortgage market

Public Policy in Private Markets

A couple of ways to look at this course:

1. Practical/Business: What does regulation mean for my business?

2. Social/citizen/public policy: Why do we need regulation and how much (an economist’s view)?

Public Policy in Private Markets

Example: Microsoft: use of market power in OS

market to control internet browser market

Should Microsoft be punished? Why? How much? What does this mean for my company

(MS) now?

Syllabus

Contact Class Material

Kwoka & White: cases (required) i>clicker, every day, starts counting on

Feb. 2 Waldman and Jensen: IO, policy,

regulation (recommended)

Syllabus

Website: http://courses.umass.edu/resec453/

Academic Honesty Policy: Your own writing, citing properly, no

cheating in exams, no bringing your friend’s clicker.

Class Format

Syllabus

Grades: 3 Exams: 50% - 80% of total grade

2 midterms (March 8, April 19) Final

Homework: 5-8 assignments (1 page memos), 20%

Mandatory Based on cases presented in class (more later)

Syllabus

In-Class Work: i>clicker activities, group work, classroom

experiments, other in-class writing 80% if you participate (blue questions), 20%

based on correct response (orange questions).

10% toward final grade optional. If you do poorly, exams weight increases by 10%

Enter response within 30 secs, be aware of academic honesty policy.

Register your i>clicker! Points start counting on Feb. 2.

Syllabus

Casework: Optional, 20% of your grade; if you opt out,

exams weight is increased by 20% Presentation based on an antitrust case Group of 4-5 students; you come up with

group formation. 15 min pre-recorded video of your

presentation Day of “debate”: both videos are shown Both parties have 5 minutes to reply, class

votes

Class Format

Grade calculationCoursework Dates Mandatory/

OptionalWeight

Exams (lowest is dropped; 60% to best, 40% to 2nd best)

1st Mid-term (March 8); 2nd Mid-term (April 19); Final Exam (see finals schedule)

Mandatory (but you drop the lowest)

50%, 60%, 70% or 80%

Homework (Best 5 out of 6)

On “Case” days and other select days

Mandatory 20%

In-Class Work Almost every day Optional 10%Case Presentation On “Case” days, but

presentation needs to be sent in advance

Optional 20%

Total 100%

Class Overview

Competition Policies Monopolization (e.g. predatory practices,

tying, etc.) Collusion Mergers Vertical Restraints

Time permitting: information policies, product quality regulation

Public Policy in Private Markets

Do we have too much or too little government intervention in the US? (use your i>clicker)

A. Too much

B. Too little

Class Overview

Rationales for government intervention: Dominant belief: US favors free enterprise Regulation: Why alter the operation of markets? What is done when there is unhappiness about

market outcomes? Extent of government intervention varies with cycles

(politics) Government regulation is often criticized (e.g. mortgage

crisis); how should things work? However, regulation remains in place and is continously

growing and evolving

Class Overview: Competition Policies

Antitrust laws: how firms compete with each other (rules of the game)

What is legal? What is illegal? What are the economics behind

government intervention? Focus: market power and its use in

detriment of buyers and consumers

Class Overview: Competition Policies

Example: Vitamin Cartel Cartel involved vitamins, A, B, C and folic acid Firms involved: Roche, BASF, Aventis, Solvay,

Merck, Daiichi, Esai and Takeda Firms admitted to participating in worldwide

price fixing conspiracy over 10 years 1999: in US, Canada and Australia, Roche &

BASF pay $750 million in fines to settle suit. 2001: in EU 8 companies pay approx. 1.2 bill

Class Overview: Competition Policies

Example: Vitamin Cartel Why was this illegal? How did they conspire? How did they get caught? How are standards set? (what are the

economic issues)

Class Overview: Competition Policies

Example: Lysine Cartel 1995: Archer Daniels Midland (ADM)

investigated for price fixing by DOJ 3 food ingredients: lysine, citric acid, high

fructose corn syrup ADM pleads guilty to criminal charges

$100 million to US government for criminal charges Several millions in private damage suits to

compensate customers. Top executives sent to jail

Class Overview: Types of regulation

Information Policies (time permitting) How much information is needed? What

format should this information have? E.g. Nutrition labeling: recent proposals to

have traffic lights on nutrition labels

Product Quality (time permitting) Safety: crash ratings for cars, pesticide levels,

etc. What are the processing standards? Do we

need this? (cost-benefit analysis)

Goals for the course

Review of the existing laws and how they apply to business

Analyze the laws from an economics angle. Do they serve desirable goals? What are the alternatives?

Public Policy in Private Markets

Do we have too much or too little government intervention in the US? (use your i>clicker)

A. Too much

B. Too little

For next class

Check class website for class slides and important updates