Economics 147 John F. Stewart Lecture 16 Oligopoly: Entry and Non-Pricing Deterrence Non-Price Strategies to Deter Entry Excess Capacity Raising Rivals Cost Learning by doing (first mover) Product Proliferation Policy monopolization predation University of North Carolina Chapel Hill Strategic Entry Deterrence Basic Story Assume perfect information all know rules of post entry game symmetry Prior to entry profits are v0 Post entry profits are v1 for each firm Incumbent firm can make an investment c that entrant must match to successfully enter Entry will be deterred if c>v1 Will deter if v0 - c > v1 Excess Capacity Incumbent Entrant No Ads c Ads Enter (matching c) v1, v1 v1-c, v1-c Don t enter 0, v0 0, v0-c Econ 147 J Stewart Econ 147 (16_s)Non-rpice deterence.prz, Page 1-4 10/28/02
Portland Seattle Olympia Salem Sacramento San Francisco Carson City Los Angeles San Diego Las Vegas Spokane Boise Great Falls Helena Salt Lake City Phoenix Tucson Rock Springs Cheyenne Santa Fe Denver Albuquerque El Paso ACTotal Amarillo Pierre Raising Rivals Cost Sewell Plastics Bismark Minneapolis Boston Sioux Falls Milwaukee Albany Providence Madison Detroit Hartford Sioux Des Lansing City Cleveland Moines New York Omaha Chicago Philadelphia Pittsburgh Trenton Lincoln Harrisburg Dover Springfield Columbus Kansas City Indianapolis Washington, D.C. Jefferson Charleston Annapolis Topeka City Frankfort Richmond Norfolk St. Louis Louisville Oklahoma City Dallas Austin Houston Tulsa Corpus Christi Brownsville St. Paul LittleRock ACTrans Baton Rouge Nashville Birmingham AC PROD Jackson Montgomery NewOrleans Atlanta Tallahassee Tampa Raleigh Columbia Charleston Jacksonville Montpelier Miami Bangor Augusta Concord New product expensive to ship substantial entry Spatial monopolistic competition Falling prices Coke Production Coop long term requirements contract no sales on non-coke firms Equalized shipping 40% of market removed Results exit of several plants increasing shipping cost decreased competition for non-coke business Product Differentiation and Proliferation Same general idea "Location Game" RTE Cereal Market Structure Big 4 (Kellogg, General Mills, General Foods, Quaker Oats) make 85% of output (add Nabisco and Ralston Purina and you get 95%). Leading seller seem to have big profits. No new firms, but many (80 new brands) have enter the industry Technical scale economies are relatively low. (3-5% of market and a couple of brands) Relatively low absolute capital requirements ($85-150 million). Increasing returns to brand type but only need a few brands. Linear Beach The FTC's Case Colored Marshmallows Incumbent Entrant Demand depends closeness of neighbors If spaced properly, incumbent firm can make profit entering firm cannot Nuts & Twigs AC MC Qbrand Econ 147 J Stewart Econ 147 (16_s)Non-rpice deterence.prz, Page 5-8 10/28/02
Advertising and Market Structure Advertising to Sales Profits to Sales Public Policy toward dominance Antitrust law Sherman, Section 2 Clayton, Section 7 (Mergers) Dilemma are you dominant because you are successful? are you dominant because you don't play fair Advertising Spending Strategies to Obtain Dominance Merger (US Steel, Glaxo?) Raising rivals costs (IBM, Microsoft?) Capacity expansion (Alcoa?) Vertical integration Product differentiation Access to consumers Sherman Act: Section 2 Language: "Every person who shall monopolize of attempt to monopolize or combine or conspire to monopolize any part of trade or commerce (ISCC) shall be deemed guilty of a felony..." Deals with: The acquisition and exercise of market power by a single firm. Enforcement: Both criminal and civil cases Rule of reason standard 1. Substantial market power in an economically relevant market a. Market definition (product, geographic) b. Market power (share, pricing & behavior) 2. Intent (presence of predatory or exclusionary tactics Elements of a Section 2 Case Econ 147 J Stewart Econ 147 (16_s)Non-rpice deterence.prz, Page 9-12 10/28/02
Microsoft 1st Case 1995 Dominant market share in op. systems Practices: long term contracts large minimum commitments per-processor contract restrictive nondisclosure agreements Results consent decree (no admission of liability) agreed to stop practices contempt proceeding Microsoft 2nd Case 2000 Dominant market share in op. systems Practices: tying of products through design intimidation of OEM customers to use Microsoft product, not use others restrictive nondisclosure agreements Judge Finds Microsoft Guilty of Violating Antitrust Law "So, in no way can I go back and look at that and say that there s anything that I d do differently." "This ruling turns on its head the reality that consumers know - that our software has helped make PCs more accessible and more affordable to millions." Judge Finds Microsoft Guilty of Violating Antitrust Law "It demonstrates that no company, no matter how powerful or how successful, can refuse to play by the rules and thwart competition" Assistant AG for Antitrust, Joel Klein Bill Gates, 4/3/2000 Econ 147 J Stewart Econ 147 (16_s)Non-rpice deterence.prz, Page 13-16 10/28/02
Findings of Fact Judge Jackson Nov. 1999 Market computer operating systems for Intel platform world wide. Market Power overwhelming share few (no) viable substitutes substantial barriers to entry Conclusion Microsoft is a monopoly under the law Findings of Fact Judge Jackson Nov. 1999 Behavior Targeting of "middleware" Netscape (tried to keep 32 bit Netscape from being released) Java (same story) tying Explorer to OEM relationships threats & incentives Verdict Judge Jackson March 3, 2000 Liable for Violation of Section 2 Sherman Act attempt to monopolize browser market What Next Remedy (Government Case) injunction (play nice) divestiture, dissolution (original finding, since abandoned) compensation (fines) Private actions conviction is a prima facie proof of private liability only have to prove damages (treble damages) Predatory Pricing Policy Laws Robinson Patman, it is usually price discrimination Section 2 of Sherman, may be used to gain or hold monopoly How to define it (and not exclude "hard competition") P less than AVC? (Areeda-Turner Test) P less than MC or AC? No post-entry output increase No post-exit price increase Look at intent Econ 147 J Stewart Econ 147 (16_s)Non-rpice deterence.prz, Page 17-20 10/28/02
Matsushita v. Zenith, 1986 Case has two parts conspiracy of Japanese produces to fix price Fixed high price in Japan; fixed a predatory price in the US Courts find in favor of the Japanese based on economic arguments Matsushita v. Zenith, 1986 Color Sets Black & White Stets Predator price 62 58 Years of Predation 10 13 Growth in Demand 5% -2% Beginning Share 5% 5% (Japan) Ending Share (Japan) 42% 17% Recoupment Price 119-138 100-106 Time of Recoupment infinity infinity Econ 147 J Stewart Econ 147 (16_s)Non-rpice deterence.prz, Page 21-24 10/28/02