Demsetz. Industry Structure, Market Rivalry and Public Policy.

· If we see unusually high power, large market power so we have to break it up · Bain, concentrated industries earned higher profits than other industries dominant interpretation—implicit or explicit collusion · Two theories consistent with the data, next one being a few firms that are superior and grow over time. · If it’s the latter that superior because 1. Firm size—if it was implicit or explicit collusion, all firms should have higher than average profits because no one would join collusion if it made them worse off 2. Relative market share should stay the same · Just because someone is more profitable doesn’t mean that others know how to be more profitableif there are artificial barriers then you dont have to compete in order to have your monopoly

· Have to be superior performance that consumers see · Assumption, no artificial government BTE—if no artificial BTE, must be better to grow · May be hard to encapsulate the information · Your team works well as a team, what if its because they’ve worked together for 20 years and gets along—very hard to imitate o If you don’t know what the source of superior performance is then you’ll have high profits; once people find out they’ll bid up your salary and there wont be high profits anymore · SW airlines, everyone knew he liked them, sing on the airplanes, do luggage, etc. · Assume you’re the source of someone’s superior performance, others would offer you a higher wages and the company would have to give you more money to keep you—this is how people capitalize superior performance, if they don’t know, unusually high profits. · If you can trust each other, you can tell each other the truth and the team works better

· It takes a long time to identify the source of superior performance · Similar to Hayek · How do you encapsulate information

· Downward pricing power. You only have power to help consumer, you can determine how much you can pass on to consumers. Imitation will then happen and competitors’ costs will decrease and pricing power decreases. · If you attack market power then you prevent innovations; example, if you have to pass off all the gains right away, then there’s no incentive to look for those ways to benefit consumers because they don’t benefit at all · Do consumers have better or worse options than before? Collusion has fewer options.

· You come up with superior thing, you can keep some of the gains if you pass on some of the gains to the consumers

· If there are falling cost curves, natural monopoly over the entire range of output, then tendency towards monopoly · However you don’t always see a monopoly, what if there are economies up to 25% of output. There would be a tendency towards a few large firms—tendency towards large stable firms · GRAPHS—marginal costs are the same

· Price to cost margin is higher, you can be punished for this; however, consumers are better off · If government says you have to pass on all the gains to consumers you don’t have incentive to discover them

· Everyone should be earning higher rates of returns · The larger firms are the only ones earning above normal rates of return, because they’re superior and makes consumers better off · Implications: concentrated industries because they earn higher than average profits, they must be nefarious and must be broken up; as a result, lets prevent firms from getting big and break up the big firm · If they have higher profits they must have lower costs

· The advantage of breaking up large firms may reduce implicit collusion, if small firms have same costs · De-concentration forces production into higher costs the only time it wouldn’t happen would be if small firms and big firms have the same costs · If little firms had the same cost then breaking up a big firm into small firms there’s no higher cost BUT there is the added benefit of reduced collusion · However if you break down a large firm into smaller firms and there are economies of scale, then to make a big company small then you’d have higher costs.

· Market share is the same · Smaller companies are earning below normal ROR · You have to ask more questions, to figure out which hypothesis is better.

· Implicit collusion, concentrated=higher profits · Evidence is consistent with both theories so you have to ask different questions · Look at profits across firms and variable market share · The data is consistent with the large firm doing better in concentrated industries and the small firms not · Small firms wouldn’t be apart of collusion if they earned below N rates of return

· Scale advantages, but MC for last unit is the same. Higher ROR doesn’t mean lower MC for the last unit. · Rising cost curves for both cases, but because you’re rising from lower AC you’ll earn profits · Tendency towards monopoly is if MC of you is LESS than competitors but if they’re ALWAYS less then you’ll get a MONOPOLY not concentrated INDUSTRY · Concentrated industries, MC is less than competitors BUT THEY’RE RISING (economies of scale up to 25%) · Concentrated industry: no incentive to expand · Big company is more profitable because your AC are less · At the MARGIN you’re both the same.

· If little guys are earning below normal rate of return, concentrated industry in the process of getting more concentrated · If the small firms are earning normal rates of return, stable

· Market share will go up and competitor’s will go down if you have innovation. · Collusive: you would market shares to stay the same · Collusion—changing relative market shares? NO · Restriction on internal growth of firms and attempt to break up large firms because they “hurt consumers” Let them grow big because it helps consumers, might just be a form of competition.