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Terms in this set (26)

1. Discuss the effect of antitrust policy in the:

a. monopolistic competition model:
Each firm in this model has only a small share of the market and makes no profit, so antitrust policy would have little effect.

Average total costs for firms in this model are always falling, so antitrust policy to break it up would result in higher product prices.

Each firm in this model can have a large share of the market and make positive profit, so antitrust policy would lead to lower prices.

In this model, firms get together and allocate market share. Antitrust policy would prevent that, holding prices down and increasing quantity supplied.

b. cartel model of oligopoly.
In this model, firms get together and allocate market share.

Antitrust policy would prevent that, holding prices down and increasing quantity supplied.

Average total costs are always falling, so antitrust policy to break it up would result in higher product prices.

Combined, a cartel in this model has only a small share of the market and makes no profit, so antitrust policy would have little effect.

In this model, potential collusion, not market structure, determines equilibrium, so antitrust policy would have little effect unless it influenced barriers to entry and exit.

c. contestable market model of oligopoly:
In this model, potential competition, not market structure, determines equilibrium, so antitrust policy would have little effect unless it influenced barriers to entry and exit.

In this model, firms contest the mergers between other firms, negating the need for antitrust policy. Firms self-monitor in this market model.

The firms have only a small share of the market and make no profit, so antitrust policy would have little effect.

The market in this model is viewed as a contest among firms vying for the greatest market share by lowering prices. Antitrust policy would only result in higher product prices.
3. In 1993 Mattel proposed acquiring Fisher-Price for $1.2 billion. In the toy industry, Mattel is a major player with 11 percent of the market. Fisher-Price has 4 percent. The other two large firms are Tyco, with a 5 percent share, and Hasbro, with a 15 percent share. In the infant/preschool toy market, Mattel has an 8 percent share and Fisher-Price has a 27 percent share, the largest. The other two large firms are Hasbro, with a 25 percent share, and Rubbermaid, with a 12 percent share.

a. What are the approximate Herfindahl and four-firm concentration ratios for these industries? (Assume all other firms in each industry have 1 percent of the market each.)

b. If you were Mattel's economist, which industry definition would you suggest using in court if you were challenged by the government?:
Toy market.
Infant/preschool toy market.

c. Give an argument why the merger might decrease competition:
The increased market share allows Mattel to limit output and increase prices or create significant barriers to entry by controlling distribution.

Mattel will have a harder time competing with the remaining firms in the market.

The merger will not reduce competition.

Barriers to entry would rise since Mattel would be able to extract an entry fee from any new firms in the market.

d. Give an argument why the merger might increase competition.

-A combined Mattel and Fisher-Price (15 percent market share) might be in a better financial position to compete against Hasbro, which already enjoys a 15 percent market share
- .A larger Mattel will be less likely to collude with the remaining firms in the market.
- By buying its supplier, Mattel will be able to lower production costs and therefore lower product prices.
- Mergers do not increase competition.