Transcript Post-Merger HHI Between 1000 and 1800

Short Run Costs
1
Production Processes
X-Box Production
http://www.youtube.com/watch?v=dzJUSFr5EvQ&feature=related
KTM Factory
http://www.youtube.com/watch?v=jihqmdX0jkM
1939 River Rouge Plant
http://www.youtube.com/watch?v=TcXfk0op6JA
Scorpion Factory
http://www.youtube.com/watch?v=hMCyqyyh5MA
2
Short Run versus Long Run?
short run - a period of time where some
inputs are fixed (capital = building,
equipment, etc.)
 long run - a period of time in which all
inputs can be varied (no inputs are fixed)

3
Short Run Cost Function
Definition:
 A function that defines the minimum
possible cost of producing each output
level when variable factors are employed
in the cost-minimizing fashion. (Based on
the inability to change the fixed factors)
4
In this case, what is your total
product/output (Q)?
Number of Paninis (for simplicity assume
that Panera only produces a single
product).
 In general a firm uses capital, labor and
materials to produce the product/output
where capital is often fixed in the short
run.

5
In Short Run, how does the number
of Paninis produced change as you
change the number of workers?
# of workers
# of paninis
0
0
1
5
2
12
3
20
4
25
5
28
6
How does output change if you
hire one more person?

Depends on how many workers you
currently have. Output increases by 5
paninis when you hire the 1st worker,
increases by 7 paninis when you hire the
2nd worker, …., and increases 3 paninis
when you hire the 5th worker.
7
What happens to “productivity”
as the first few employees are
hired?
 Specialize
and marginal
product increases.
Marginal Product is the change in total output
attributable to the last unit of an input.
8
What would happen to
“productivity” if you continued to
hire more and more workers?
Marginal product would start to fall
because some inputs are fixed in the short
run.
 Law of diminishing marginal returns OR
Law of diminishing marginal product.

9
What costs would you have to pay
even if you didn’t produce a single
panini?
 Fixed
Costs, FC (or Total
Fixed Costs, TFC)
(often involves building and equipment)
Fixed Costs = Costs that do not change with
changes in output
10
What costs would you have to
pay only if you produced
paninis?
Variable
Costs, VC (or Total
Variable Costs, TVC)
(often assumed to be labor and material)
Variable Costs = Costs that change with changes in
output
11
What costs would increase if we
wanted to produce one more
panini?
 Variable
Costs (such as labor
and materials)
12
If you hired more and more
employees

and the store became more and more
crowded until the marginal product of a
worker started to fall, what would happen
to the cost of producing one more panini
(marginal cost)?
Marginal cost = cost of producing an
additional unit of output
13
CostsQ
FC
VC
TC
AFC
AVC
0
100
0
100
-
-
Fixed costs do not
vary with output
1
ATC
MC
(150-100)/1= 50
100
50
150
100
50
Variable costs increase by 50 from 0 to 1 unit
of output and increases by 30 from 1 to 2
2
100
80
180
50
40
units.
150
30
90
20
Average Fixed Costs (AFC) = Average Variable Costs (AVC)
3
33.3
33.33
66.7 so at an
Costs/Q
Fixed Costs/Q
so100at an100
output200 = Variable
output of 2, AVC=80/2=40.
of 2, AFC=100/2=50.
10
4
5
100
110
210
25
27.5
52.5
Average Total Costs (ATC) = Total
Costs/Q so at an output of 2,
ATC=180/2=90
100
130
230 or AFC+ATC.
20
26
46
20
14
Costs Q
FC
VC
TC
AFC
AVC
ATC
5
100
130
230
20
26
46
MC
30
6
100
160
260
16.7
26.67
43.3
40
7
100
200
300
14.3
28.57
42.9
50
8
100
250
350
12.5
31.25
43.8
60
9
100
310
410
11.1
34.44
45.6
70
10
100
380
480
10
38
48
15
TC= ATC*Q
What is happening to TC as Q increases?
MC
3
33.33
33.33
66.67
60
4
25.00
27.50
$/Q
10
52.50
20
5
20.00
26.00
46.00
30
6
7
8
16.67
14.29
12.50
26.67
28.57
31.25
11.11
34.44
MC
70
ATC
50
40
AVC
30
20
43.33
40
10
50
0
42.86
43.75
60
9
80
AFC
Q
45.56
70
10
10.00
38.00
48.00
480
16
10
40.00
8
50.00
90
7
2
15030
90.00 180
20
150.00
6
50.00
5
100.00
4
1
100
9
50
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Increases!
What are total fixed costs in this example? AFC*Q
30
80
20
70
90.00
66.67
60
5
20.00
26.00
46.00
30
6
16.67
26.67
43.33
40
7
14.29
28.57
42.86
50
8
12.50
31.25
43.75
60
9
11.11
34.44
40
AVC
30
20
AFC
10
0
Q
45.56
70
10
10.00
38.00
48.00
17
10
20
9
52.50
8
27.50
7
25.00
ATC
50
6
10
4
MC
5
33.33
90
4
40.00
100
50
3
33.33
50.00 150.00
100*1=100
MC
2
3
50.00
ATC
-
1
2
100.00
AVC
-
0
1
AFC
-
$/Q
Q
0
Why are AFC diminishing? Spreading a fixed number out
over a larger and larger Q
MC
100
50
80
20
70
90.00
66.67
60
52.50
20
5
20.00
26.00
46.00
30
6
16.67
26.67
43.33
40
7
14.29
28.57
42.86
50
8
12.50
31.25
43.75
60
9
11.11
34.44
40
AVC
30
20
AFC
10
0
Q
45.56
70
10
10.00
38.00
48.00
18
10
27.50
9
25.00
ATC
50
8
10
4
MC
7
33.33
30
6
33.33
40.00
90
150.00
5
3
50.00
50.00
4
2
100.00
$/Q
1
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Why is AVC getting closer to ATC?
MC
100
50
80
20
70
90.00
66.67
60
52.50
20
5
20.00
26.00
46.00
30
6
16.67
26.67
43.33
40
7
14.29
28.57
42.86
50
8
12.50
31.25
43.75
60
9
11.11
34.44
40
AVC
30
20
AFC
10
0
Q
45.56
70
10
10.00
38.00
48.00
19
10
27.50
9
25.00
ATC
50
8
10
4
MC
7
33.33
30
6
33.33
40.00
90
150.00
5
3
50.00
50.00
4
2
100.00
$/Q
1
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Because ATC = AVC+AFC
and AFC is getting close to 0
Where does the law of diminishing marginal product
set in and how do you know? Where MC starts increasing!
MC
100
50
80
20
70
90.00
66.67
60
52.50
20
5
20.00
26.00
46.00
30
6
16.67
26.67
43.33
40
7
14.29
28.57
42.86
50
8
12.50
31.25
43.75
60
9
11.11
34.44
45.56
70
10
10.00
38.00
48.00
40
AVC
30
20
AFC
10
0
Q
Why does this happen?
An input is fixed in the short run!
20
10
27.50
9
25.00
ATC
50
8
10
4
MC
7
33.33
30
6
33.33
40.00
90
150.00
5
3
50.00
50.00
4
2
100.00
$/Q
1
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Where does MC cross ATC?
Where does MC cross AVC?
100
At their minimums
90
80
MC
70
$/Q
60
ATC
50
40
AVC
30
20
AFC
10
9
8
7
6
If MC<ATC, ATC is decreasing
If MC>ATC,
ATC is increasing
Q
21
Same for AVC
5
3
2
1
0
0 relationship
What is the
between MC and ATC?
MC and AVC?
4
10
How do you know this is the short run?
100
50
80
20
70
90.00
66.67
60
52.50
20
5
20.00
26.00
46.00
30
6
16.67
26.67
43.33
40
7
14.29
28.57
42.86
50
8
12.50
31.25
43.75
60
9
11.11
34.44
40
AVC
30
20
AFC
10
0
Q
45.56
70
10
10.00
38.00
48.00
22
10
27.50
9
25.00
ATC
50
8
10
4
MC
7
33.33
30
6
33.33
40.00
90
150.00
5
3
50.00
50.00
4
2
100.00
$/Q
1
There are fixed costs
MC
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Fixed Cost versus Sunk Cost
Fixed Cost = costs that do not change with changes in
output
Sunk Cost= a cost that is forever lost after it has been paid

Does profit maximizing output depend on
whether cost if fixed or sunk given that you
produce paninis?
No

Does the decision whether to produce any
paninis depend on whether cost is fixed or
sunk?
Yes
23
Short Run versus Long Run?
short run - a period of time where some
inputs are fixed (capital = building,
equipment, etc.)
 long run - a period of time in which all
inputs can be varied (no inputs are fixed)

UQM Technologies
http://www.youtube.com/watch?v=UvnHQz6lDQ8&feature=related
24
Profit Maximization
25
Profit Maximization assuming:
1.
2.
Firm must charge every consumer the
same price (i.e., no price discrimination)
No Strategic Interaction among Firms
We will consider three industry structures:
 Price taking Firms
 Monopoly
 Monopolistic Competition
26
Price Taking Firm’s Short Run Costs
Q
FC
VC
TC
AFC
AVC
0
100
0
100
-
-
ATC
MC
50
1
100
50
150
100
50
150
30
2
100
80
180
50
40
90
20
3
100
100
200
33.3
33.33
66.7
10
4
100
110
210
25
27.5
52.5
20
5
100
130
230
20
26
46
27
Price Taking Firm’s Short Run Costs
Q
FC
VC
TC
AFC
AVC
ATC
5
100
130
230
20
26
46
MC
30
6
100
160
260
16.7
26.67
43.3
40
7
100
200
300
14.3
28.57
42.9
50
8
100
250
350
12.5
31.25
43.8
60
9
100
310
410
11.1
34.44
45.6
70
28
What output maximizes profits if the marginal revenue (MR)
for each unit the firm sells is $55? What are these profits?
8
MC
55*8-43.75*8=90
50
150.00
100
30
90.00
20
33.33
33.33
66.67
10
5
6
25.00
20.00
16.67
27.50
26.00
26.67
46.00
20
50
30
40
43.33
40
7
8
9
14.29
12.50
11.11
28.57
31.25
34.44
10.00
38.00
ATC
AVC
30
20
42.86
50
10
60
0
43.75
AFC
45.56
70
10
MC
70
60
52.50
$/Q
4
80
48.00
10
3
90
9
40.00
8
50.00
7
2
2
50.00
1
100.00
0
1
6
ATC
-
5
AVC
-
4
AFC
-
3
Q
0
Q
29
What output maximizes profits if the marginal revenue for
each unit the firm sells is $35? What are these profits?
50
80
20
70
90.00
66.67
60
52.50
20
5
20.00
26.00
46.00
30
6
7
8
16.67
14.29
12.50
26.67
28.57
31.25
11.11
34.44
10.00
38.00
10
50
0
42.86
43.75
45.56
48.00
30
40
70
10
AVC
20
43.33
60
9
40
AFC
10
27.50
ATC
50
9
25.00
$/Q
10
4
MC
8
33.33
30
7
33.33
40.00
90
150.00
6
3
50.00
50.00
35*6-43.33*6=-50
5
2
100.00
100
4
1
6
MC
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Q
Produce an output of 6 in shortrun if fixed costs are sunk.
30
What output maximizes profits if the marginal revenue for
each unit the firm sells is $25? What are these profits?
MC
50
80
20
70
90.00
66.67
60
52.50
20
5
20.00
26.00
46.00
30
6
7
8
16.67
14.29
12.50
26.67
28.57
31.25
11.11
34.44
10.00
38.00
10
50
0
42.86
43.75
45.56
48.00
30
40
70
10
AVC
20
43.33
60
9
40
AFC
10
27.50
ATC
50
9
25.00
$/Q
10
4
MC
8
33.33
30
7
33.33
40.00
90
150.00
6
3
50.00
50.00
25*5-46*5=-105
5
2
100.00
5?
4
1
100
3
ATC
-
2
AVC
-
1
AFC
-
0
Q
0
Q
Better off producing 0 so
profits=-FC=-100
31
Short-Run Profit Maximizing Rule
 Produce
at an Output where
Marginal Revenue = Marginal Cost
(MR)
(MC)
if Total Revenue > Variable Cost
[When the firm cannot price discriminate, this is
the same thing as saying as long as
Price > AVC (from P*Q > AVC*Q) ]
32
Monopoly Characteristics
1.
2.
3.
There is a single seller
There are no close substitutes
for the good
There are extremely high
barriers to entry
33
Monopolist Marginal Revenue
TR
(with no price discrimination) MR 
Q
P
Q TR MR
10
0
+9
1 9
+7
2 16
+5
3 21
+3
4
3
D
2
1
11
10
9
8
7
MR
Note that Marginal Revenue for a given
unit is plotted at the midpoint of that unit.
34
12
Q
0
6
+1
-1
-3
-5
-7
-9
5
0
5
4
10
6
3
0
7
2
24
25
24
21
16
9
8
1
2
1
4
5
6
7
8
9
5
4
3
9
0
0
9
8
7
6
10
Use Calculus to Obtain MR curve for Linear
Demand Curve

Demand Curve:
Slope of D
 P=a-bQ
 TR

= (a-bQ)Q

=aQ-bQ2
 MR

=ΔTR/ ΔQ =∂TR/ ∂Q
Slope of MR

=a-2bQ
[In prior graph, a=10 and b=1]
35
Monopoly


If the firm’s goal were to
maximize total revenue,
where would it produce?
P=$5; TR=$25
10
9
8
7
6
5
4
3
D
12
11
10
9
8
7
6
5
4
3
2
Q
1

Will a monopolist ever charge a2
price less than $5?
1
What price will the monopolist 0
charge?
0

MR
36
Monopoly Maximizing Profits


If the monopolist
maximizes profits, where
would it produce?
At an output where
MR=MC as long as
P>AVC.
10
9
MC
8
7
ATC
6
5
AVC
4
3
2
D
1
12
11
10
9
8
7
6
5
4
3
2
0
1
This is at an output of
Q=4 so a price of P=6.
0

Q
MR
37
MATH BEHIND: Maximizing Profits
being where MR=MC
MaxQ Profits = MaxQ TR(Q)-TC(Q)
so profits are maximized where
TR TC

 MR  MC  0
Q
Q
Or where,
MR  MC
Applies when Q>0
38
Monopoly Maximizing Profits
TR
10
9
Profits
MC
8
7
ATC
6
5
AVC
4
3
2
D
1
12
11
10
9
8
7
6
5
3
2
1
0
0
4
At Q=4 and P=6, what
is Total Revenue?
TR=P*Q=6*4=24
 At Q=4, what are Total
Costs?
TC=ATC*Q=4.5*4=18
 At Q=4 and P=6, what
are Profits?
Profits=TR-TC=24-18=6
Or
Profits=P*Q-ATC*Q
=(P-ATC)*Q
=(6-4.5)*4=6

Q
TC
MR
39
Monopolist in Long Run
What should this
monopolist do in the
Long Run assuming
that the monopolist
thinks his costs will not
change and neither will
demand?
Keep producing Q=4 or
change plant size
depending if there is a
plant size that would
result in greater profits.

10
9
Profits
MC
8
7
ATC
6
5
AVC
4
3
2
D
1
12
11
10
9
8
7
6
5
4
3
2
1
0
0
Q
MR
40
Monopolist in Long Run
Profits

What should this
monopolist do in the
Long Run assuming
that the monopolist
thinks his costs will not
change and neither will
demand?
10
MC
9
8
ATC
7
6
AVC
5
4
3
1
12
11
10
9
8
7
6
5
4
3
2
1
0
0
Exit the industry or change
plant size depending if
there is a plant size that
would result in positive
profits given demand
curve.
D
2
MR
41
Monopolistic Competition
Characteristics
1.
2.
3.
There are many buyers and
seller
Each firm in the industry
produces a differentiated product
There is free entry into and exit
from the industry
[Think bakery or coffee shop in big city.]
42
Bakery in a Monopolistically Competitive Industry
Maximizing Profits in the Short Run
13
12
 If bakery maximizes
11
profits, where would it
10
produce?
9
Where MR=MC which is at 8
an output of Q=3.5 so a 7
6
price of P=8.
5
 What are the bakery’s
4
profits?
3
TR-TC=P*Q-ATC*Q
2
=8*3.5 - 6.25*3.5 = 6.12 1
0
MC
ATC
AVC
10
9
8
7
6
5
4
3
2
1
0
D
Q
MR
43
Bakery in a Monopolistically Competitive Industry
Maximizing Profits in the Long Run
In long-run if the bakery 12
is making positive
11
economic profits, we
10
9
would expect other
8
bakeries to enter
7
causing a reduction in
6
demand.
5
 What are maximum
4
profits when demand is
3
D’?
2
Q=3 so a price of P=6.67.
1
Profits=P*Q-ATC*Q
0
=6.67*3-6.67*3=0

MC
ATC
AVC
10
9
8
7
6
5
4
3
2
1
0
D’
Q
MR
44
Review of Profit Maximization (when setting a single price)
45
Marginal Revenue from 5th Unit is just the shaded area
below. This area is $11.
20
18
MC
When the MR curve
is linear, the area
under the MR curve
can be obtained by
just taking the MR at
Dthe midpoint of the
quantities – in this
case at 4.5.
16
14
ATC
12
$/unit
AVC
10
8
6
4
2
0
0
1
2
3
4
5
6
The orange area is the
same as the purple
area.
7
8
9
10
Q
11
12
13
MR
14
15
16
17
18
19
20
46
Marginal Cost of 5th Unit is just the shaded area below.
This area is $9.
20
18
MC
When the MC curve
is linear, the area
under the MC curve
can be obtained by
taking the MC at
D the midpoint of the
quantities – in this
case at 4.5.
16
14
ATC
12
$/unit
AVC
10
8
6
4
2
0
0
1
2
3
4
5
6
7
The purple area is the
same as the red area
8
9
10
Q
11
12
13
MR
14
15
16
17
18
19
20
47
Change in Profits associated with producing
5 Units rather than 4 units.
20
18
MC
Yellow area is
change in profits
associated with
producing 5 units
rather than 4 units.
DThis area is $2.
16
14
ATC
12
$/unit
AVC
10
8
6
4
2
0
0
1
2
3
4
5
6
7
Subtract MC of 5th unit
from MR of 5th unit–
brown area from purple.
8
9
10
Q
11
12
13
MR
14
15
16
17
18
19
20
48
Review of Profit Maximization (when setting a single price)
49
PROFIT MAXIMIZATION
Profits are
maximized at an
output where
MR=MC which is
Q=5. Price is 15
and ATC is 11.2 at
Q=5.
20
18
MC
16
15
14
ATC
12
11.2
$/unit
AVC
10
D
8
Profits are then
15*5-11.2*5=19
6
4
2
0
0
1
2
3
4
5
6
7
8
9
10
Q
11
12
13
MR
14
15
16
17
18
19
20
50
The Nature of
Industry
51
Case Study
February 20, 1986:
 Coca Cola announced intentions to
purchase Dr Pepper
 Pepsi announced intentions to buy SevenUp
 The FTC (Federal Trade Commission)
announced decision to oppose
 Pepsi withdrew; Coca Cola persisted

52
FTC’s Ranking of Competitiveness: Concentrated
Case Study
Producers in 1985
Coca-Cola
PepsiCo
Philip Morris (7-up)
Dr. Pepper Co
R.J. Reynolds (Sunkist, Canada Dry)
Royal Crown Cola
Proctor and Gamble (Orange Crush,
Hines)
Others (supermarket brands)
Herfindahl Index (no merger)
37.42+28.92+5.72+4.62+3.02… = 2324
4-Firm Concentration Ratio
37.4+28.9+5.7+4.6 = 76.6
Share
37.4%
28.9
5.7
4.6
3.0
2.9
1.8
15.7
53
Case Study
Producers in 1985
Coca-Cola + Dr. Pepper
PepsiCo
Philip Morris (7-up)
R.J. Reynolds (Sunkist, Canada Dry)
Royal Crown Cola
Proctor and Gamble (Orange Crush,
Hines)
Others (supermarket brands)

Herfindahl with merger
422+28.92+5.72+3.02… = 2668
Share
37.4+4.6=
42.0
28.9
5.7
3.0
2.9
1.8
15.7
54
Anti-trust Enforcement
Department of Justice /Federal Trade
Commission Enforcement

FTC Horizontal Merger Guidelines
http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html

FTC Competition Enforcement Reports
http://www.ftc.gov/search/site/competition%20enforcement%20report
55
DOJ/FTC Horizontal Merger Guidelines
The Guidelines describe the analytical process that the Agency will
employ in determining whether to challenge a horizontal merger. First,
the Agency assesses whether the merger would significantly increase
concentration and result in a concentrated market, properly defined and
measured. Second, the Agency assesses whether the merger, in light of
market concentration and other factors that characterize the market,
raises concern about potential adverse competitive effects. Third, the
Agency assesses whether entry would be timely, likely and sufficient
either to deter or to counteract the competitive effects of concern.
Fourth, the Agency assesses any efficiency gains that reasonably
cannot be achieved by the parties through other means. Finally the
Agency assesses whether, but for the merger, either party to the
transaction would be likely to fail, causing its assets to exit the market.
The process of assessing market concentration, potential adverse
competitive effects, entry, efficiency and failure is a tool that allows the
Agency to answer the ultimate inquiry in merger analysis: whether the
merger is likely to create or enhance market power or to facilitate its
exercise.
56
The general standards for horizontal mergers are
as follows:
a) Post-Merger HHI Below 1000. The Agency regards markets in this
region to be unconcentrated. Mergers resulting in unconcentrated
markets are unlikely to have adverse competitive effects and ordinarily
require no further analysis.
b) Post-Merger HHI Between 1000 and 1800. The Agency regards
markets in this region to be moderately concentrated. Mergers
producing an increase in the HHI of less than 100 points in moderately
concentrated markets post-merger are unlikely to have adverse
competitive consequences and ordinarily require no further analysis.
Mergers producing an increase in the HHI of more than 100 points in
moderately concentrated markets post-merger potentially raise
significant competitive concerns depending on the factors set forth in
Sections 2-5 of the Guidelines.
57
c) Post-Merger HHI Above 1800. The Agency regards markets in this
region to be highly concentrated. Mergers producing an increase in the
HHI of less than 50 points, even in highly concentrated markets postmerger, are unlikely to have adverse competitive consequences and
ordinarily require no further analysis. Mergers producing an increase in
the HHI of more than 50 points in highly concentrated markets postmerger potentially raise significant competitive concerns, depending on
the factors set forth in Sections 2-5 of the Guidelines. Where the postmerger HHI exceeds 1800, it will be presumed that mergers producing
an increase in the HHI of more than 100 points are likely to create or
enhance market power or facilitate its exercise. The presumption may
be overcome by a showing that factors set forth in Sections 2-5 of the
Guidelines make itunlikely that the merger will create or enhance
market power or facilitate its exercise, in light of market concentration
and market shares.
58
Concentration Measures by
SIC/NAICS Code

Department of Census
http://www.census.gov/epcd/www/concentration.html
http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml

Retail Bakery (311811)
 2002
4- firm CR = 4.0, HI=8.0
2007 4- firm CR = 3.7, HI=7.3

Soft Drink Manufacturing (312111)
 2002
4- firm CR = 46, HI=709
 2007 4- firm CR = 58, HI=1,095
59
Problems with using only CR and
HI to proxy for level of competition
1)
2)
3)
4)
5)
Often difficult to Define Relevant Market
Does not take into account Entry Barriers
Cannot necessarily equate more
concentration with less competition
Merger may increase efficiency which may
benefit consumers
Must consider how industry is likely to evolve
with and without merger
60
Major Changes in CSD Industry Post-1985
1.
2.
3.
4.
7-Up and Dr. Pepper merged in late 1986 and
Cadbury-Schweppes purchased them in 1995.
Cadbury-Schweppes also acquired a number
of other brands including Canada-Dry, Sunkist,
A&W, Crush and Hires.
Technological change results in greater
economies of scale associated with bottling.
Coca-Cola and Pepsi vertically integrate by
acquiring a number of their bottling companies.
Diet CSDs’ market share has increased (from
25.9% in 1999 to 30.2% in 2004).
61
http://www.youtube.com/watch?v=dVfUo6NzTKE
62
63