In This Case, One May Be Better Than Two

Earlier this January Citigroup held its annual entertainment, media and telecommunications conference in Las Vegas, NV. Among the massive plasma screen televisions, human sized talking robots and Cash Money Millionaire CEOs, there was talk of the Satellite radio market and where it was headed. The duopoly-throne is held by big-tymers Sirius Satellite Radio and XM Satellite Radio. While both companies have grown rapidly and generated strong revenues and subscriber growth, they continue to lose money (See link below for the article).
Looking at struggle between the rival of East Coast and West Coast Hip-Hop industry, obvious comparisons can be made to shed light on the satellite radio industry. Notorious BIG led the East coast and Snoop Dog and Tupac Shakur led the West coast. While both of these groups were widely successful with their music, the competition and rivalry led to the deaths of Tupac, Biggie and many others. Would it not have been better to set aside differences and work together to create music for fans without violence? We think so.
Rather than the two satellite companies fighting it out and losing money (symbolized by the rap artist’s violence), they should merge together and provide a better service to all subscribers. The key here is the high economies of scale associated with high sunk costs (satellites), and low marginal costs as more subscribers are added. The satellite radio industry could also be described as a network economy, as more people purchase this good individual demand will increase. Economies of scale and network economies are two sources of a natural monopoly.
Sirius CEO Mel Karmazin spoke out to investors saying that this merger could be in the best interest of everyone. Given the nature of the industry and satellite radio’s many competitors, it seems the merger makes sense. With a regulated monopoly of satellite radio, the two powerhouses can join forces giving way to an economically sound provision of entertainment. In the words of Snoop, it sounds like this merger, “Ain’t nuthin’ but a G-Thang baby”. And by g-thang, he means good thing.
http://money.cnn.com/2007/01/10/news/companies/sirius/index.htm
Sirius-XM merger makes sense

Posted by Ain't nuthin' but a G-thang baby (not Jura)

The Electric Price Shock

The foundation of the Smithian economic model is that the market allows both allocative and productive efficiency. Such a market, now the standard for industries such as telephone companies, airlines and trucking, achieves this by forcing producers to compete to offer their good for the lowest price, thus saving consumers money. This, however, has not been the case for the business of generating electricity. After opening to competition over a decade ago, a truly competitive market for electricity production has yet to develop.

Advocates of the new system, such as Joseph T. Kelliher, the chairman of the Federal Energy Regulatory Commission, hold that eventually “market discipline will deliver the best prices.” Some argue that change can already be seen. Mark L. Fagan conducted a study that concluded that the new system often produces better results. Fagan argues that in 12 of 18 states that restructured, “prices were lower for industrial customers than they would they would have been under the old system.” Proponents of this system, however, seem to be quickly losing support to those who want to return to an updated version of the old system, in which states had rate-setting power.

Critics of introducing competition into the utility industry believe that the new system is not effective and, among other things, “can be manipulated to drive up prices, with the increases passed on to consumers.” Furthermore they argue that companies that produce electricity can withhold or limit it, further lifting prices. Many places, such as Baltimore, have already begun to experience heavy rate increases. Wary of these increases six states, including California, have suspended or delayed transition to the competitive system. Regardless of the debate, as of now, the market structure that led to “unambiguous drops in the prices of telephone calls, air travel and trucking” has yet to work its magic for electricity.

by Carter Mann, Christopher Hildner, and Bradley Fromm

Article: http://select.nytimes.com/gst/abstract.html?res=F30C11FE35540C768DDDA90994DE404482

Wall Street vs. the FCC: Sirius-XM Merger?

Since the creation of the satellite radio industry, Sirius and XM Radio have dominated the market. So much so, that in analyzing and regulating the relatively new satellite radio market, the FCC classified the industry as a duopoly, with the two media giants as the only competitors in the business.

According to CNNMoney’s Paul La Monica, in the past few weeks, Wall Street analysts have been speculating about the possibility of a merge between Sirius and XM Radio. Sirius CEO Mel Karmazin, speaking at a Citigroup event in Las Vegas, said that a merger between the two companies could result in benefits across the board. Many analysts agree with this statement, speculating that if such a merge took place, the companies could redirect their huge marketing and advertising budgets into other areas and reduce the subscription cost to customers.

All of this speculation leaves out an important part of the merger equation. According to MediaWeek’s Jeffrey Yorke, the FCC already rejected a proposal for the two media companies to join forces in the summer of 2004. Since the duopoly that the two firms currently enjoy leaves them in a great position to make large profits, the FCC is not going to jump at the chance to allow them to consolidate into a single-firm monopoly. FCC Chairman, Kevin Martin, has said that the current regulations on the market are clear on the point that the industry must have two competing firms. The FCC is currently reviewing data on the ownership trends of 10 different media companies. This report, due sometime this spring, could influence the FCC’s ruling on a possible merger between Sirius and XM Radio.

This situation illustrates what can happen when the market and its regulating bodies are at odds. While the two companies may want merge, the FCC may decide that a merger is not in the best interest of consumers and the industry itself. It will be interesting to see what course of action Sirius and XM Radio decide to pursue and what regulatory action the FCC will take in response.

By Charles Thomas, Brian Rock, Zoey Wang, and Lian Ye

Works Cited:

CNNMoney - Sirius-XM Merger Makes Sense

MediaWeek - FCC Nixes Prospect of Sirius-XM Merger

Resurrecting Ma Bell?

Some of you have probably seen Stephen Colbert's rant about the recent AT&T-BellSouth merger. This $67 billion acquisition of BellSouth by AT&T comes close on the heels of last year's $6.7 billion Verizon-MCI and $16 billion AT&T-SBC mergers, and it would seem that the telecommunication industry is indeed returning to the old days of Ma Bell's phone monopoly. There are now only 3 remaining competitors: AT&T, Verizon, and Qwest - all of which consist of at least one Baby Bell. A more realistic picture of what things look like:

.

A quick history lesson for those that aren't familiar with it: Beginning in 1972, and taking effect in 1984, the Department of Justice undertook antitrust proceedings that led to the breakup of telecom monopolist AT&T ("Ma Bell"), which owned both local and long-distance telephone service throughout the US. AT&T lost all local service rights, relegated to long-distance only, but was also allowed to diversify into the computer industry (a venture which failed quickly). AT&T's local service was split into seven Regional Bell Operating Companies ("Baby Bells"), though they continued to hold local monopolies. Competition in the long-distance market, however, grew strongly as Sprint, MCI, etc. quickly entered the market. The immediate effect was a dramatic raise in the cost of local calls as the long-distance revenues from the previously coupled service provider could no longer underwrite the more costly local networks. On the bright side, long-distance rates did fall, but only to be driven back up by government regulations that transferred profits from long-distance to local companies (since it was the local companies that owned and operated the infrastructure).

Now, of the original seven bells, one remains free-standing (Qwest), two have been incorporated into Verizon, and four are in the newly constructed AT&T, seemingly bringing the market ever-closer to one large entity once again. This has gotten many consumer rights and industry watchdog groups up in arms, as they view this as an end to the idea of a Bell vs. Bell competitive utopia of sorts. Yet many economists think that this is not a bad thing at all and claim that it will actually help the consumer. The most obvious advantage of such mergers is the return of the consolidation that had originally allowed AT&T to defray costs between sectors of their company. The Bell breakup separated service providers from infrastructure owners, a situation that encourages advantages to be taken. But this is not the only reason why this deal isn't bad, the main one being that the market is a different place now than it was 20 years ago, with vastly changed technology. Plain old telephone systems (or POTS, as they are known) are becoming outdated as they are replaced by cell phones and Voice-over-IP (VOIP) systems. This is especially true in population centers, where technology takes off fast, but also where telecom companies stand to make the most profit (as they have the lowest installed infrastructure to users ratio). Continuing to provide service to rural areas becomes increasingly expensive as companies are forced to maintain "legacy" systems, and it makes sense to incorporate their service into consolidated vertical ownership so that none of these consumers are forced to pay egregious amounts for their small portion of total service - a return to the old cost-underwriting-for-public-service that was present under the old AT&T.

Another large argument for the mergers stems from the emerges of these new technologies. As POTS are phased out (in favor of cell phones currently), consumers' expectations from telecom companies are also changing drastically. Internet users want increasingly faster broadband connections to the web, and many previously distinct industries are converging towards this demand. Cable companies offer internet over their high-speed coaxial lines, phone companies continuously upgrade DSL/ADSL services, satellite companies improve their technology towards "spot beams" and other high tech names, and cellular/wireless companies promise impending high-speed access whereever their is cellular reception. With the internet poised to eliminate POTS forever with VOIP, all of these newly-competing companies are greatly enlarging the market for telecom services. The biggest craze today is for the lying of fiber optic lines to every consumer's house, an ultra-high speed link that would could replace all other connections (delivering voice, video, internet, etc. all over one huge capacity line). With so many companies rushing to give this to the consumer, competition is not suffering.

One valid concern about this merger is that AT&T will now own 100% of Cingular Wireles, the nation's largest (by a good margin) cellular provider. Once again, though, there are still plenty options for consumers currently, and the cellular market is one that has low enough entry costs (see Helio mobile, for example, which sprung out of nowhere), especially with the emergence of mobile virtual network operators who can coexist with current infrastructure owners. This is still the one aspect of AT&T's that needs the most attention, but it is not a situation of impending doom. It should also be noted that the US is behind other parts of the world in cell phone technology, and overseas service providers have been looking for opportunities to gain a foothold here as well - and in today's world, such globalization is another great protective device against unfair monopolistic practices.

Economists Robert Crandall and Clifford Winston threw down the one of the first gauntlets in favor of this merger back when it was intially announced, but they also provide an interesting critique of government antitrust regulation in general.


--posted by Risto Keravuori, Joseph Saunders, and Cheryl Kong

Boeing Benefits from Market Concentration

Boeing’s earnings release this morning recorded huge growth at the Chicago aerospace company. Net income more than doubled, and airplane manufacturing slots are filled for the next three years. In addition to the strength of its defense department, Boeing is riding on the growth of its commercial aircraft division and the introduction of the new Boeing 787 Dreamliner. It only helps that their only competitor, Airbus, has pushed back the introduction of their competing A380 due to production problems.

Wait… there’s been a huge boom in aerospace, but Boeing only has one competitor? What about zero economic profits? The commercial aircraft industry is one of the few examples where, because of a combination of sunk R&D costs and economies of scale, the market is structured with only two major players. If the lack of competition is alarming, throw in the role of government and you’ve got an industry that is at times highly controversial.

The two companies, both in their infancy and even now, receive hefty support from governments to finance their projects. Ideally, the subsidies and loans they receive should only balance out prohibitively costly barriers to ensure that the industry continues to exist. Rules policing the role of government support are outlined in a 1992 bilateral trade agreement and WTO regulations. In recent years, Boeing has accused Airbus (a European consortium) of receiving illegal subsidies from European governments. Airbus countered that US government contracts and tax breaks violate the previous trade agreements.

Although this conflict has yet to be resolved, both companies are benefiting from a huge boom in aircraft orders that will last through the end of the decade.

Post by: Holly Bui, Daniel Mendelson, Kevin Turner

Who Controls the Media?

By HoosAdvantage: Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung

In the absence of practical organic growth prospects, media industry executives have the urge to merge. This wave started a dozen years ago and has been marked by such deals as “Time merging with Warner, buying Turner Broadcasting, and then selling itself to America Online; Disney buying ABC; Viacom buying CBS; and Vivendi buying Universal. Later months have seen such combinations as Comcast and AT&T Broadband, EchoStar and DirecTV, Vivendi Universal and USA Networks.” A tide of activity in this sector over the past decade has provoked wide-ranging comment from the press, investment analysts, and other commentators. Critiques are concerned that it might not take too long for very concentrated conglomerates to control every image, radio and TV channel, and even the emerging internet service.

There is a state of oligopoly or monopoly in a given media industry. For example, movie production is known to be dominated by major studios since the early 20th Century. The music and television industries recently witnessed cases of media consolidation, with Sony Music Enterntainment's parent company merging their music division with Bertelsmann AG's BMG to form Sony BMG and TimeWarner's The WB and CBS Corp.'s UPN merging to form The CW. There is also a state of large-scale owners. This market structure exists for television broadcasting, cable systems and newspaper industries, all of which are characterized by the existence of large-scale owners. Concentration of ownership is often found in these industries. As a result, a small number of large companies lead to a very concentrated media and entertainment industry. To see a graph of Family Tree of the current media conglomerates:

With this concentrated market structure, the industry Learner Index is relatively high, thus the market outcome lies farther from the competitive case and the market power is being exploited more. Concentration of media ownership is very frequently seen as a problem of contemporary media and society. When media ownership is concentrated in the ways mentioned above, a number of undesirable consequences follow, including the following:

• For the general public, there are less diverse opinions and voices available in the media.
• For minorities and others, fewer opportunities are available for voicing their concerns and reaching the public.
• Healthy, market-based competition is absent, leading to slower innovation and increased prices.

Source: McKinseyQuarterly Media Merger: The wave rolls in

U.S. curbing deals with the enemy

By: Elite Economists

Shell recently joined with Spain and Iran to develop a new gas field in Iran. The development is aimed to take place about a year from now and become a new and very important source of income for Iran. This development would give Iran even more leverage in the international realm of politics and economics. As of now Iran has the second largest natural gas reserves, following Russia. This movement creates many issues for the U.S.

As an adversary to the United States as well as many other democratized nations, a move like this threatens the U.S. The U.S. created a law, Iran-Libya Sanctions Act in 1995 in which the U.S. will create a sanction against businesses and nations that invest too much in Iran’s energy source. This deal is currently under review and can possibly cause the U.S. to act on this business move.

The U.S. government is greatly affecting various economies with their aggressive government regulations. The pressure is on businesses and nations to avoid profitable dealings with American enemies. This deal would’ve bought in about 15 billion to Iran’s income every year. Even with countries and businesses in need of a financial advancement, I’m sure this is hard for them to swallow, especially when the business opportunities are right in front of their faces. This is once again an example of how the U.S. succeeds in controlling the world economy.

Source: "Big Shell Iran deal could bring U.S. sanctions"

Market for...Love?

With Valentine’s Day right around the corner, what better a time to talk about the ‘perfect substitute’ or the ‘perfect complement’ for all of us? Increasing demand for relationships from all the lonely singles out there has solicited tremendous growth in the on-line dating industry.

One particular dating service that had previously lost on-line subscriptions to racier social-networking sites has since become the largest online dating service in the United States. Here’s how Match.com did it. After a period of losing subscribers, Match.com revamped its focus audience such that it was geared towards people over 50 and divorcees. With older people getting “connected” more often, they’ve become an attractive target for a company that advocates “serious relationships.” By creating a new web-site designed towards usability, and by employing the psychological ‘talents’ of “Dr Phil” McGraw to create guides with advices on setting realistic relationship goals, Match.com has increased its online traffic to 4.3 million unique visitors per month; second only to Yahoo! Personals in terms of monthly visits to dating websites.

Match.com, owned by Barry Diller, incorporated the use of economies of scope to revamp the online dating market. Barry Diller also owns better known brands such as the loan exchange Lending Tree and the invitation service, eVite. As links and banners were cross-promoted on Diller’s broad range of media, more people were reached with each additional dollar spent.

Extremely high start-up costs in relation to advertising and technology restricted entry into the relatively small market for online dating (only eight major dating services), and thus the dating services that do exist have exhibited near monopolistic power in terms of the monthly fees and services that they charge. As the market structure and concentration remains the way it is, Match.com seems to be continually earning an increase in its quarterly revenue. Will other online services catch on to this market of old people?

http://coachingtip.blogs.com/so_baby_boomer/2007/01/boomers_and_onl.html

The Wall Stree Journal, How Match.com Found Love Among Boomers, January 27-28, 2006

Posted on behalf of Pamela Tsang, Thomas Li, and Chi Liu

Hostile Takeover in the Airline Industry?

Charlotte, Jeff, and Josh

http://money.cnn.com/2007/01/30/news/companies/delta_merger/index.htm

http://www.usatoday.com/money/biztravel/2007-01-30-usairways-delta-merger_x.htm

US Airways is beginning to second guess its plans for a hostile takeover bid of Delta Airlines. The creditors' committee of Delta, whose support for consolidation is necessary for the deal to go through, has been vacillating on a decision after US Air increased its bid for the company by 20% three weeks ago. Delta's management has been fighting consolidation in the hope that reorganization and a departure from bankruptcy protection can be quickly accomplished. Delta has secured financing from six large investment banks to emerge from bankruptcy in the spring, and has additionally promised to emerge from protection as a company open to mergers (without a "poison pill" prohibiting takeovers).

Delta has resisted a bid on the grounds that the two airlines have significant overlap in routes and that consolidation would merely lead to competitors doing the same to increase their own market share vis-a-vis the new US Air-Delta company. Delta had previously been rumored to be considering a merger with Northwest - a combination that to them could create a mutually beneficial relationship. US Air's chance at success in their takeover bid has been riddled with skepticism on the part of analysts. They seem to agree that it would be better to let Delta emerge from bankruptcy and see what the industry looks like after the company has a chance to reestablish itself. Talk by US Airways of further sweetening the deal has been met only with more skepticism.

Delta's belief in its ability to reaffirm its place in the airline industry and its distaste for the US Airways deal should be respected for the time being. If it is established that fares remain too low for the most efficient airlines to be profitable, then mergers and takeovers should be reconsidered. However, there seems to be better options for a merger (as with Northwest) in the marketplace, and at least for the consumer and airline quality, more competition and a less concentrated marketplace should at least be tested out. As airlines finally are becoming profitable five and a half years after September 11th, perhaps the market should simmer before being shaken up yet again.

Drug-dealer Drama: The hidden economics of pharmaceuticals

Meghan Magennis, Seon Hwang, Kristy Choi, Minsoo Park

http://www.washingtonpost.com/wp-dyn/content/article/2006/04/24/AR2006042401508.html

It turns out that the drug-dealer in the back alley isn’t the only one who has spent some time in court. In 2006, the Federal Trade Commission challenged brand-name pharmaceutical companies in Supreme Court for cutting deals with generic companies to delay the sale of cheaper drugs. The Federal Trade Commission discovered at least seven cases where brand-name drug companies paid generic drug manufacturers not to challenge their patent after it expired. The Washington Post explains that “the agreements allow the branded companies to maintain their patent exclusivity for longer periods, while the generic company receives money, for, in effect, dropping its challenge.”

In one case, Cephalon, Inc. convinced four generic companies to drop challenges to the patent of the sleep-disorder drug Provigil. All four generics agreed to steer clear of the market until 2011, and together they will receive licensing payments of $136 million from Cephalon.

This case illustrates that market power carries a multi-million-dollar price tag. Cephalon, and many other brand-name companies, are willing to pay others not to enter the market. By restricting the number of firms in the market, pharmaceutical companies can implement monopoly-like pricing schemes- pricing way above marginal costs. In other words, Cephalon is aiming to keep its Lerner Index high.

As long as big pharmaceutical names continue to cut deals with generic makers, consumers will have to pay brand-name prices. The Federal Trade Commission recognizes that these big-name agreements are making prescription drugs unaffordable for many citizens. The future of prescription drug prices lies in the hands of the Supreme Court, who will decide if these types of arrangements are legal.

Government Regulation Affecting Youtube and MySpace Abroad

The popularity of sites such as Youtube and MySpace has increased drastically over the last year. These sites allow users to make ‘video blogs,’ in which they can post media clips ranging from home videos to music videos to the most recent episode of popular television shows. In the arena of video-sharing, two of the most controversial debates center around piracy and censorship.
Last year, Google purchased Youtube for $1.65 billion, a price so high as a result of the mass volumes of copyrighted videos posted on the website. If it hadn’t been for those copyrighted materials such as episodes of 24 and The Simpsons that were floating on Youtube’s cyber-turf, the company’s value would have been much lower. Twentieth Century Fox has taken legal action and are requesting that these videos be removed from the site. Under US Federal regulations, copyrighted material is prohibited from being reproduced and distributed, thus creating a barrier to entry and limiting competition. However, in the UK, Youtube is not required to monitor its users’ posting. Therefore, barriers to entry are not as high abroad.
However, European users face a different kind of barrier to entry. In Europe, television services must be licensed, a regulation that helps to monitor advertising, hate speech and censorship for children. In general, television licensure is a barrier to entry and creates a monopolistic market. Until now, online video-sharing has not been affected by the regulations that apply to television licensure; however, the EU is pushing to extend broadcasting regulations to the internet. If this directive is adopted, it will create two barriers to entry – firstly, sites administering video-sharing will decline and secondly, users of these sites will be driven away. If these companies are forced to operate outside of the EU, the Member States will suffer high GDP losses.

Blog Post by Jake Carter-Lovejoy, Jessica Halper, Michael Ledwith, and Drew Muir

Articles:

http://business.timesonline.co.uk/article/0,,9071-2569108,00.html
http://www.timesonline.co.uk/article/0,,13509-2407359,00.html

Bankruptcies drastically fall down in 2006. So what’s the fuss about? You can get your money back!

By Sujin, Priya, Ziad

Most people tend to see government regulation as a negative; however, we found the 2005’s bankruptcy reform legislation to be effective. The legislation makes it harder for someone to simply renounce their debts by declaring bankruptcy. For basic information check out http://mahalanobis.twoday.net/stories/3194683/.


Some people think the legislation is unfair to the poor because most rules are broken disproportionately by the poor. There are more poor and also the reasons that revolve around the poor are correlated. But the legislation helps companies and corporations while enforcing contracts. In our opinion, the government’s decision to enforce this legislation has more benefits than costs.

Craig Newmark, an associate professor of Econ at North Carolina State University, writes in his online blog that one of his sources strongly agrees with the 2005 bankruptcy reform legislation. He states “the bottom line is that most of those prevented from declaring bankruptcy by the new law weren’t sympathetic, they were simple scofflaws, and are better off for having to pay their debts like responsible adults”. To read more view http://newmarksdoor.typepad.com/mainblog/.

Similarly, the article states “you can’t have a prosperous society without having prosperous companies”. Encouraging bourgeois virtues like temperance, diligence, thrift, and keeping one’s word can only help our society. So what’s the problem with the government encouraging people to keep their word and to pay their debts!

Wal-Mart will own the world someday…

Or maybe not, but they are taking serious steps to either purchase or become a bank. They currently have built alliances with financial service providers such as Money Gram International and Sun Trust Banks. The idea of Wal-Mart introducing itself fully into the banking industry sends shivers through retailers and other financial institutions alike. Wal-Mart has excellent economies of scope to expand a potential banking business to an enormous size due to the fact that it contains much of the physical capital it needs and has many stores all over the world which would facilitate money transfers. Besides this, it will eat up even more of the retail market by lowering prices and providing financial services and/or very attractive payment plans for purchases at its stores, thus capturing a new (very low) socio-economic market.

This seems like a great plan for Wal-Mart and for most of us, but it deters equitable and fair competition for other firms that suffer because of Wal-Mart’s huge economies of scope and its ability to have the lowest prices and maybe soon, the lowest loan rates. Banks and retailers who are in the market will lose a lot of customers and the barriers to entry into any of the two industries will be raised enormously if Wal-Mart reaches its objective.

The only force that can stop Wal-Mart right now is government regulation (specifically the FTC). The government may prohibit Wal-Mart from owning or operating a bank because this behavior may be perceived as anti-competitive. However, Wal-Mart is still exerting a lot of pressure in order to open up a bank. If and when they do, the government will make sure there are enough restrictions imposed upon Wal-Mart and its bank in order to foster healthy competition throughout the economy.

Always low prices and rates? We think not.

Sources: http://www.businessweek.com/magazine/content/05_06/b3919046_mz011.htm
http://www.epinet.org/content.cfm?id=2328
Authors: Adam Koussari-Amin, Amy Peckinpaugh, Braden Rotberg and Fabio Vanegas.

Office Depot? What's that?

Had anyone else not heard of the proposed merger between Office Depot and Staples that Jura mentioned in class? What happens when the government wants to prevent a merger? What sorts of evidence do they use? We decided to investigate the case.

The attempted acquisition of Office Depot by Staples, one of the office supply chain’s two leading rivals (the other being OfficeMax), is a prime example of modern anti-trust regulation in the U.S. Staples began preparing for the merge in early 1997 and was promptly sued by the Federal Trade Commission. The FTC sought an injunction in federal court barring the merge.

The government’s burden was to prove that the merger would be anti-competitive by analyzing firm behavior. Using Econometric analysis, the FTC demonstrated that prices for office supplies in Staples and Office Depot were lower in cities where the two competed head-to-head as opposed to those where only one of the stores had set up shop. To put this into terms we can relate to, look at one of the examples the FTC cited – file folders. In Orlando, where Office Depot competes with both Staples and OfficeMax, file folders cost $1.95. In Leesburg, Florida, a city some fifty miles away in which Office Depot is the only superstore, the same file folders will run you $4.17. Any this is according to Office Depot’s own ads!

The FTC argued that if the merger was permitted to go through, some forty markets across the country would be in Leesburg’s situation, containing only one of the three superstores. Notice how the FTC’s definition of the geographical market is critical – if Leesburg is lumped into Orlando’s market, the merger might go through. But as it stands defined, the FTC can show that the merger would tend to raise prices for consumers, and hurt their ultimate welfare. And a note to those of you considering going into business – don’t do what Office Depot did, which was to label its stores as located in “price zones” if they faced entry by other superstores, and “non-competitive” if they did not. Talk about the “smoking gun memo” for the FTC! In the face of such evidence, Staples’s argument that the newly merged company would face increased competition from non-office supply stores selling similar products (think Wal-Mart, Target) seemed to break down.

And so the proposed merger between Staples and Office Depot was rejected by a 4-1 decision of the federal court, and became one for the record books.

The FTC’s website, www.ftc.gov, is a great resource for more information on this attempted merger, especially the log of press releases and the testimonies of government officials.

Posted by Jung-In Choi, Katie Meyer, and Helen Mayer

FCC says "Yes" to More Local Cable Service Providers

On December 20, 2006, the FCC ruled that local governments should “speed up the approval process for new competitors [for providing cable services], cap the fees paid by new entrants, and ease requirements that competitors build systems that reach every home”¹according to the Associated Press. Is this FCC regulation of the cable service market fair?

Proponents of the FCC ruling state that the new regulation should allow more competitors into the cable service market through reducing demands of the local government to new entrants, which should lead to better consumer satisfaction with their cable service provider.

Opponents of the ruling argue that the new regulations will lead to “cherry picking”¹, where new cable providers will only better serve the rich neighborhoods, leading the rest of the consumers with their original cable service problems. In addition, opponents of the regulation believe that there will be loss of local oversight due to the “federalization” of the cable market and fewer funds available for public channels.

From an economic prospective, the answer to the question is no. The FCC regulation will get rid of the barriers to entry in the cable market that were set up by the local governments. If this is the case, then there should be an increase in consumer satisfaction of their cable service providers because there will now be more competitors in the market, which will allow consumers to have more options in choosing a good cable service provider.

There also should be no threat of “cherry picking” in the long run because all the firms will be more competitive, thus the old firms will offer incentives (e.g. lower prices) and the new firms will want to expand their services so that they have the largest consumer base possible from which to generate revenue.

The only unsolvable issue left in this case is the dispute between the powers of the local government and the federal government. Does the federal government have the right to impose these regulations on the local government? The answer must be a yes, since the federal government is a higher hierarchical bureaucracy than the local government. Furthermore, the federal government deals with issues that concern not only localities, but the U.S. economy on a much larger scale. Thus, it seems that this “unfair” FCC regulation is not so unfair after all.

Works Cited

¹“Local Governments: FCC Not Playing Fair” by John Dunbar

Posted By: Lance Wang, Chris Doyle, and Caryl Huynh

Economics of Scalping

By Jim Baltz, Wooi Yang Chang, and Brian Gavron

What’s interesting and relevant to our coursework in this week’s current events? How about the Super Bowl?

This brief article from the New York Times describes how the internet has changed the market for scalpers, people who sell tickets to events like the Super Bowl on the secondary market. There are thousands of these tickets on the market, each priced at an average of about $5,000 per ticket, a huge mark up from their $600-700 initial price since demand far exceeds the very limited supply.

In the past, one needed a scalper contact or waited until game day to purchase tickets from a random guy near the venue, often wondering if the tickets could be fake. Today, there exists a large variety of search sites online (try googling “Super Bowl tickets”), through which one can buy their tickets from hundreds of different sellers before game day. Many sites also guarantee the authenticity of their tickets, which is very important for this market that tends to have many forgeries. Market concentration is low, with most sellers offering 2-3 tickets, so competition is high. Increased transparency and competition through these sites have revolutionized the market.

This market is interesting because every ticket is unique, so there are technically very close substitutes within the market but not perfect substitutes. For example two seats next to each other are almost perfect substitutes. There are fewer substitutes as one moves further away from any given seat. Yet, the rate of change in substitutability is relatively slow for most of the stadium as one is only willing to pay so much extra to get a slightly better view of the field. That means cross price elasticity, if you consider every ticket as unique, is extremely high for similar goods, resulting in low price dispersion between sellers of similar goods (similar sections of the stadium). This is an example of how an educated consumer benefits. Sellers must charge very close to the market price or they will likely sell nothing. Note that prices may not be accurately represented initially on websites due to fees charged later (obfuscation).

Overall, researching and buying tickets through these sites is quick and easy, and will remain so in the future. Since search engines generally make a commission per sale, it is in their best interest to keep competition and transparency high. Thus, prices remain low so consumers use their site, and websites suffer less from decreased profits than the sellers.

I’m not sure if I’ll be one of those consumers in the near future, but if I wanted to, I’d rather buy re-sold tickets online than from a sketchy guy on the side of the road.

Go Bears!

Wireless over Wires

http://media.seekingalpha.com/article/7887

For our blog, we read an article about the telecommunications industry. The article stated that telecommunications companies put forth the initial investment to build a national infrastructure and should therefore be allowed to utilize it as they see fit, including the installation routers which violate the principle known as “net neutrality”.

We disagree with this position. While building the national infrastructure, telecommunications companies had the fixed cost of construction heavily subsidized by the federal government. Additionally, they were permitted to charge rates substantially above marginal cost without the threat of monopoly prosecution. Due to this economic assistance, we believe the infrastructure that supports the Internet is much more of a public good than it is portrayed as in the article. Thus, the government has a duty to regulate this contentious field.

We are not necessarily advocating for or against network neutrality legislation. However, we believe that the government has a duty to investigate the possible effects of network neutrality regulation. If it is found that such regulation would harm the research and development efforts of the telecommunications industry or hinder the creation/introduction of new generation of Internet products or services without providing substantial benefits to consumers, then government regulation should be avoided in this sensitive area. However, if the government investigation finds that the implementation of non-network neutral routers causes substantial harm to consumers, through decreased competition and increased prices, the government should impose net neutrality legislation to protect this valuable public asset.

FTC and DOJ probe anti-competitive practices in Private Equity

A recent concern about anti-competitive practices among Private Equity (PE) firms has caused the Justice Department to launch an investigation into PE funds. Two recent articles in the Wall Street Journal highlight the growing concern over potentially anticompetitive activity with regards to PE firms and the mergers and acquisition (M&A) market: "Carlyle Agrees to FTC Limits to Secure Kinder Morgan Deal" and "GE Sets Private-Equity Limits" .

The first article concerns The Carlyle Group's intended Buyout of Kinder Morgan, which, after FTC review, may only proceed if Carlyle gives up "daily involvement in running" Magellan Midstream, a company that competes in the energy distribution market with Kinder Morgan . The FTC contends that Carlyle's stake in these two companies could have threatened competition in 11 metropolitan areas, including Richmond, VA.

The second article discusses the bids that GE has solicited for it's plastics business, valued at approximately $10 billion. Sources contend that GE will not entertain club offers. The concern, for the DOJ, is that there maybe a potential lack of competition among these bidders: “The "club" issue has taken on greater significance since October, when the Justice Department launched an antitrust probe of private-equity funds. While the ostensible goal of forming buyout clubs has been to spread the risk of larger investments among the members of the club, some takeover professionals have voiced concern that clubs may also limit the number of competing bidders and the value of potential bids." (WSJ - GE article).

These two articles highlight the growing concern in the Antitrust Community that consumers, the beneficiaries of antitrust regulations such as the Sherman and Clayton Act, may be harmed by lack of competition in the PE market. The recent investigation by the DOJ and the unusual restrictions enforced by the FTC are signals that other similar business transactions will be closely scrutinized.

** Posted on behalf of Marie Copoulos, Tiffany Luong, and Vicky Ukritnukun