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ISAT 171 – Governance of Sociotechnical Systems Review/Study Guide for Exam 1

Exam Format Reminder

• Three exams total, each worth 18-19% of your final grade

• Half objective questions (multiple choice and matching)

• Half short-answer questions (typically 1-3 sentences)

• In-person, on paper, closed book, and closed notes

• Focuses on understanding key concepts and applying them to real-world situations

Study Guide: 05-A Market Failures Due to a Lack of Competition

Key Concepts and Definitions

• Market Failure: Inefficiency caused by breakdown of competition, leading to negative consumer and societal consequences.

• Monopoly: Market with a single dominant seller, diminishing consumer choice and manipulating prices.

• Oligopoly: Market dominated by a few large firms, resulting in reduced competition.

• Monopsony: Market with a single buyer exerting control over supplier prices.

• Oligopsony: Few buyers dominate, minimizing supplier power.

• Collusion and Price-Fixing: Firms' secret agreements to set prices or divide markets, nullifying competition.

• Predatory Pricing: Strategy where dominant firm lowers prices temporarily to eliminate competitors, then raises them again.

• Market Leverage: Dominant firms exploit market power for profit maximization at consumer and supplier expense.

• Natural Monopoly: Scenario where a single provider is most efficient due to high costs and economies of scale.

• Regulated Competition: Government oversight of monopolies to ensure fair pricing.

Major Themes and Takeaways

I. How Lack of Competition Leads to Market Failures

• Competition fosters fair pricing, innovation, and efficiency.

• Decline in competition allows firms to set higher prices, reduce quality, and limit market access.

• Key Takeaway: Lack of competition creates inefficiencies and limits consumer choice.

II. Examples of Market Failures Due to Reduced Competition

1. Collusion and Price-Fixing

   • Firms secretly agree on high prices, harming consumers by eliminating competitive pricing.

   • Example: Airline ticket prices set through collusion.

2. Predatory Pricing

   • Dominant firm drops prices to eliminate competition, then raises prices.

   • Example: Large retailers underpricing local businesses.

3. Market Leverage

   • Monopolies manipulate markets for advantages.

   • Example: Tech companies demanding lower supplier prices while charging consumers more.

III. Monopolies and Their Impact on Markets

• What is a Monopoly? A market controlled by a single seller leading to reduced consumer options.

• Characteristics of Monopolies:

  • No close substitutes.

  • High barriers prevent new entrants.

  • Significant pricing power.

Barriers to Entry Preventing Competition

• High Startup Costs: New entrants struggle to compete.

• Patents/Copyrights: Create legal barriers for competition.

• Economies of Scale: Large firms produce more efficiently, deterring newcomers.

• Control of Resources: Block competitors by monopolizing key inputs.

• Key Takeaway: Barriers create monopolies, leading to market inefficiencies.

IV. Natural Monopolies

• What is a Natural Monopoly? A single provider is most efficient due to high infrastructure costs.

• Examples: Electricity distribution, water supply, public transport.

• Why Common?:

  • Economies of scale lower costs.

  • Infrastructure duplication is inefficient.

• Challenges: Leads to inefficiencies and potential exploitation; regulation is needed for fair pricing.

V. Regulation and Policy Responses to Market Failures

• Antitrust Laws: Break up monopolies; prevent mergers that reduce competition.

• Regulation of Natural Monopolies: Price controls to prevent exploitation.

• Promoting Competition: Policy incentives for new entrants and reducing entry barriers.

• Deregulated Competition: Allowing competition in power generation with monopolized distribution.

• Key Takeaway: Regulation and policies correct failures caused by monopolistic behavior.

VI. Conclusion: Addressing Market Failures

• Competition is essential for pricing, innovation, and efficiency.

• Market failures arise from monopolies and collusion.

• Natural monopolies require regulation for fair service.

• Key Takeaway: Balancing regulation and competition is crucial for market efficiency.

Exam Preparation: Key Focus Areas

1. Define and explain how monopolies cause market failures.

2. Differentiate between monopoly, oligopoly, monopsony, and oligopsony.

3. Describe examples of anti-competitive behavior (e.g. collusion, predatory pricing).

4. Explain why natural monopolies exist and how they are regulated.

5. Analyze the U.S. electricity market structure regarding competition.

6. Discuss policy responses to market failures, including antitrust laws.

7. Apply concepts of market failure to industries like utilities and healthcare.

Study Guide: 05-B The Google Antitrust Case and Economic Rationales for Regulating Technology

Key Concepts and Definitions

• Antitrust Law: Promotes competition and prevents monopolies.

• Monopoly: A single company dominating the market.

• Exclusive Contracts: Prevent competitors from market access.

• Bundling: Requiring concurrent purchase of services limiting choices.

• Market Leverage: Dominant firms restrict competition through power.

• Price-Fixing: Conspiring to set prices.

• Predatory Pricing: Temporarily lowering prices to eliminate competition.

• Platform Markets: Digital marketplaces where a dominant company controls access.

• Regulatory Oversight: Government intervention to protect consumer interests.

Major Themes and Takeaways

I. The Google Antitrust Case

• August 2024 ruling: Google abused monopoly in search and online ads.

• Key Issue: Exclusive contracts with Apple/Samsung limited competition.

• Historical Context: Echoes past cases (e.g., Standard Oil, AT&T).

II. Google’s Antitrust Violations

1. Exclusive Contracts with Device Manufacturers

   • Google paid Apple/Samsung to make its search default.

2. Bundling of Services

   • Forced pre-installation of apps on Android for Play Store access.

3. Restrictive Advertising Practices

   • Manipulating ad auctions in its favor.

4. Self-Promotion in Search

   • Prioritizing Google services in search results.

5. Acquiring Competitors

   • Buying smaller companies before they can compete.

III. Impact of Google’s Monopoly

1. Limited Consumer Choice: Reduces alternative search options.

2. Privacy Concerns: Diminished competition reduces data protection pressure.

3. Stifled Innovation: Startups struggle against Google’s dominance.

4. Higher Advertising Costs: Increases costs for businesses.

5. Bias in Access to Information: Influences public opinion through search algorithms.

IV. Antitrust Actions and Their Benefits

• Reasons to Regulate Google:

  • Restore balance, encourage innovation, protect consumers.

V. Economic Rationales for Regulating Technology

• Preserve competition, foster innovation, protect consumer interests.

VI. The Future of Antitrust in Tech

• Increased scrutiny on Big Tech firms like Amazon, Apple, Meta.

VII. Balancing Regulation and Innovation

• Overregulation vs. underregulation challenges internal market dynamics.

VIII. Conclusion: Antitrust in the Digital Age

• Highlights dangers of monopolies; need for strong enforcement of antitrust laws.

Exam Preparation: Key Focus Areas

1. Allegations against Google in the antitrust case.

2. Economic impact of Google’s dominance.

3. Analyze Google's anticompetitive practices.

4. Benefits of antitrust regulation.

5. Differences between platform markets and traditional monopolies.

6. Influence from past antitrust cases.

7. Balancing regulation and innovation in tech.

8. Future predictions for antitrust actions against tech companies.

Study Guide: 05-C Market Failures Due to Inadequate Information

Key Concepts and Definitions

• Market Failure: Inefficient resource allocation resulting in negative outcomes.

• Inadequate Information: Buyers/sellers lack sufficient information for rational decisions.

• Rational Choice: Decisions based on cost-benefit analysis with accurate information.

• Information Asymmetry: One party having superior information, leading to an unfair edge.

• Adverse Selection: High-quality goods driven out by lower-quality alternatives due to lack of information.

• Moral Hazard: Excessive risks taken due to lack of consequences.

• Government Regulation: Policies introduced to correct information-related market failures.

Major Themes and Takeaways

I. The Role of Information in Markets

• Reliable information is essential for efficient market operation.

II. Causes of Inadequate Information

1. Information Asymmetry: Seller’s knowledge exceeds buyers'.

2. Product Complexity: Difficulties in evaluating products in certain industries.

3. Information Overload: Excessive data hindering accurate decision-making.

4. Deliberate Withholding: Businesses conceal information to manipulate behaviors.

III. Effects on Market Efficiency

1. Adverse Selection: Drives high-quality goods out of the market.

2. Moral Hazard: Leads to reckless behavior without full risk accountability.

3. Reduced Consumer Confidence: Decline in market trust affects purchasing decisions.

4. Inefficient Resource Allocation: Too much production of low-quality goods.

IV. Government Responses to Inadequate Information

1. Drug Safety and FDA: Regulates pharmaceuticals for safety.

2. Energy Star Program: Standardizes energy efficiency labeling.

3. Food Labeling Laws: Ensures transparency in nutrition information.

4. Truth-in-Lending: Protects borrowers from misleading loan terms.

V. Conclusion: Importance of Transparency

• Adequate information is essential for fair competition and resource allocation; government regulations mitigate information failures.

Study Guide: 05-D Market Failures Due to Inadequate Excludability

Key Concepts and Definitions

• Excludability: Ability to restrict non-payers from using a service.

• Rivalrousness: Consumption by one person reduces availability for others.

Major Themes and Takeaways

I. Understanding Excludability and Rivalrousness

• Excludable Goods: Payment required to access (e.g., movie tickets).

• Non-Excludable Goods: Available to everyone without cost (e.g., public fireworks).

II. Market Failures Related to Inadequate Excludability

1. Free Rider Problem: Benefits without payment lead to underfunding.

2. Public Goods: Often underprovided due to non-profitability.

3. Tragedy of the Commons: Overuse of resources without regulation.

III. Policy Solutions to Inadequate Excludability

1. Government Funding: Taxes support public goods.

2. Public Goods Solutions: Direct funding for education and services.

3. Regulations to Protect Commons: Quotas and property rights to encourage responsible resource use.

IV. Conclusion: Role of Excludability

• Understanding excludability allows for better policy design to enhance efficiency and social welfare.

Study Guide: 05-E The Economics of Electric Vehicle Adoption in the U.S.

Key Concepts and Definitions

• Supply and Demand: Key forces in EV market growth.

• Market Incentives: Policies promoting EV adoption (tax credits).

• Externalities: Unaccounted costs/benefits from vehicle emissions.

• Infrastructure Investment: Required for widespread EV adoption.

Major Themes and Takeaways

I. Role of Supply and Demand

• Supply-Side: Technological advances and increased competition drive down costs and increase production.

• Demand-Side: Lower prices and greater environmental awareness promote EV adoption.

II. Market Incentives Driving EV Growth

• Government Tax Incentives: Reduce upfront EV purchase costs.

• Practical Ownership Benefits: Carpool lane access and lower operating costs enhance appeal.

III. Criticisms of Government Incentives

• Market Distortions: Potential misallocation of resources.

• Long-Term Sustainability: Concerns about the future of tax incentives and capacity.

IV. Externalities and Environmental Considerations

• Negative Externalities: Gasoline vehicles contribute to pollution and health costs.

• Positive Externalities: EVs improve environmental conditions and public health.

V. Future Challenges for EV Adoption

• Range Anxiety: Consumer concerns about battery limitations impact purchases.

• Infrastructure Challenges: Expansion of charging stations is critical.

VI. Conclusion: Economic Trajectory of EVs

• EVs represent a significant shift in transportation, contingent on long-term support and development.

Exam Preparation: Key Focus Areas

1. Explain supply and demand influence on EV adoption.

2. Describe government incentives and their consumer impact.

3. Critically analyze pros/cons of EV subsidies.

4. Discuss externalities of gasoline vs. electric vehicles.

5. Identify infrastructure challenges for EV growth.