ECON 308 Chapter Notes -Deadweight Loss, Market Power, Clorox

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Published on 19 Apr 2013
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Williamson: Economies as an Antitrust Defense- the Welfare Tradeoffs
- In the occasional case where efficiency and market power consequences exist,
can economies be dismissed on the grounds that market power effects invariably
dominate? If they can’t, then a rational treatment of the merger question requires
that an effort be made to establish the allocative implications of the scale
economy and market power effects associated with the merger
- The Court took the position in Brown Shoe that not only were efficiencies no
defense, but a showing that a merger resulted in efficiencies could be used
affirmatively in attacking the merger since small rivals could be disadvantaged
- In a concurring opinion to the Clorox (Procter and Gamble case) decision, Justice
Harlan provides the first hint that efficiencies may deserve greater standing
- It is clear that economies would be an acceptable antitrust defense for only a
restricted set of structural conditions.
- To disallow trade-offs altogether merely reflects a particularly severe a priori
judgement as to net benefits
- Inasmuch as they rank efficiency and progressiveness above reductions in
market power, an absolute defense would appear to obtain when, for any
structural condition present or prospective, it could be shown either that
economies haven’t yet been exhausted or that discreteness conditions would not
efficiently permit a separation.
- Trade-off analysis is designed to cope with these kinds of issues
- See equation 3, p 185: if this inequality holds, the net allocative effect of the
merger is positive. If it equals 0, it’s neutral.
- It is evident that a relatively modest cost reduction is usually sufficient to offset a
relatively large price increase even if the elasticity of demand is as high as 2
- If a reduction in average costs is 5-10 percent due to a merger, the merger must
give rise to price increases in excess of 20 percent if elasticity is 2 or in excess of
40 percent if elasticity is 0.5 for the net allocative effects to be negative
- A merger which yields non-trivial real economies must produce substantial
market power and result in relatively large price increases for the net allocative
effects to be negative.
- Partial equilibrium analysis is defective in that it isolates one sector from the rest
of the economy and so it fails to examine interactions between sectors. Certain
economic effects may therefore go undetected, and sometimes behaviour which
appears to yield net economic benefits in a partial equilibrium analysis will result
in net losses when investigated in a general equilibrium context
- Whereas partial equilibrium analysis indicates that an increase in the monopoly
price in any one sector invariably yields a loss, viewed more generally such an
isolated price increase may actually lead to a desireable reallocation of
resources.
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Document Summary

Williamson: economies as an antitrust defense- the welfare tradeoffs. If they can"t, then a rational treatment of the merger question requires that an effort be made to establish the allocative implications of the scale economy and market power effects associated with the merger. The court took the position in brown shoe that not only were efficiencies no defense, but a showing that a merger resulted in efficiencies could be used affirmatively in attacking the merger since small rivals could be disadvantaged. In a concurring opinion to the clorox (procter and gamble case) decision, justice. Harlan provides the first hint that efficiencies may deserve greater standing. It is clear that economies would be an acceptable antitrust defense for only a restricted set of structural conditions. To disallow trade-offs altogether merely reflects a particularly severe a priori judgement as to net benefits. Trade-off analysis is designed to cope with these kinds of issues.

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