The test will be open-book, open-note. The "For Reference" readings
will not be on the test. You will not need a calculator, though there
may be simple calculations (I won't take off for arithmetic errors,
if your reasoning is clear). The test will include a newspaper
clipping, which I will give you to read in advance. Please bring
your own paper (I will bring paper too, and a stapler).
1. MARKETS AND VALUE MAXIMIZATION
Value maximization (efficiency) at the individual transaction level.
Supply and demand--- the equilibrium price and quantity, and why they
form an equilibrium.
Value maximization at the market level. Producer and consumer surplus.
Perfect competition. Why free markets generally maximize value.
Price floors, including the minimum wage
Price ceilings
Mandated health insurance
Choice of product quality-- competitive and monopoly markets.
2. MARKET FAILURE AND GOVERNMENT FAILURE
Creating property rights, enforcing property rights, and enforcing
contracts.
Information (graph)
Externalities, positive and negative (graph)
Market power (graph)
Rational ignorance of voters.
Government failure. Two big reasons--- rentseeking, incentives for
politicians and bureaucrats.
When do we expect government failure?
3. MAKING REGULATIONS
The procedure-- the Federal Register, the OMB, public comment.
Cost-benefit analysis.
Marginalism (graph)
Time discounting.
The growth of regulation over time.
4. MARKET POWER AND THE ANTITRUST LAW
What is market power? Where does it come from?
What is wrong with monopoly? --triangle loss, rent-seeking, higher
costs.
Sherman Act---monopolization. Price-fixing. Per se violations.
Clayton Act--mergers, exclusive dealing, tie-ins, predatory pricing.
Rule of reason.
Being a monopoly is not illegal in itself, if a company acquires it
by fair means.
The FTC and the Justice Dept. both enforce the laws.
Private cases. Treble damages.
Concentration ratios and the Herfindahl Index
Exemptions from the antitrust laws
Explicit price agreements. Addyston Pipe
Noncompete agreements vs. illegal cartels
The NASDAQ case.
The Cournot model and best-reply functions
The Prisoner's Dilemma in advertising or price competition.
Why it is hard to maintain a cartel, with or without meetings and
legal agreements.
5. MERGERS
Why merge two firms?
The Bork-Williamson diagram and numerical examples. Cost savings vs.
increased market power.
Table 7.1: costs, elasticities, and price changes
The Staples-Office Depot case
Vertical, horizontal, and conglomerate mergers.
6. THE PRINCIPAL AGENT PROBLEM AND GOVERNMENT FAILURE
Econ regulation and its history
Voters controlling politicians and civil servants. Measuring output.
The principal-agent problem.
Diagram for the principal-agent problem within the firm.
Wilson's 3 bureaucrats
The public interest, capture, and "economic theory of regulation"
theories
Stigler-Peltzman and Becker models
Example: Bloomington Hospitals-- entry restriction
7. NATURAL MONOPOLY
Natural Monopoly. Figs 11.1, 11.2.
The evolution of a natrual monopoly into not being a natural monpooly.