Demsetz. Industry Structure, Market Rivalry and Public Policy.

Demsetz. Industry Structure, Market Rivalry and Public Policy.

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What is Demsetz’ central thesis for why industries become concentrated? Why is his assumption that there are no barriers to entry important to his argument?
· If we see unusually high power, large market power so we have to break it up · Bain, concentrated industries earned higher profits than other industries dominant interpretation—implicit or explicit collusion · Two theories consistent with the data, next one being a few firms that are superior and grow over time. · If it’s the latter that superior because 1. Firm size—if it was implicit or explicit collusion, all firms should have higher than average profits because no one would join collusion if it made them worse off 2. Relative market share should stay the same · Just because someone is more profitable doesn’t mean that others know how to be more profitableif there are artificial barriers then you dont have to compete in order to have your monopoly
Why would competitive entry not be able to eliminate “excess” profits earned by a firm that exhibits superior team production? Could such superior team performance result from having internal labor, capital and idea markets that were superior to external markets for these goods?
· Have to be superior performance that consumers see · Assumption, no artificial government BTE—if no artificial BTE, must be better to grow · May be hard to encapsulate the information · Your team works well as a team, what if its because they’ve worked together for 20 years and gets along—very hard to imitate o If you don’t know what the source of superior performance is then you’ll have high profits; once people find out they’ll bid up your salary and there wont be high profits anymore · SW airlines, everyone knew he liked them, sing on the airplanes, do luggage, etc. · Assume you’re the source of someone’s superior performance, others would offer you a higher wages and the company would have to give you more money to keep you—this is how people capitalize superior performance, if they don’t know, unusually high profits. · If you can trust each other, you can tell each other the truth and the team works better
Why might the capitalization of superior performance into the prices of the resources responsible for that superior performance be slow for firms that are complex teams?
· It takes a long time to identify the source of superior performance · Similar to Hayek · How do you encapsulate information
Why are superior entrepreneurial efforts likely to lead to at least some short-term monopoly (market) power? What would attacking the resultant market power through antitrust do to the incentives for such innovation? Why does Demsetz distinguish the case of profits via superior entrepreneurship from that of profit via collusion?
· Downward pricing power. You only have power to help consumer, you can determine how much you can pass on to consumers. Imitation will then happen and competitors’ costs will decrease and pricing power decreases. · If you attack market power then you prevent innovations; example, if you have to pass off all the gains right away, then there’s no incentive to look for those ways to benefit consumers because they don’t benefit at all · Do consumers have better or worse options than before? Collusion has fewer options.
Does Demsetz’ “superior ability...as a competitive basis for acquiring a measure of monopoly power” help or harm consumers?
· You come up with superior thing, you can keep some of the gains if you pass on some of the gains to the consumers
Why does Demsetz not see economies of scale as the main cause of industry concentration? Why does he see the evidence as pointing to lower but rising cost curves for larger firms in concentrated industries?
· If there are falling cost curves, natural monopoly over the entire range of output, then tendency towards monopoly · However you don’t always see a monopoly, what if there are economies up to 25% of output. There would be a tendency towards a few large firms—tendency towards large stable firms · GRAPHS—marginal costs are the same
Should antitrust authorities prosecute a large firm that has 10% lower costs than rivals, but that uses its market power to restrict output in a way that increases prices 5% more than what they would have been without the restriction?
· Price to cost margin is higher, you can be punished for this; however, consumers are better off · If government says you have to pass on all the gains to consumers you don’t have incentive to discover them
What does Demsetz expect to be true about the profitability of different sized firms in concentrated industries if the profitability is due to collusion or cooperation among the existing firms, supported by barriers to entry? If larger firms have higher profit rates in such industries, what must be true of their costs?
· Everyone should be earning higher rates of returns · The larger firms are the only ones earning above normal rates of return, because they’re superior and makes consumers better off · Implications: concentrated industries because they earn higher than average profits, they must be nefarious and must be broken up; as a result, lets prevent firms from getting big and break up the big firm · If they have higher profits they must have lower costs
Why is a de-concentration or anti-merger policy more likely to have benign results if small firms in such industries earn the same or higher rates of return as larger firms? Why is the opposite the case if larger firms earn higher rates of return?
· The advantage of breaking up large firms may reduce implicit collusion, if small firms have same costs · De-concentration forces production into higher costs the only time it wouldn’t happen would be if small firms and big firms have the same costs · If little firms had the same cost then breaking up a big firm into small firms there’s no higher cost BUT there is the added benefit of reduced collusion · However if you break down a large firm into smaller firms and there are economies of scale, then to make a big company small then you’d have higher costs.
How is Demsetz’ hypothesis consistent with higher average ROR in more concentrated industries?
· Market share is the same · Smaller companies are earning below normal ROR · You have to ask more questions, to figure out which hypothesis is better.
Why is correlating industry rates of return with industry concentration “not enlightening” about the chance that de-concentration will promote inefficiency? How does comparing large and small firm rates of return for different levels of industry concentration help us see the answer?
· Implicit collusion, concentrated=higher profits · Evidence is consistent with both theories so you have to ask different questions · Look at profits across firms and variable market share · The data is consistent with the large firm doing better in concentrated industries and the small firms not · Small firms wouldn’t be apart of collusion if they earned below N rates of return
Why do higher rates of return for larger firms in more concentrated industries not necessarily imply that those firms have lower marginal costs? Why would the failure of large firms to be ever more dominant support this conclusion?
· Scale advantages, but MC for last unit is the same. Higher ROR doesn’t mean lower MC for the last unit. · Rising cost curves for both cases, but because you’re rising from lower AC you’ll earn profits · Tendency towards monopoly is if MC of you is LESS than competitors but if they’re ALWAYS less then you’ll get a MONOPOLY not concentrated INDUSTRY · Concentrated industries, MC is less than competitors BUT THEY’RE RISING (economies of scale up to 25%) · Concentrated industry: no incentive to expand · Big company is more profitable because your AC are less · At the MARGIN you’re both the same.
Does Demsetz’ data show a lower rate of return to small firms in more concentrated industries? Why would concentration tend to increase further in such industries?
· If little guys are earning below normal rate of return, concentrated industry in the process of getting more concentrated · If the small firms are earning normal rates of return, stable
Why would you expect to happen to industry structure when one or a few firms’ cost curves shifted down due to their innovations? How is this different than if increased concentration increased the effectiveness of collusion in an industry
· Market share will go up and competitor’s will go down if you have innovation. · Collusive: you would market shares to stay the same · Collusion—changing relative market shares? NO · Restriction on internal growth of firms and attempt to break up large firms because they “hurt consumers” Let them grow big because it helps consumers, might just be a form of competition.