Public Policy in Private Markets

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 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 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) • 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 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: • 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 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 calculation

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) • Too much • 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) • Too much • Too little

For next class • Check class website for class slides and important updates

Public Policy in Private Markets