pindyckrubinfeld_microeconomics_ch10

7/21/2019 PindyckRubinfeld_Microeconomics_Ch10

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Fernando & YvonnQuijano

Prepared by:

Market Power:Monopoly and

Monopsony

10

C H A

P

T E

R

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C h a p t e r 1 0 : M a r k e t P o w e r : M o n o p o l y

a n d M o n o p s o n y

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CHAPTER 10 OT!"#E

(0.( "onopoy

(0.2 "onopoy Po)er

(0.* +ources o& "onopoy Po)er

(0. The +ocia Costs o& "onopoy Po)er

(0.- "onopsony

(0. "onopsony Po)er

(0.' /i#iting "ar$et Po)er The Antitrust /a)s





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% &onopoly "ar$et )ith ony one seer.

% &onopsony "ar$et )ith ony one buyer.

●&arket power Abiity o& a seer or buyerto a&&ect the price o& a good.

Market Power: Monopoly and Monopsony





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"11P1/3(0.(

A4erage Re4enue and "argina Re4enue

●&ar()nal re*en+e Change in re4enueresuting &ro# a one5unit increase in output.

TA,!E 10-1 Total. Mar()nal. and A*era(e Re*en+e

Total Mar()nal A*era(e

Pr)/e P +ant)ty Re*en+e R Re*en+e MR Re*en+e

AR6 0 60 555 555

- ( - 6- 6-

2 7 *

* * 9 ( *

2 7 5( 2

( - - 5* (






"11P1/3(0.(

A4erage Re4enue and "argina Re4enue

A4erage and #arginare4enue are sho)n &orthe de#and cur4eP 8 Q.

A*era(e and Mar()nal

Re*en+e

3)(+re 10-1



C h a p t e r 1 0 : M a r k e

t P o w e r : M o n o p o l y



"11P1/3(0.(

The "onopoist:s 1utput ;ecision

Q< is the output e4e at )hich"R 8 "C.

I& the &ir# produces a s#aer

output=say, Q(=it sacri&icesso#e pro&it because the e>trare4enue that coud be earned&ro# producing and seing theunits bet)een Q( and Q<

e>ceeds the cost o& producingthe#.

+i#iary, e>panding output &ro#Q< to Q2 )oud reduce pro&it

because the additiona cost)oud e>ceed the additionare4enue.

Prof)t "s Ma)&)6ed 7hen Mar()nal

Re*en+e E8+als Mar()nal Cost

3)(+re 10-2







"11P1/3(0.(

The "onopoist:s 1utput ;ecision

?e can aso see agebraicay that Q< #a>i#i@es pro&it. Pro&it π is thedi&&erence bet)een re4enue and cost, both o& )hich depend on Q

As Q is increased &ro# @ero, pro&it )i increase unti it reaches a#a>i#u# and then begin to decrease. Thus the pro&it5#a>i#i@ingQ is such that the incre#enta pro&it resuting &ro# a s#a increasein Q is ust @ero Bi.e., D %Q 8 0. Then

Fut R %Q is #argina re4enue and C %Q is #argina cost. Thusthe pro&it5#a>i#i@ing condition is that

, or






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"11P1/3(0.(

An E>a#pe

Part a sho)s tota re4enue R , tota cost C ,and pro&it, the di&&erence bet)een the t)o.

Part b sho)s a4erage and #arginare4enue and a4erage and #argina cost.

"argina re4enue is the sope o& the totare4enue cur4e, and #argina cost is thesope o& the tota cost cur4e.

The pro&it5#a>i#i@ing output is Q< 8 (0, thepoint )here #argina re4enue eGuas#argina cost.

At this output e4e, the sope o& the pro&it

cur4e is @ero, and the sopes o& the totare4enue and tota cost cur4es are eGua.

The pro&it per unit is 6(-, the di&&erencebet)een a4erage re4enue and a4eragecost.

Fecause (0 units are produced, tota pro&itis 6(-0.

Ea&ple of Prof)t Ma)&)6at)on

3)(+re 10-$






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"11P1/3(0.(

A Rue o& Thu#b &or Pricing

?e )ant to transate the condition that #argina re4enue shoudeGua #argina cost into a rue o& thu#b that can be #ore easiyappied in practice.

To do this, )e &irst )rite the e>pression &or #argina re4enue







"11P1/3(0.(


ote that the e>tra re4enue &ro# an incre#enta unit o& Guantity, BPQ%Q, has t)o co#ponents

1- Producing one e>tra unit and seing it at price P brings inre4enue B(BP 8 P .

2- Fut because the &ir# &aces a do)n)ard5soping de#andcur4e, producing and seing this e>tra unit aso resuts in a s#adrop in price P %Q, )hich reduces the re4enue &ro# a unitssod Bi.e., a change in re4enue QP %Q.

Thus,







"11P1/3(0.(


BQ/P BP %Q is the reciproca o& the easticity o& de#and,(%E d, #easured at the pro&it5#a>i#i@ing output, and

o), because the &ir#:s obecti4e is to #a>i#i@e pro&it, )ecan set #argina re4enue eGua to #argina cost

)hich can be rearranged to gi4e us

B(0.(

EGui4aenty, )e can rearrange this eGuation to e>pressprice directy as a #ar$up o4er #argina cost

B(0.2







In (99-, Priosec, represented a ne)generation o& antiucer #edication. Priosec)as based on a 4ery di&&erent bioche#ica#echanis# and )as #uch #ore e&&ecti4ethan earier drugs.

Fy (99, it had beco#e the best5seingdrug in the )ord and &aced no #aorco#petitor.

Astra5"erc$ )as pricing Priosec at about6*.-0 per daiy dose.

The #argina cost o& producing andpac$aging Priosec is ony about *0 to 0cents per daiy dose.

The price easticity o& de#and, E D, shoud

be in the range o& roughy (.0 to (.2.

+etting the price at a #ar$up e>ceeding 00

"11P1/3(0.(






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"11P1/3(0.(

+hi&ts in ;e#and

A monopolistic market has no supply curve.

The reason is that the #onopoist:s output decision depends not onyon #argina cost but aso on the shape o& the de#and cur4e.

+hi&ts in de#and can ead to changes in price )ith no change in output,changes in output )ith no change in price, or changes in both price and

output.






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"11P1/3(0.(

+hi&ts in ;e#and

+hi&ting the de#and cur4e sho)sthat a #onopoistic #ar$et has nosuppy cur4e=i.e., there is noone5to5one reationship bet)eenprice and Guantity produced.

In a, the de#and cur4e D( shi&ts

to ne) de#and cur4e D2.

Fut the ne) #argina re4enuecur4e "R2 intersects #argina

cost at the sa#e point as the od#argina re4enue cur4e "R(.

The pro&it5#a>i#i@ing outputthere&ore re#ains the sa#e,athough price &as &ro# P ( to P 2.

In b, the ne) #argina re4enuecur4e "R2 intersects #argina

cost at a higher output e4e Q2.

Fut because de#and is no) #oreeastic, price re#ains the sa#e.

<h)fts )n =e&and

3)(+re 10-'







"11P1/3(0.(

The E&&ect o& a Ta>

?ith a ta> t per unit, the &ir#:se&&ecti4e #argina cost isincreased by the a#ount t to"C J t .

In this e>a#pe, the increase inprice P is arger than the ta> t .

Effe/t of E/)se Ta on Monopol)st

3)(+re 10-5

+uppose a speci&ic ta> o& t doars per unit is e4ied, so that the #onopoist#ust re#it t doars to the go4ern#ent &or e4ery unit it ses. I& "C )as the&ir#:s origina #argina cost, its opti#a production decision is no) gi4en by







"11P1/3(0.(

<The "utipant Kir#

+uppose a &ir# has t)o pants. ?hat shoud its tota output be, and ho)#uch o& that output shoud each pant produceL ?e can &ind the ans)erintuiti4ey in t)o steps.

●Step 1. ?hate4er the tota output, it shoud be di4ided bet)eenthe t)o pants so that marginal cost is the same in each plant.

1ther)ise, the &ir# coud reduce its costs and increase its pro&itby reaocating production.

●Step 2. ?e $no) that tota output #ust be such that marginal

revenue equals marginal cost. 1ther)ise, the &ir# coud increaseits pro&it by raising or o)ering tota output.







"11P1/3(0.(

<The "utipant Kir#

?e can aso deri4e this resut agebraicay. /et Q( and C ( be the output

and cost o& production &or Pant (, Q2 and C 2 be the output and cost o&

production &or Pant 2, and QT 8 Q( J Q2 be tota output. Then pro&it is

The &ir# shoud increase output &ro# each pant unti the incre#enta pro&it&ro# the ast unit produced is @ero. +tart by setting incre#enta pro&it &ro#output at Pant ( to @ero

Here BPQT %Q( is the re4enue &ro# producing and seing one #ore unit=

i.e., marginal revenue, "R, &or a o& the &ir#:s output.







"11P1/3(0.(

<The "utipant Kir#

The ne>t ter#, C (%Q(, is marginal cost at Pant (, "C(. ?e thus ha4e

"R "C( 8 0, or

+i#iary, )e can set incre#enta pro&it &ro# output at Pant 2 to @ero,

Putting these reations together, )e see that the &ir# shoud produce so that

B(0.*






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"11P1/3(0.(

<The "utipant Kir#

A &ir# )ith t)o pants#a>i#i@es pro&its bychoosing output e4es Q(

and Q2 so that #argina

re4enue "R B)hich

depends on total outputeGuas #argina costs &oreach pant, "C( and "C2.

Prod+/t)on w)th Two Plants

3)(+re 10-4







"11P1/3 P1?ER(0.2

Part a sho)s the #ar$etde#and &or toothbrushes.

Part b sho)s the de#and&or toothbrushes as seen byKir# A.

At a #ar$et price o& 6(.-0,easticity o& #ar$et de#andis (.-.

Kir# A, ho)e4er, sees a#uch #ore eastic de#andcur4e D A because o&

co#petition &ro# other &ir#s.

At a price o& 6(.-0, Kir# A:sde#and easticity is .

+ti, Kir# A has so#e#onopoy po)er Its pro&it5#a>i#i@ing price is 6(.-0,)hich e>ceeds #arginacost.

The =e&and for Toothbr+shes

3)(+re 10-9







"11P1/3 P1?ER(0.2

Re#e#ber the i#portant distinction bet)een a per&ecty co#petiti4e &ir#and a &ir# )ith #onopoy po)er For the competitive irm! price equals

marginal cost" or the irm #ith monopoly po#er! price e$cee%s marginal

cost.

"easuring "onopoy Po)er

● !erner "nde of Monopoly Power

"easure o& #onopoy po)er cacuated ase>cess o& price o4er #argina cost as a&raction o& price.

"athe#aticay

This inde> o& #onopoy po)er can aso be e>pressed in ter#s o& the easticity o&de#and &acing the &ir#.

B(0.







"11P1/3 P1?ER(0.2

The Rue o& Thu#b &or Pricing

The #ar$up BP "C%P is eGua to #inus the in4erse o& the easticity o& de#and &acing the &ir#.

I& the &ir#:s de#and is eastic, as in a, the #ar$up is s#a and the &ir# has itte #onopoypo)er.

The opposite is true i& de#and is reati4ey ineastic, as in b.

Elast)/)ty of =e&and and Pr)/e Mark+p

3)(+re 10-






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"11P1/3 P1?ER(0.2

TA,!E 10-2 Reta)l Pr)/es of >H< and =>=s

2009

T)tle Reta)l Pr)/e =>=

Purple Rain 629.77

Rai%ers o the &ost Ark 62.9-

'ane Fon%a (orkout 6-9.9-

The Empire )trikes *ack 6'9.97

An +icer an% a ,entleman 62.9-

)tar Trek- The otion Picture 62.9-

)tar (ars 6*9.97

1;5

T)tle Reta)l Pr)/e >H<

Pirates o the Cariean 6(9.99

The Da 0inci Co%e 6(9.99

ission- 1mpossile 111 6('.99

2ing 2ong 6(9.97

3arry Potter an% the ,olet o Fire 6('.9

1ce Age 6(9.99

The Devil (ears Pra%a 6('.99

)ource B200' Fased on http%%))).a#[email protected]#. +uggested retai price.







"11P1/3 P1?ER(0.2

Fet)een (990 and (997, o)erprices induced consu#ers to buy#any #ore 4ideos.

Fy 200(, saes o& ;M;s o4ertoo$saes o& MH+ 4ideocassettes.

High5de&inition ;M;s )ereintroduced in 200, and aree>pected to dispace saes o&con4entiona ;M;s.

>)deo <ales

3)(+re 10-;







+1NRCE+ 1K "11P1/3 P1?ER(0.*

I& there is ony one &ir#=a pure #onopoist=its de#and cur4e is the #ar$etde#and cur4e.

Fecause the de#and &or oi is &airy ineastic Bat east in the short run, 1PECcoud raise oi prices &ar abo4e #argina production cost during the (9'0s andeary (970s.

Fecause the de#ands &or such co##odities as co&&ee, cocoa, tin, and copperare #uch #ore eastic, atte#pts by producers to cartei@e these #ar$ets andraise prices ha4e argey &aied.

In each case, the easticity o& #ar$et de#and i#its the potentia #onopoypo)er o& indi4idua producers.

The Easticity o& "ar$et ;e#and







+1NRCE+ 1K "11P1/3 P1?ER(0.*

?hen ony a &e) &ir#s account &or #ost o& the saes in a #ar$et, )e say thatthe #ar$et is highy concentrate%.

The u#ber o& Kir#s

% barr)er to entry Condition thati#pedes entry by ne) co#petitors.







+1NRCE+ 1K "11P1/3 P1?ER(0.*

Kir#s #ight co#pete aggressi4ey, undercutting one another:s prices tocapture #ore #ar$et share.

This coud dri4e prices do)n to neary co#petiti4e e4es.

Kir#s #ight e4en coude Bin 4ioation o& the antitrust a)s, agreeing to i#itoutput and raise prices.

Fecause raising prices in concert rather than indi4iduay is #ore i$ey to bepro&itabe, cousion can generate substantia #onopoy po)er.

The Interaction A#ong Kir#s






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THE +1CIA/ C1+T+ 1K "11P1/3 P1?ER(0.

Rent +ee$ing

% rent seek)n( +pending #oney insociay unproducti4e e&&orts to acGuire,#aintain, or e>ercise #onopoy.

In (99, the Archer ;anies "idand Co#pany BA;" success&uy obbied theCinton ad#inistration &or reguations reGuiring that the ethano Bethy acoho

used in #otor 4ehice &ue be produced &ro# corn.

?hyL Fecause A;" had a near #onopoy on corn5based ethano production,so the reguation )oud increase its gains &ro# #onopoy po)er.







THE +1CIA/ C1+T+ 1K "11P1/3 P1?ER(0.

Price Reguation

?hen price is o)ered toP c , at the point )here

#argina cost intersectsa4erage re4enue, outputincreases to its #a>i#u#Qc . This is the output that

)oud be produced by aco#petiti4e industry.

/o)ering price &urther, toP * reduces output to Q*

and causes a shortage,Q:

*

Q*

.

Pr)/e Re(+lat)on

3)(+re 10-11






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THE +1CIA/ C1+T+ 1K "11P1/3 P1?ER(0.

atura "onopoy

A &ir# is a natura #onopoybecause it has econo#ies o&scae Bdecining a4erage and#argina costs o4er its entireoutput range.

I& price )ere reguated to be P c the &ir# )oud ose #oney andgo out o& business.

+etting the price at P r yieds the

argest possibe outputconsistent )ith the &ir#:sre#aining in businessO e>cess

pro&it is @ero.

% nat+ral &onopoly Kir# that can producethe entire output o& the #ar$et at a costo)er than )hat it )oud be i& there )erese4era &ir#s.

Re(+lat)n( the Pr)/e of a #at+ralMonopoly

3)(+re 10-12






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THE +1CIA/ C1+T+ 1K "11P1/3 P1?ER(0.

Reguation in Practice

% rate?of?ret+rn re(+lat)on "a>i#u# priceao)ed by a reguatory agency is based on theBe>pected rate o& return that a &ir# )i earn.

The di&&icuty o& agreeing on a set o& nu#bers to be used in rate5o&5return

cacuations o&ten eads to deays in the reguatory response to changes incost and other #ar$et conditions.

The net resut is regulatory lag =the deays o& a year or #ore usuay entaiedin changing reguated prices.







"11P+13(0.-

% ol)(opsony "ar$et )ith ony a &e) buyers.

% &onopsony power Fuyer:s abiity to a&&ectthe price o& a good.

% &ar()nal *al+e Additiona bene&it deri4ed&ro# purchasing one #ore unit o& a good.

% &ar()nal epend)t+re Additiona cost o&buying one #ore unit o& a good.

% a*era(e epend)t+re Price paid per unit o& agood.







"11P+13(0.-

In a, the co#petiti4e buyer ta$es #ar$et price P < as gi4en. There&ore, #argina e>penditure anda4erage e>penditure are constant and eGuaO

Guantity purchased is &ound by eGuating price to #argina 4aue Bde#and.

In b, the co#petiti4e seer aso ta$es price as gi4en. "argina re4enue and a4erage re4enue areconstant and eGuaO

Guantity sod is &ound by eGuating price to #argina cost.

Co&pet)t)*e ,+yer Co&pared to Co&pet)t)*e <eller

3)(+re 10-1$






"11P+13(0.-

The #ar$et suppy cur4e is#onopsonist:s a4erage e>penditurecur4e AE.

Fecause a4erage e>penditure isrising, #argina e>penditure iesabo4e it.

The #onopsonist purchases GuantityQ4 m, )here #argina e>penditure and

#argina 4aue Bde#and intersect.

The price paid per unit P4 m is then

&ound &ro# the a4erage e>penditureBsuppy cur4e.

In a co#petiti4e #ar$et, price andGuantity, P c and Qc , are both higher.

They are &ound at the point )herea4erage e>penditure Bsuppy and#argina 4aue Bde#and intersect.

Monopson)st ,+yer

3)(+re 10-1'





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"11P+13(0.-

These diagra#s sho) the cose anaogy bet)een #onopoy and #onopsony.

a The #onopoist produces )here #argina re4enue intersects #argina cost.

A4erage re4enue e>ceeds #argina re4enue, so that price e>ceeds #argina cost.

b The #onopsonist purchases up to the point )here #argina e>penditure intersects #argina4aue.

"argina e>penditure e>ceeds a4erage e>penditure, so that #argina 4aue e>ceeds price.

Monopoly and Monopsony

3)(+re 10-15

"onopsony and "onopoy Co#pared





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"11P+13 P1?ER(0.

"onopsony po)er depends on the easticity o& suppy.

?hen suppy is eastic, as in a, #argina e>penditure and a4erage e>penditure do not di&&erby #uch, so price is cose to )hat it )oud be in a co#petiti4e #ar$et.

The opposite is true )hen suppy is ineastic, as in b.

Monopsony Power: Elast)/ *ers+s "nelast)/ <+pply

3)(+re 10-14



C h a p t e r 1 0 : M a r k e t P o w e r : M o n o p o l y a n d M o n o p s o n y

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"11P+13 P1?ER(0.

+ources o& "onopsony Po)er

Elast)/)ty of Market <+pplyI& ony one buyer is in the #ar$et=a pure #onopsonist=its #onopsonypo)er is co#petey deter#ined by the easticity o& #ar$et suppy. I& suppyis highy eastic, #onopsony po)er is s#a and there is itte gain in beingthe ony buyer.

#+&ber of ,+yers

?hen the nu#ber o& buyers is 4ery arge, no singe buyer can ha4e #uchin&uence o4er price. Thus each buyer &aces an e>tre#ey eastic suppycur4e, so that the #ar$et is a#ost co#petey co#petiti4e.

"ntera/t)on A&on( ,+yers

I& &our buyers in a #ar$et co#pete aggressi4ey, they )i bid up the pricecose to their #argina 4aue o& the product, and )i thus ha4e itte#onopsony po)er. 1n the other hand, i& those buyers co#pete essaggressi4ey, or e4en coude, prices )i not be bid up 4ery #uch, and thebuyers: degree o& #onopsony po)er #ight be neary as high as i& there

)ere ony one buyer.





"11P+13 P1?ER(0.

The +ocia Costs o& "onopsony Po)er

The shaded rectange andtrianges sho) changes inbuyer and seer surpus)hen #o4ing &ro#

co#petiti4e price andGuantity, P c and Qc ,

to the #onopsonist:s priceand Guantity, P m and Qm.

Fecause both price andGuantity are o)er, there is

an increase in buyerBconsu#er surpus gi4enby A 5 *.

Producer surpus &as by A 6 C , so there is adead)eight oss gi4en bytrianges * and C .

=eadwe)(ht !oss fro&

Monopsony Power

3)(+re 10-19





"11P+13 P1?ER(0.

Fiatera "onopoy

% b)lateral &onopoly "ar$et )ith onyone seer and one buyer.

onopsony po#er an% monopoly po#er #ill ten% to counteract each other.




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"11P+13 P1?ER(0.

The roe o& #onopsony po)er )asin4estigated to deter#ine the e>tent to )hich4ariations in price5cost #argins coud beattributed to 4ariations in #onopsony po)er.

The study &ound that buyers: #onopsony

po)er had an i#portant e&&ect on the price5cost #argins o& seers.

In industries )here ony &our or &i4e buyersaccount &or a or neary a saes, the price5cost #argins o& seers )oud on a4erage beas #uch as (0 percentage points o)er than inco#parabe industries )ith hundreds o& buyersaccounting &or saes.

Each #aor car producer in the Nnited +tatestypicay buys an indi4idua part &ro# at eastthree, and o&ten as #any as a do@en,

suppiers.




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/I"ITI "ARQET P1?ER THE ATITRN+T /A?+(0.'

% ant)tr+st laws Rues and reguations

prohibiting actions that restrain, or arei$ey to restrain, co#petition.

There ha4e been nu#erous instances o& iega co#binations. Kor e>a#pe

% In (99, Archer ;anies "idand Co#pany BA;" and t)o other #aorproducers o& ysine Ban ani#a &eed additi4e peaded guity to cri#ina charges

o& price &i>ing.

% In (999, &our o& the )ord:s argest drug and che#ica co#panies=Roche A.. o& +)it@erand, FA+K A.. o& er#any, Rhone5Pouenc o& Krance, andTa$eda Che#ica Industries o& apan=)ere charged by the N.+. ;epart#ento& ustice )ith ta$ing part in a goba conspiracy to &i> the prices o& 4ita#ins

sod in the Nnited +tates.

% In 2002, the N.+. ;epart#ent o& ustice began an in4estigation o& price &i>ingby ;RA" Bdyna#ic access rando# #e#ory producers. Fy 200, &i4e#anu&acturers=Hyni>, In&ineon, "icron Technoogy, +a#sung, and Epida=had ped guity &or participating in an internationa price5&i>ing sche#e.






% parallel /ond+/t Kor# o& i#picitcousion in )hich one &ir# consistenty&oo)s actions o& another.

% predatory pr)/)n( Practice o&pricing to dri4e current co#petitors outo& business and to discourage ne)

entrants in a #ar$et so that a &ir# canenoy higher &uture pro&its.






The antitrust a)s are en&orced in three )ays

1- Through the Antitrust Division o the Department o 'ustice.

2- Through the a%ministrative proce%ures o the Fe%eral Tra%e Commission.

$- Through private procee%ings.

En&orce#ent o& the Antitrust /a)s

Antitrust in Europe

The responsibiity &or the en&orce#ent o& antitrust concerns that in4o4e t)o or#ore #e#ber states resides in a singe entity, the Co#petition ;irectorate.

+eparate and distinct antitrust authorities )ithin indi4idua #e#ber states areresponsibe &or those issues )hose e&&ects are &et )ithin particuar countries.

The antitrust a)s o& the European Nnion are Guite si#iar to those o& the Nnited+tates. e4ertheess, there re#ain a nu#ber o& di&&erences bet)een antitrusta)s in Europe and the Nnited +tates.

"erger e4auations typicay are conducted #ore Guic$y in Europe.

It is easier in practice to pro4e that a European &ir# is do#inant than it is to sho)

that a N.+. &ir# has #onopoy po)er.






Robert Cranda, president and CE1 o& A#erican, #ade a phone ca toHo)ard Putna#, president and chie& e>ecuti4e o& Frani&&. It )ent i$e this

Cran%all- I thin$ it:s du#b as he &or Christ:s sa$e, a right, to sit here andpound the SU6VW out o& each other and neither one o& us #a$ing a SU6VW di#e.

Putnam- ?e . . .

Cran%all- I #ean, you $no), SU6VW, )hat the he is the point o& itL

Putnam- Fut i& you:re going to o4eray e4ery route o& A#erican:s on top o&e4ery route that Frani&& has=I ust can:t sit here and ao) you to bury us

)ithout gi4ing our best e&&ort.Cran%all- 1h sure, but Eastern and ;eta do the sa#e thing in Atanta andha4e &or years.

Putnam- ;o you ha4e a suggestion &or #eL




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Cran%all- 3es, I ha4e a suggestion &or you. Raise your SU6VW &ares 20percent. I: raise #ine the ne>t #orning.

Putnam- Robert, )e. . .

Cran%all- 3ou: #a$e #ore #oney and I )i, too.

Putnam- ?e can:t ta$ about pricing

Cran%all- 1h SU6VW, Ho)ard. ?e can ta$ about any SU6VW thing )e)ant to ta$ about.

Cranda )as )rong. Ta$ing about prices and agreeing to &i> the# is a cear4ioation o& +ection ( o& the +her#an Act.

Ho)e4er, proposing to &i> prices is not enough to 4ioate +ection ( o& the+her#an Act Kor the a) to be 4ioated, the t)o parties #ust agree to coude.

There&ore, because Putna# had reected Cranda:s proposa, +ection ( )asnot 4ioated.





=O@ /la)&: In 4ioation o& +ection 2 o& the +her#an Act, "icroso&t engaged inpractices designed to #aintain its #onopoy in the #ar$et &or des$top PCoperating syste#s. It tied its bro)ser to the ?indo)s 97 operating syste#,e4en though doing so )as technicay unnecessary. This action )as predatorybecause it #ade it di&&icut or i#possibe &or etscape and other &ir#s tosuccess&uy o&&er co#peting products.

M< response: There are bene&its to incorporating the bro)ser &unctionaityinto the operating syste#. ot being ao)ed to integrate ne) &unctionaity intoan operating syste# )i discourage inno4ation. 1&&ering consu#ers a choicebet)een separate or integrated bro)sers )oud cause con&usion in the#ar$etpace.

=O@ /la)&: In 4ioation o& +ection 2 o& the +her#an Act, "icroso&t atte#ptedto di4ide the bro)ser business )ith etscape and engaged in si#iar conduct)ith both Appe Co#puter and Inte.

M< response: "icroso&t:s #eetings )ith etscape, Appe, and Inte )ere &or4aid business reasons. Indeed, it is use&u &or consu#ers and &ir#s to agree

pindyckrubinfeld_microeconomics_ch10

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