Strategies with Respect to Government Discuss how dumping impact domestic firms and how government could respond. How would this impact domestic consumers?
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Chapter10StrategieswithRespecttoGovernment.pptPowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
Strategies with Respect to
Government
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CHAPTER 10
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Government Intervention in Business
- Arguments for government intervention
Markets do not restrain the greed of big business
Unscrupulous profit-seeking firms
Harm individuals
Firms – acquire market power and exploit it
Restrict output and raise the price
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Government Intervention in Business
- Government intervention
Humans are self-interested
Compare the costs and benefits of actions
Personal benefit will increase or decrease?
People formulating and executing public policies - incentives to enhance their own well-being
Catering to the demands of politically well-organized special interest groups
To o benefit special interest groups
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Government Intervention in Business
- Government intervention
Taxes
Alter incentives and reduce “the bottom line”
Compliance and paperwork
Raise selling, general, and administrative costs (SG&A)
New requirements on capital and workplace
Affect how resources are used
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Rent-Seeking Competition
- Rent seeking
A private entity pursuing favorable treatment from the government
- Subsidy
Benefits – a small population group
Costs – spread over the remaining population
- Optimal size of lobbying groups
Determined by a cost-benefit calculation
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Rent-Seeking Competition
- Government subsidy programs
Subsidies for ethanol, sugar, and other agricultural products
Tax breaks for certain companies
Allocation of highway funds
Relatively small
Few voters organize and work for their passage
The “grabbing hand”
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Rent-Seeking Competition
- Creative destruction
Market process
Destroys the old, inefficient, structure
While creating a new, more efficient one
Good for society
Bad for those whose jobs and activities are in the old structure
- Ask for protection
Groups under siege from competition
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Rent-Seeking Competition
- Federal regulation of food and drugs
Pure Food and Drugs Act of 1906
U.S. Food and Drug Administration (FDA)
Regulates 20-25% of the U.S. GDP
Significant power over
Product entry
Ways in which food and drugs are marketed to consumers
Manufacturing practices of food and drug firms
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Rent-Seeking Competition
- FDA’s regulations
Justified by asymmetric information
Producers know more about product quality than consumers
If regulators are better informed about quality than consumers
Regulation that
Punishes firms who cheat on quality
Requires firms to disclose information about product quality
Can improve efficiency
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Rent-Seeking Competition
- FDA’s regulations
Harm efficiency if specific industry groups use the regulations
To make it more difficult for new firms to enter the industry
Or begin producing competing products
To meet certain minimum standards or that ban the use of certain additives
Benefit incumbent producers at the expense of producers of cheaper substitutes
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Rent-Seeking Competition
State & federal oleomargarine restrictions
Benefited dairy-producing interests
Meat inspection laws
To please local butchers and local slaughterhouses in eastern markets
To reduce the competitive threat posed by the large mid-western meatpackers
- 1906 Pure Food and Drugs Act
Benefited national food manufacturers
Disadvantaged smaller, local firms
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Antitrust
- Antitrust
The attempt by government to enhance “fair” competition
The Sherman Act of 1890
The 1914 Clayton Act
Antitrust Division of the Department of Justice
The Federal Trade Commission, 1914
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Antitrust
- Conventional view of antitrust laws
With the rise of large-scale enterprises
Businesses had power over consumers in being able to dominate markets
- Another view of antitrust laws
Rent seeking
Politically influential businesses - getting a national law passed
To use the power of the state against their business rivals
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Antitrust
- 1911, Standard Oil Case
Standard Oil
Buying smaller firms
Increasing the efficiency of oil refining and distribution - economies of scale
Reduced prices and increased output
Divided into 33 separate organizations
Smaller rivals
Unable to compete against Standard Oil
Joined forces against Standard Oil
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Antitrust
- A law may be enacted
Not because an entrepreneur has created or exploited some inefficiency in the market
But because the entrepreneur was successful and others want to take his market away through rent seeking
- A firm may file a suit
In an attempt to change a rival’s market behavior
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Antitrust
- The Herfindahl–Hirschman index (HHI)
Measure of concentration—how dominant one or a few firms are in a market
- HHI = (size)2 + (size)2 +…+ (size)2
(size)2 is the size of a firm squared
- The higher the HHI
The more dominated the market is by a single firm
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Antitrust
- Guidelines in merger cases
If post-merger HHI > 1800
Mergers producing an increase in the HHI > 100 points - likely to create or enhance market power or facilitate its exercise
Process for overcoming an anticompetitive presumption
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Business Insight
The Wireless Market and the HHI
- AT&T and Verizon:
60% of revenue and subscribers
Continue to gain share
- T-Mobile and Sprint
Most of the remaining 40%
- HHI = 2,848
Jumped by almost 700 points since 2003
32% increase
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Business Insight
The Wireless Market and the HHI
- HHI > 1800 post-merger
Market is “highly concentrated”
- 2008-2009, AT&T, Verizon, T-Mobile, Sprint
70 new smart phones
Over a variety of platforms
100,000 applications on the Apple Store
15,000 applications on the Android Market
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Antitrust
- Subjects of antitrust enforcement
Price fixing
Tying - forcing customers to buy one product to get another (the Microsoft case)
Exclusive dealing - pressuring distributors to dump competitors’ wares
Standard setting - a standard becomes the dominant or only one in use (the Microsoft case)
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Antitrust
- Competitive strategy
A firm must develop a distinctive capability that has value in the marketplace
Differentiate itself
Increase its size to benefit from economies of scale
Form alliances
May be perceived as anticompetitive by the government antitrust agencies
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Antitrust
- Past 10 years, antitrust enforcement has targeted or forbidden
The use by airlines of a clearinghouse that listed fares
Licensing agreements and renegotiations involving patented products in the chemical and pharmaceutical industries
Information sharing among competing hospitals
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Antitrust
- Past 10 years, antitrust enforcement has targeted or forbidden
Exchange of advertising and marketing plans by infant-formula manufacturers through an industry trade association
Certain joint ventures in the online bond trading industry and foreign-exchange trading industry
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Antitrust
- Managers need to consider antitrust laws
Flow of information
What information is released
When it is released
To whom it is released
Pre-deal discussions with potential partners and suitors
Use of patents to dominate a market
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Antitrust
- Managers need to consider antitrust laws
Limitations
Which competitors can be licensed
Which licenses can be exchanged
Which provisions can be written into license contracts
Threat of private antitrust action can change behavior
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International Regulation
- The World Trade Organization (WTO)
Created by the General Agreement on Trades and Tariffs (GATT) in 1995
To deal with international trade disputes
2007, WTO had 150 members
Implements and enforces agreements
Customs regulations
Environmental restrictions
Intellectual property rights
Dumping
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Dumping
- Dumping
A foreign firm sells a product at a price that is lower than the firm sells it in its home country
- Dumping cases
Commerce Department
International Trade Commission (ITC)
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Dumping
- Antidumping taxes
Applying a tax on the foreign goods that are being dumped
Popular strategy for domestic firms to use against rival foreign firms
On imports sold at below “normal value”
Price in their home market
Or the cost of production
Below average variable cost
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Dumping
- Dumping cases - filed when
A foreign firm sells at a price that is below a domestic firm’s price
Not just the firm’s average cost
- Elastic demand
Customers are quite sensitive to price
- Inelastic demand
Customers are less sensitive to price
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Dumping
- Firm selling in two different countries with two different demands
Different prices
Elastic demand – lower price
Inelastic demand – higher price
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Trade and Tariffs
- Rent-seek for protectionism
Import restrictions
Tariffs
- Small interest groups seek benefits that cost large groups
Shrimping industry - benefits
More H2-B visa programs (cheap labor)
Tariffs: 93% for Vietnam, 113% for China
Cost – U.S. consumer
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Trade and Tariffs
- Small interest groups seek benefits
Run up against other small groups
Bear the costs from those government benefits
- Battle between rent seekers
Tariffs on imported steel
Not supported by manufacturers who use steel
Supported by steel producers
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Trade and Tariffs
- Battle between rent seekers
Tariffs on foreign-made cars
Supported by car makers
Not supported by steel manufacturers
- Where rent seeking is competitive
And entry into the rent seeking is not limited
The rents should be competed to zero
Firms will gain only enough rents to cover all costs of rent seeking
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Economic Regulation
- Economic regulation - on a single industry
Government
Prescribing the pricing and output behavior
Running and operating the business
- Social regulation - across all businesses
Health and safety standards for products and the workplace
Standards for protecting the environment
Other government restrictions
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Economic Regulation
- Natural monopoly
Arises from economies of scale
The largest firm is much more cost efficient than the smaller firms
Only one firm will end up supplying the market
Charge high prices, earn huge profits
And keep other firms from entering the market
Railroads, airlines, utilities, and trucking
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Rate of Return Regulation
- Rate of return regulation
An industry is told the prices it must charge and the quantities it must sell
Industries: electric utilities, telecommunications, trucking, railroads, airlines, and cable television
Regulatory commissions
Price = average accounting costs plus a markup
Fair rate of return on capital
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Rate of Return Regulation
- Problems
It can bias the regulated companies toward increasing their costs and operating inefficiently
Increase the assets that will be included in the rate base - earn more money
Grandiose buildings
Acquire luxury furnishings and decorative items
Double up on equipment
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Network Effects
- Network effects, network externalities
Arise from the benefit to the consumers of a good from standardization of the good
The larger a network, the greater the benefits another member gets from joining that network
One network
Standardized product
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Network Effects
- Implications of network effects
Markets can become dominated or monopolized by inefficient technologies or firms
Being the first to enter a market
Dominate the market
No matter whether it offers the best product or is the most efficient
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Network Effects
- Inefficiencies due to network externalities
QWERTY typewriter keyboard
Vs. Dvorák keyboard
Windows
Vs. Mac
Gas-powered automobiles
Vs. steam-powered ones
Light-water nuclear power plants
Vs. inert-gas version
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Social Regulation
- Social regulation
Applied across all industries
- Regulatory agencies
The Occupational Safety and Health Administration (OSHA)
Protecting workers against injuries and illnesses associated with their jobs
The Consumer Product Safety Commission (CPSC)
Minimum standards for safety of products
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Social Regulation
- Regulatory agencies
The Food and Drug Administration (FDA)
Safety and effectiveness of food, drugs, and cosmetics
The Equal Employment Opportunity Commission (EEOC)
Hiring, promotion, and discharge of workers
The Environmental Protection Agency (EPA)
Air, water, and noise pollution
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Growth of Social Regulation
- Federal regulations
Listed in the Federal Register: 25,000 pages
Annual administrative costs: $15 billion
Costs of complying with the rules and regulations: $300 billion per year
Complying with environmental regulations: $200 billion per year
Opportunity costs
Total cost: $600 billion a year
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Growth of Social Regulation
- Arguments for regulation
Needed to correct a market failure
Externalities, public goods, or asymmetric information
Without government intervention, the public would be harmed
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Rent Seeking and Social Regulation
- Regulation
Benefit small, special interest groups at the expense of the general public
Restricts market entry or reduce output
Reduce competition, create cartels, increase returns
Tariffs and licensing restrictions
Sought by rent seekers
Firms and industries
Join forces with “public interest groups”
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
