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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.

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Public policy in private markets

Public Policy in Private Markets

Introduction


Welcome to resec 453

Welcome to ResEc 453

  • Introduction

  • What is this course about?

  • How will this course work?

  • Course Overview


Public policy in private markets1

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

Government Policies: Antitrust policy, regulation, taxes & subsidies, trade regulations, price controls, wage regulations, investment incentives, macroeconomic policies

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

Performance: Profits, market share, production efficiency


Public policy in private markets2

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

Government Policies: Antitrust policy, regulation, taxes & subsidies, trade regulations, price controls, wage regulations, investment incentives, macroeconomic policies

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

Performance: Profits, market share, production efficiency


Public policy in private markets3

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 markets4

Public Policy in Private Markets

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

  • It is bad for firms because this is a measure of inefficiency

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

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

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


Public policy in private markets5

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 markets6

Public Policy in Private Markets

A couple of ways to look at this course:

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

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


Public policy in private markets7

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

Syllabus

  • Contact

  • Class Material

    • Kwoka & White: cases (required)

    • i>clicker, every day, starts counting on Feb. 2

    • Waldman and Jensen: IO, policy, regulation (recommended)


Syllabus1

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

Class Format


Syllabus2

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)


Syllabus3

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.


Syllabus4

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 format1

Class Format

  • Grade calculation


Class overview

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 markets8

Public Policy in Private Markets

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

  • Too much

  • Too little


Class overview1

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

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 policies1

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 policies2

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 policies3

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

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

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 markets9

Public Policy in Private Markets

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

  • Too much

  • Too little


For next class

For next class

  • Check class website for class slides and important updates


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