Econ Lesson 15 Market Power

Antitrust Laws

Laws designed to prevent firms from amassing market power

Parallel Conduct

Form of implicit collusion in which a firm consistently follows the action of another

Firm A raises prices then Firm B follows

Predatory Pricing

When an incumbent firm lowers price in order to drive out competition or limit entry into the market by challenger firms

Horizontal Mergers

Merger of two firms that produce the same product. The Department of justice investigates mergers to attempt to predict effects on Market Concentration

Market Concentration

An attempt to measure competition by determining the number and market share of firms in an industry

Herfindahl Index

Obtaining a measure of market concentration. The sum of the squared market percentages of the top 50 firms.

Public Interest Theory of Government

Regulation exists for the benefit of citizens

Rational Ignorance

Occurs when the cost of educating oneself on an issue exceeds the potential benefit that the knowledge would provide

Economic Theory of Government

Legislative and regulatory outcomes that assumes political markets are no different from economic markets in that organized groups seek to further their self-interest

Rent Seeking

When groups call for legislation or regulation that increases their profits or incomes

Acquired Regulation

Regulation that actually benefits the regulated industry

Four Policies Beneficial to a Regulated Industry

Direct Subsidy

Control of entry of new rivals (barriers to entry)

Policies that harm substitutes and help complements

Price fixing