Transcript ECONOMICS 3150B

ECONOMICS 3200M
Winter 2013
Professor Lazar
N205J Schulich
[email protected]
416-736-5068
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ECONOMICS 3200M
Lecture 1
Ch. 19, 20
January 9, 2013
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Course Requirements
• Three tests
• February 6 @ 14:30; March 13 @ 14:30; Exam period in
April
• 30%, 30%, 40%
• Format: 3 questions of 6 – short essays
• Open book: No cell phones, no wireless communication
devices
• No excuses for missing first two tests
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Other Ground Rules
• No taping of lectures
• No cell phones in class, including text
messaging!
• Responsible for all chapters in text except chapter 18
• Listen before you write
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Office Hours
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Thursdays: 14:00-17:00
N205J, Schulich
Phone: 736-5068
Email: [email protected]
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Objectives
• Focus of the course: Examine real-world competitive
behavior, and highlight the theoretical limitations of
traditional microeconomic theories
• Study different market structures
– Consider how these structures develop and evolve over time
– Implications for competitive behavior
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Disclosure: Personal Bias
• Theoretical underpinnings of competition policy and competition law
have not yet incorporated the work of Michael Porter
• Porter’s work, which builds upon that of Schumpeter emphasizes that
companies strive to create a competitive advantage
– Those that succeed outperform their competitors and are most likely to
dominate their markets
– The laggards eventually exit the industry
• Competition policy tends to inhibit companies from freely developing
competitive advantages because the successful companies are likely to
be constrained in their ability to exploit their advantages
– The long-run consequences of this are much more significant than the
supposed loses in consumer welfare resulting from a reduction in the
number of unsuccessful “competitors”
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Disclosure: Personal Bias
• According to Schumpeter, the competitive gales of creative
destruction, the product of entrepreneurs, drive the capitalist system
forward and produce the dramatic improvements in standards of living.
• If one were to compare the top 25-100 companies on the Fortune 500
list in 1970 and the list in 2013, one would find that there has been a
dramatic turnover in the list
– All of these changes have taken place and will take place without the
intervention of competition policy
– Consider: Kodak, Xerox, Microsoft, Sony, Zenth, Sears, TWA, AIG,
Bank of America, Barnes & Noble, HMV, Eaton’s, GM, US Steel,
Motorola, Nokia, RIM, Dell
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Creative Destruction
Schumpeter on capitalism
• “This process of creative destruction is the essential fact
about capitalism. It is what capitalism consists in and what
every capitalist concern has got to live in.”
• “The function of entrepreneurs is to reform or
revolutionize the pattern of production by exploiting an
invention or more generally an untried technological
possibility for producing a new commodity or producing
an old one in a new way.”
• “The essential point to grasp is that in dealing with
capitalism we are dealing with an evolutionary process.”
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Top 15 Fortune 500 Companies (Sales)
2011
1. Wal-Mart
2. Exxon Mobil
3. Chevron
4. Conoco Phillips
5. Fannie Mae
6. GE
7. Berkshire Hathaway
8. GM
9. Bank of America
10. Ford
11. HP
12. AT&T
13. JP Morgan Chase
14. Citigroup
15. McKesson
1970
1. GM
2. Exxon
3. Ford
4. GE
5. IBM
6. Chrysler
7. Mobil
8. Texaco
9. ITT Industries
10. Gulf Oil
11. AT&T
12. US Steel
13. Chevron
14. LTV
15. DuPont
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Top 30 Global Companies (Market Value, (US$ Billions)
2012
1. Apple (559)
2. Exxon Mobil (409)
3. Petro China (279)
4. Microsoft (271)
5. IBM (242)
6. Industrial & Commercial Bank of
China (236)
7. Royal Dutch Shell (222)
8. China Mobile (221)
9. GE (212)
10. Chevron (212)
11. Wal-Mart (208)
12. Nestle (207)
13. Berkshire Hathaway (201)
14. China Construction Bank (193)
15. AT&T(185)
16. Proctor & Gamble (185)
17. Samsung Electronics (182)
18. Johnson & Johnson (181)
19. Wells Fargo (180)
20. BHP Billiton (180)
21. JP Morgan Chase (176)
22 Petrobas (171)
23. Pfizer (171)
24. Coca Cola (168)
25. Google (165)
26. HSBC (161)
27. Philip Morris (153)
28. Novartis (152)
29. Roche (151)
30. Toyota Motors(150)
Total Market Value: $6.4 T
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Other Notable Companies
• Gazprom (31); Vodafone (36); Anheuser-Busch InBev
(40); Sinopec (54); Amazon.com (60); Saudi Basic
Industries (63); LVMH (64); SAP (66); Royal Bank of
Canada (67); Comcast (71); Home Depot (78); Rosneft
(79); Taiwan Semiconductor (82); Sberbank of Russia
(86); Honda Motor (90); AMX (94); Visa (103); Inditex
(112); UPS (116); H&M (129); Ping An Insurance (131);
Lukoil (132); Nike (138); Reliance Industries (143); eBay
(145); Hyundai Motor (156); Tata Consultancy Services
(158); Barrick Gold (161); Teva Pharmaceutical (163);
Hutchinson Whampoa (167); Starbucks (172); Hon Hai
Precision (174); GM (183); Costco Wholesale (190);
Potash Corp’n (192); Target (195)
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Largest Canadian Companies (Market Value)
2006
1. Royal Bank
2. Manulife Financial
3. Bank of Nova Scotia
4. TD Bank
5. EnCana
6. Suncor Energy
7. Bank of Montreal
8. CIBC
9. Husky Energy
10. Canadian Natural Resources
11. RIM
12. Thomson
13. Barrick Gold
14. Sun Life Financial
15. CNR
16. Brookfield Asset Management
17. BCE
18. Rogers Communications
19. Alcan
20. Goldcorp
21. Talisman Energy
22. Petro Canada
23. Potash of Saskatchewan
24. Telus
25. Trans Canada
26. Teck Cominco
27. Nexen
28. Power Corp
29. Cameco
30. Nortel
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Largest Canadian Companies (Market Value)
2011
1. Royal Bank ($54 B)
2. EnCana (41)
3. RIM (41)
4. Imperial Oil (40)
5. TD (39)
6. Barrick Gold (33)
7. Bank of Nova Scotia (33)
8. Potash of Saskatchewan (31)
9. Canadian Natural Resources (29)
10. Suncor (28)
11. Goldcorp (28)
12. Manulife Financial (26)
13. Husky Energy (23)
14. CNR (22)
15. BCE (20)
16. Bank of Montreal (19)
17. TransCanada (19)
18. CIBC (19)
19. Rogers (18)
20. Great West Life (18)
21. Petro Canada (17)
22. Power Financial (15)
23. Talisman Energy (15)
24. Enbridge (14)
25. Sun Life Financial (14)
26. Kinross Gold (14)
27. Canadian Oil Sands (13)
28. Nexen (12)
29. Telus (11)
30. Brookfield Asset Management (11)
Total Market Value: $716 B
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Competition Law/Policy
• Canadian Competition Act
• S. 1.1
– Purpose: Maintain and encourage competition in Canada in order
to
• promote the efficiency and adaptability of the Canadian economy,
• expand opportunities for Canadian participation in world markets,
• ensure that small and medium-sized enterprises have an equitable
opportunity to participate in the Canadian economy and
• provide consumers with competitive prices and product choices
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Competition Law/Policy
• S. 61: Price maintenance (Resale price maintenance)
• (1) No person who is engaged in the business of producing or
supplying a product, who extends credit by way of credit cards or is
otherwise engaged in a business that relates to credit cards, or who has
the exclusive rights and privileges conferred by a patent, trade-mark,
copyright, registered industrial design or registered integrated circuit
topography, shall, directly or indirectly,
– (a) by agreement, threat, promise or any like means, attempt to influence
upward, or to discourage the reduction of, the price at which any other
person engaged in business in Canada supplies or offers to supply or
advertises a product within Canada; or
– (b) refuse to supply a product to or otherwise discriminate against any
other person engaged in business in Canada because of the low pricing
policy of that other person.
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Competition Law/Policy
• S. 78: Abuse of dominant position
– (a) squeezing, by a vertically integrated supplier, of the margin available to an
unintegrated customer who competes with the supplier, for the purpose of impeding
or preventing the customer’s entry into, or expansion in, a market;
– (b) acquisition by a supplier of a customer who would otherwise be available to a
competitor of the supplier, or acquisition by a customer of a supplier who would
otherwise be available to a competitor of the customer, for the purpose of impeding
or preventing the competitor’s entry into, or eliminating the competitor from, a
market;
– (c) freight equalization on the plant of a competitor for the purpose of impeding or
preventing the competitor’s entry into, or eliminating the competitor from, a
market;
– (d) use of fighting brands introduced selectively on a temporary basis to discipline
or eliminate a competitor;
– (e) pre-emption of scarce facilities or resources required by a competitor for the
operation of a business, with the object of withholding the facilities or resources
from a market;
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Competition Law/Policy
• S. 78: Abuse of dominant position
– (f) buying up of products to prevent the erosion of existing price levels;
– (g) adoption of product specifications that are incompatible with products produced
by any other person and are designed to prevent his entry into, or to eliminate him
from, a market;
– (h) requiring or inducing a supplier to sell only or primarily to certain customers, or
to refrain from selling to a competitor, with the object of preventing a competitor’s
entry into, or expansion in, a market;
– (i) selling articles at a price lower than the acquisition cost for the purpose of
disciplining or eliminating a competitor
– (4) In determining, for the purposes of subsection (1), whether a practice
has had, is having or is likely to have the effect of preventing or lessening
competition substantially in a market, the Tribunal shall consider whether
the practice is a result of superior competitive performance
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Competition Law/Policy
• Schumpeter recognized: companies that have succeeded in creating a
competitive advantage and gaining some degree of market power face
a choice:
– Defend the advantage through defensive tactics, many of which would be
similar to the anti-competitive acts described in the “Abuse of Dominant
Position” section of the Competition Act, and thus become fat and lazy
and an easy target for competitors; or
– Continue to innovate and take risks in order to create new competitive
advantages to maintain its market power – remain lean and hungry.
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Competition Law/Policy
• Consider the fate of the following:
– Eaton’s, Woolworths, Montgomery Ward, Kresge, Sears Roebuck and
Wal-Mart, Target, Inditex, H&M, Costco
– IBM and Microsoft, Microsoft and Google, Intel, Cisco, Oracle, Dell
– Nokia, RIM and Apple
– Barnes & Noble and Amazon
– Record labels – Universal, EMI, Sony, BMG, Warner
– Stelco, U.S. Steel
– PanAm, TWA, Eastern Airlines
– Xerox, Polaroid, Kodak, RCA
– Ford, Chrysler, GM
– Groupon
– Newspapers, magazines
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Competition Law/Policy
• Part VIII: Matters Reviewable by Tribunal
• Restrictive Trade Practices
• S. 75: Refusal to deal
– (e) the refusal to deal is having or is likely to have an adverse effect on
competition in a market
• S. 77: Exclusive dealing, tied selling and market restriction
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(2) Where, on application by the Commissioner or a person granted leave under section
103.1, the Tribunal finds that exclusive dealing or tied selling, because it is engaged in
by a major supplier of a product in a market or because it is widespread in a market, is
likely to
– (a) impede entry into or expansion of a firm in a market,
– (b) impede introduction of a product into or expansion of sales of a product in a
market, or
– (c) have any other exclusionary effect in a market,
– with the result that competition is or is likely to be lessened substantially, the
Tribunal may make an order directed to all or any of the suppliers against whom an
order is sought
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Competition Law/Policy
• (4) The Tribunal shall not make an order under this section
where, in its opinion,
– (a) exclusive dealing or market restriction is or will be engaged in
only for a reasonable period of time to facilitate entry of a new
supplier of a product into a market or of a new product into a
market,
– (b) tied selling that is engaged in is reasonable having regard to the
technological relationship between or among the products to which
it applies, or
– and no order made under this section applies in respect of
exclusive dealing, market restriction or tied selling between or
among companies, partnerships and sole proprietorships that are
affiliated
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Competition Law/Policy
• Cannot encourage competition – only the desire to succeed and gain a
competitive advantage encourages competition
• Cannot “promote the efficiency and adaptability of the Canadian
economy” – only the actions of senior management can do this, and
these actions will succeed only if senior management is properly
motivated and wise enough to recognize the advantages of being lean
and hungry
• Goal should be to promote dynamic efficiency with the resulting
improvements in productivity, competitiveness and standards of living
• Schumpeter: there is no reason to fear the creation of monopolies,
unless of course they are the creation of government
– The creation of monopolies through the creation and successful execution
of competitive strategies produces the long-term gains from the economy
and provides the basis for aggressive competition that sets the stage for the
process of creative destruction
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Competition Law/Policy
• S. 50: Illegal trade practices
• Price discrimination or predatory pricing having the effect
or tendency of substantially lessening competition or
eliminating a competitor, or designed to have that effect
– an indictable offence and liable to imprisonment for a term not
exceeding two years
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Competition Law/Policy
• What is meant by “lessening” competition?
• Defining market
– Product scope
– Geographic scope
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