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Antitrust Policy and Regulation

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In 1993 Mattel proposed acquiring Fisher-Price for $1.2 billion. In the toy industry Mattel is a major player with 11 percent of the market. Fisher-Price has 4 percent. The other two large firms are Tyco, with a 5 percent share, and Hasbro, with a 15 percent share. The other two firms are Tyco, with a 5 percent share, and Hasbro, with a 15 percent share. In the infant/preschool toy market, Mattel has an 8 percent share and Fisher-Price has a 27 percent share, the largest. The other two large firms are Hasbro, with a 25 percent share, and Rubbermaid, with a 12 percent share.

a) What are the approximate Herfindahl and four-firm concentration ratios for these firms in each industry?
b) If you were Mattel's economist, which industry definition would you suggest using in court if you were challenged by the government?
c) Give an argument why the merger might decrease competition.
d) Give an argument why the merger might increase competition.

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Questions

1. Both antitrust policy and industrial regulation deal with monopoly. What distinguishes the two approaches? How does the government decide to use one form of remedy rather than the other?

2. Suppose a merger of firms would simultaneously lessen competition and reduce unit costs through economies of scale. Do you think such a merger should be allowed?

3. In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter the Coca-Cola Company, with 39 percent of the market, indicated it wanted to acquire the Dr. Pepper Company. Seven-Up and Dr. Pepper each controlled about 7 percent of the market. In your judgement, was the government's decision to block these mergers appropriate?

4. Use economic analysis to explain why the optimal amount of product safety may be less than the amount that would totally eliminate risks of accidents and deaths. Use automobiles as an example.

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