Description
I will provide all Module 4 documents upon tutor accepting bid.
Directions:
Please follow the instructions on the syllabus indicating how to complete and turn in this assignment. Note that effort is important here – these are big questions/issues and you should put careful and detailed thought into your answers.
(5 points) Kroger is a major, national grocery chain that has proposed to merge with another large grocery chain (Albertsons). As you know from this module, the concern of such large mergers is that it will cause inefficiencies in our economy stemming from monopoly power. Please read the following article and describe what you believe are the efficiency trade-offs the surround the decision of whether to allow this merger or not. Finally, if you were in charge of this decision at the Justice Department, would you allow the merger? Why or why not? Hint: be sure to focus on efficiency as defined and described in this module – do not stray into lines of thinking outside of economic efficiency.
https://www.reuters.com/markets/deals/kroger-albertsons-unions-antitrust-experts-urge-ftc-block-merger-letter-2022-11-03/
(5 points) We have all been “ripped off” in an economic transaction. A transaction where we have felt powerless and the other party knows this and exploits their power. If we are the buyer, we end up paying a price we know is far higher than their marginal cost and/or the quality and service associated with the purchase is horrible. Foundationally, our problem is that we are dealing with a seller who has monopoly power.
I would like you fully describe a personal economic transaction of this sort. What is the source of the monopoly power in your example, and how was it used? Will this monopoly power last? Why or why not? And, lastly, should there be government intervention to address this? Why or why not? Note: Do NOT do a good search or default to an electric company example or some other textbook case – I want you to come up with your own and unique example – if you grabbed one from the module or from an internet search you will not receive any credit!
Unformatted Attachment Preview
Managerial Economics
Problem Set 4
Directions:
Please follow the instructions on the syllabus indicating how to complete and turn in
this assignment. Note that effort is important here – these are big questions/issues
and you should put careful and detailed thought into your answers.
1. (5 points) Kroger is a major, national grocery chain that has proposed to merge with
another large grocery chain (Albertsons). As you know from this module, the
concern of such large mergers is that it will cause inefficiencies in our economy
stemming from monopoly power. Please read the following article and describe
what you believe are the efficiency trade-offs the surround the decision of whether
to allow this merger or not. Finally, if you were in charge of this decision at the
Justice Department, would you allow the merger? Why or why not? Hint: be sure
to focus on efficiency as defined and described in this module – do not stray into
lines of thinking outside of economic efficiency.
https://www.reuters.com/markets/deals/kroger-albertsons-unions-antitrust-experts-urgeftc-block-merger-letter-2022-11-03/
2.
(5 points) We have all been “ripped off” in an economic transaction. A transaction
where we have felt powerless and the other party knows this and exploits their
power. If we are the buyer, we end up paying a price we know is far higher than
their marginal cost and/or the quality and service associated with the purchase is
horrible. Foundationally, our problem is that we are dealing with a seller who has
monopoly power.
I would like you fully describe a personal economic transaction of this sort. What is the
source of the monopoly power in your example, and how was it used? Will this monopoly
power last? Why or why not? And, lastly, should there be government intervention to
address this? Why or why not? Note: Do NOT do a good search or default to an electric
company example or some other textbook case – I want you to come up with your own and
unique example – if you grabbed one from the module or from an internet search you will
not receive any credit!
Module 4: Summary
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Markets are generally efficient, BUT:
This says nothing about equity
Only if markets are perfectly competitive
The less competitive the economic environment the higher the mark-up
Note: there are many other causes of market failure such as externalities, public goods,
ect…
Let’s wrap up this module with a focus on public policy towards competition.
Public Policy Towards Monopoly Power:
Note: this is a potentially huge literature – we are only covering the basics here…
There are three alternative ways of attempting to generate greater social welfare.
1. Antitrust Laws: These laws exist to prevent firms from taking anticompetitive
behavior, such as the case when two dominant firms merge to form a dominate
player.
Antitrust laws are difficult to implement in practice because showing that a potential
change in the market will lead to anticompetitive behavior is difficult – it requires being
able to accurately estimate changes in the demand and cost characteristics of the industry
– which are often unique and unpredictable. Nevertheless, antitrust laws exist to help
ensure that markets in the U.S. become more competitive rather than less.
2. Regulation: Government can impose price controls and production decisions
(such as whether or not a firm invests in new machine upgrades). Essentially, we
can require the firm to produce at the socially optimal level of output and charge
the perfectly competitive price.
Again, regulation is difficult, because essentially what regulators want to do is make the
firm set P = MC. But where are the regulators going to obtain the cost data? From the
firms! Firms certainly have an incentive to report costs that are higher than their true
costs, and it is often difficult for governments to effectively evaluate the data from the
firms.
3. Government ownership: The idea here is for the government to control
production and thereby ensure that the socially optimal level of production takes
place.
Historically, the U.S. has favored applying 1 and 2 to the issue of monopoly power, and
has rarely used option 3. In contrast, many western European countries tend to adopt
option 3 regularly (For example, AirFrance is a government owned Airline).
To conclude from a managerial decision-making perspective:
These extreme forms of competitive market analyses are important, but for most firms
they operate somewhere in-between. To analyze these situations we need a new tool,
which will be the focus of the upcoming module.
Competition and Decision-Making:
Think about the initiatives your company is engaged in – I suspect some of them are cost
related: how to reduce costs and raise profits (especially when times are tough). Some of
them are increasing your demand curve.
And some are designed to both increase demand AND make your demand curve steeper
(often you may hear “competitive advantage” as a rationale).
When you think about demand side initiatives it is useful to decompose them into:
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Increasing market demand overall and, as a result, your individual demand curve
(market shares remain the same). For example, maybe you and fellow breweries
put together a beer festival aimed at increasing interest in craft beer in the area.
Increasing your demand at the expense of rivals. Overall demand remains the
same, but your market share increases. You increase your advertising.
Increasing your demand and make it steeper: you send your beer off to a top
reviewer and get a 100 point review.
Module 4: Part 2
Last time we discussed the notions of productive and allocative efficiency. We are
concerned with whether free markets essentially make the best use of society’s scarce
resources. Are free markets a good way to manage economic activity?
We now focus on a different notion of efficiency.
Meaning of good outcomes, part 2:
Another (related) way of thinking about this is to realize that all economic activity
generates “well-being” in society.
So, we could ask:
“Do markets generate the greatest possible economic well-being?”
To answer this we need to:
1. determine where well-being comes from
2. figure out how to measure it
3. see if our measures of well-being are greatest when we let markets manage our
economy
Let’s tackle 1 first:
Let’s use an example to help clarify our thoughts.
Suppose I have a car I want to sell, and you’d like to buy it.
Here is a potential economic activity, and we first want to see where well-being could
come from.
Well, when I sell my car to you there are two people who could benefit – me and you.
That is, we have:
Well-being of the consumer: Let’s call this “consumer surplus” or CS
Well-being of the producer: let’s call this “producer surplus” or PS
Now, there will be cases when people not directly involved in the transaction may be
impacted by it, but generally it’s the case that the producer and consumer are the prime
potential beneficiaries of the transaction.
So….
Total economic well –being (total surplus or TS) = CS + PS
Module 4: Part 3
Recal we are thinking about whether markets are efficient, and we introduced the idea of
well being for consumers (CS) and producers (PS) as a way to measure efficiency.
Let’s start to incorporate the ideas of efficiency into a market supply and demand graph.
The supply and demand graph shows you how markets work and what outcome will
result. We want to see if this outcome is efficient in terms of generating the greatest
economic well-being (TS).
To do this – we will first define some concepts more formally, and then define them
within the context of a market graph.
Consumer Surplus:
The basic intuition of consumer surplus is: whenever a buyer purchases something they
were most likely willing to pay more than the price they actually paid. Anytime the price
you pay is less than what you were willing to pay you gain. The bigger the difference,
the bigger the gain.
Back to our example: Suppose we agree on a price of $2000 for the car, but you were
willing to pay $3000 for it. Then, your gain, your CS is $1000.
So, we have the following definition:
CS = willingness to pay – price paid
Or,
CS = Value to buyer – price paid.
Producer Surplus:
The basic story here is more complicated than consumer surplus. I’ll start with the most
straightforward explanation, and then get into the details…
Back to our example: I’m selling my car, and I probably have in my mind the lowest
price I’d be willing to accept. Suppose that this lowest price is $1000.
So, if I were willing to sell for $1000 and I received a price of $2000, then my PS is
$1000.
So, we have the following definition:
PS = price received – lowest price willing to sell
Or,
PS = price received – willingness to sell
For a minute, let’s think about this willingness to sell value. How low of a price am I
willing to sell it for? Well, it could be that my friend has agreed to buy it for $1000 if I
get no takers, or it could be that at a price less than $1000 I’d rather have the car then the
money. Either way, what I am doing is essentially using the notion of opportunity cost –
the next best alternative to the offer at hand. If the offer you make me is less than my
next best alternative, then I’ll choose the alternative rather than your offer.
In short, willingness to sell equals cost (roughly speaking….)
Total Surplus:
Total surplus will measure the total economic well being derived from economic activity.
We define TS as:
TS = CS + PS
In the car example, you earned $1000 of CS and I obtained $1000 of PS, as a result, we
have:
TS = $1000 + $1000 = $2000
Intuition: think about it: I have a car that is only worth $1000 to me. How do I know?
Because if I could sell the car for as little as $1000 I’d rather have the money than the car,
but any price below $1000 then I’d prefer to keep the car. The car gives me a $1000
worth of value. For you, the car is worth $3000 – that is how much money you would be
willing to give up in order to purchase the car. Anything more than $3000 and you’d
pass on the car, but any price less than $3000 then you’d prefer the car to the money.
For society, the car should be in your hands, not mine. Why? Because the transaction
would be mutually beneficial – your economic well being would increase and so would
mine.
Impact of a price change:
Suppose you are a better negotiator than I am, and the price we agree on is $1500 rather
than $2000.
Question: Has total surplus changed in society? Nope. It has just been redistributed
more towards you and less towards me, but overall well being stays the same.
Price changes, by themselves, do not impact overall well being.
As an example – think about scalping: is that economic activity efficient? Does it
improve TS? The answer is yes – scalping involves trade that is mutually beneficial:
both CS and PS improve.
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