up. Thank you so much. So great, it's been a while since we talked. We have a lot of exciting updates to share. This is our proposed agenda. First of all, team updates. So since the last time we talked, we have onboarded two new team members, Ramya and then Sennad. Ramya is from Amazon PayPal, and also Freshworks. You may have seen these locals before, and Sennad is from ThoughtWorks, which has a really good, well-known community and knowledge around test automation and the test pyramid and also the home of Martin Fowler. So we are very excited to have them on our team. This is the current roster. So now we have started defining member specialties and stable counterparts to our teams. Our current new hires, Dan, Mark, Ramya and Sennad are currently assigned to DevStage, and we still have two more new hires that we are looking to assign to DevStage as well. Moving on, so updates on Q3 OKRs, which is student progress. So implementing the review apps for C&E, we're still tracking at 45%. There's some challenges that I will highlight towards the end, but the implementation of the CE repo is almost done with our environment cleanup policy. Triging and adding proper priorities and labels to bugs is roughly 80% done, which is the area that will be made the most progress on. I'll also be highlighting some in our charts after this as well. Trige mechanism has been implemented. This includes GitLab, bot mentioning and reminding people to try the issues. We have also implemented a Trige package that we will also show later in the update as well. For sourcing and hiring-wise, we are tracking 75%. We source around 70. We have two, and we're looking to hire one more if we can make it in time by Q3. Other accomplishments. We started an issue grooming assistant to track missed deliverables and also regressions and bugs, thanks to Jenshin. You can see this in the form of GitLab, but reminding people, hey, if you added a regression label, make sure you add an effective regression label. If an issue is marked as a deliverable in its past milestone date, we will automatically mark it as a missed deliverable, and then we also track which milestone that has been missed as well. We're continuing to iterate on GitLab Insights dashboard. The current accomplishments we have is we have now implemented top-level team views in summary for each team. This is available for C and E repo, so if you click the links here, you can also take a look at their dedicated views for create managed plan now and the metrics that belongs to those teams. We've also kickstarted implementing this feature inside GitLab itself. The kickoff meeting is available on YouTube. Thank you, Victor. And this is the first feature that we're going to implement as part of GitLab. Moving on, we've also implemented an automatic triage package. So if you are an engineering manager, you may have received an email this morning that, hey, these are the list of top 15 issues that you should triage for this week. So those are also our effort to scale the triaging across the whole engineering organization. So for every week going forward, we'll be assigning a triage package for each team for them to help us triage issues. And this is only 15 issues per week, and that's going to scale across different teams. There's a sample of the driver and output here. Thanks to Genshin. We have also set up a dedicated project for all things triage. So if you're looking to file a bug or also raise a feature request, please visit this project. And we've also initiated a test planning process for new features. Thanks to Mark, Sena, and Ramya. So we've kickstarted with this with 11.3. All the test plans for C and E are listed here. So if you could click and take a look, but we will continue to do this for 11.4 and also in the future. Moving on to things that are in progress. So we're still working on tracking our end-to-end test coverage. So this is our first step as a team to track all test coverage in the end-to-end layer. This is going to be a single source of truth to track test coverage. The link is here. The second iteration of BitLab triage is well underway. So we've now proven that the label works. Going forward, we're going to apply the version specific labels immediately. And then we'll ask people to correct them later. The rest are still in progress. So we still continue to build out our environment specific CI. Everything is done except for production and canary. And these are the projects that will run tests on production for functional monitoring. We're still working on transferring the ownership of the QQ runners from the distribution team and defining third-party services and also speed up the tests to run in parallel. Next up, we're going to take a look at the engineering metrics, the state of bugs. So we still have some open S1 in CE, but the good news is that we don't have any open S1s in EE. And the bugs for this month is stable and trending down. We're doing better than the last time we did as far as the MRE factory event. But it's still not the end of September yet. So this metric is still in progress. The links on the top available for you to go and take a look as well. Moving on, this is our progress to track triaging severity and priority. These are the metrics for July. The blue ones are the untrived ones or unsupervised ones. We're making good progress. The right-hand side is our current state. So we still have a lot of work to do, but we clean out bugs that are older than six months. And we're focusing on the new ones that are recently created or it's within the six-month timeframe. Moving on. So I'm going to let Mark Fletcher take over here and do a showcase of what we implemented recently for our top little team views. Mark, are you there? Yeah, I'm here. Thank you. So yeah, we recently started importing the issues for CE and EE and displaying these at a team level because we thought this would be useful for both tracking the severity and priority on bugs and then being able to break that down per team as well. But we do have the overall percentage per project as well. But the other things we started displaying were things like regressions per team and the misdeliverables per team because we thought that would also be useful. But any suggestions for new graphs are really welcome because we want these to be useful for each team on the team level. So the other things that we're trying to implement because currently we do this per project, but we know that some teams work across projects. So they might work in GitLab Shell or they might work in GitLab Workhorse and obviously both CE and EE. So we plan to combine these at a top level where teams can add the projects that they're interested in and then the graphs will be based off of that. And the other things for the team level is graphs representing technical debt and merge requests that have been merged per release. So we think those would be useful at the at the team level too. And maybe the bugs that have been closed down. So I'm going to just read some questions as well. But any other suggestions for team level or project level charts that you think would be useful, please raise an issue about that. So there's some questions. S1 still non-confidential. Yeah. So we don't actually track confidential issues in GitLab Insights. And then Sid's question, can we get merge, merge requests per person for the whole company? Yeah, I expect we could do that at a top level and we could include each project as well. We could do something about that. That'd be that sounds useful. Yeah, it's really important that we keep shipping as a company. So we need to do it both.  And promising that you can always make your deliverables by just only promising 20% of what you're capable of. And work tends to fill the time that is available to it. So we should really make sure that velocity, the number and that cycle time and then the number of features shipped is very prominent in any trade-off we make. Okay. Thank you, Sid. We'll take that to an issue and implement as you suggested. Okay, that's it from me, Mac. Thank you. And as always, the team is always open for suggestions. So please ping us in quality. And if you want to see anything in this charts and any feedback, it's more than welcome. Moving on. So we've also initiated the test planning process for CE and EE. So I'm going to turn it over to Mark Lecure to touch on the new test plan format that we have implemented. Mark? Thanks, Mac. So yes, as Mac mentioned, we started rolling out test plans alongside development of 11.3. They're a place for focused discussion of quality and risk management with the result being test requirements or a summary of tests we expect to see across all levels of testing. There's links in the slide there to the discussion of the creation of the process and some links to actual test plans. Next slide, please. So writing test plans, it's easy to get bogged down in the detail of test plans and the results can be less than ideal, especially if there's too much focus on the details of the test, which is often at the expense of the value that the test provides. So we wanted something that was more efficient and produced better results. We've chosen the ACC framework, which was developed out of Google as part of an attempt to get testers to write test plans in 10 minutes. Now, from what I read, they didn't actually get there to that 10-minute limit, but when trying to do that, they identified aspects of, core aspects of effective test plans, and those are attributes, the qualities that the product should have, components, the major parts of the product, and capabilities, which is the behavior that links components and attributes. There's an example there, and if you have a look at the bottom of the slide, there's a matrix which aligns attributes and components. What you don't see is the capabilities at the intersection of attributes and components, but in laying it out like that, it encourages us to think about the product and what we're testing from different perspectives, and it leads us to quickly define important aspects of the change to be tested in a way that focuses on the value that the change provides. So when we write tests, they're valuable tests. And the capabilities that we come up with, they guide the construction of tests, they're high-level descriptions of the behavior that the test will verify, and the tests are intended to be at multiple levels in unit integration system end-to-end. So in the example there, I've got a feature proposal, a recent one, which was to allow comments on merge requests to be grouped together in batches. We want them to be reliable, so that's one of the attributes that it'll have, and the component, the major component of that feature is merge requests. And one of the capabilities at that intersection, and there'll be many other capabilities at other intersections, is just one of them, which is that reviews are persisted for the user and not just for the browser or the session, and that leads to a few different test cases, some of which, some unit tests will verify how persistence works, and end-to-end tests, there'll be one, for example, that verifies that behavior across browser sessions. So that's it for the overview. The process is new, so if you have any questions or feedback, please get in contact with the quality team. And that's it for me. Back to you, Mac. Thank you, Mark. Moving on. So these are the top challenges that I will open up for discussion as well. So the first challenge that we are seeing is the community margin being picked up too late. I've created an issue to discuss here below, and I think we need to define a better process and also notification mechanism, and also having people load balance, where if somebody leaves on vacation, we know we have somebody that can take on that area and move these contributions around. The second one on the list is, so we have around 350 new issues every week posted to CNE, so that adds up to 1,500 issues each month. So we really need help with basic triaging, and we've implemented triage mechanisms to find out to the rest of the engineering team. There's an issue to discuss further here, but bottom line is, this is everybody's help. The quality team can't triage 1,100 issues per month every month. We need to scale it out sustainably and horizontally towards all of engineering. The third one here is, of course, this is related to labels as well. Our metrics are only as accurate as our label hygiene. So we rely on people to help us ensure that the label is correct. If you're getting pinged by our GitLab bot, please help out. Number four, we currently have some open S1 bucks, which is roughly a month or two months old, which is fine, but I wanted to highlight we currently have four. So if you are the engineering manager that has this box on your radar, please work to resolve this in the timeframe. We do not want this S1 issue to be lingering for too long. The last one, I think we've mitigated it some part. So we won't be able to deliver GitLab QEA runs as part of review apps implementation. And we're going to pick this up as part of our Q4KRs. We're also pinging Marin's team and the distribution team to help us move this forward and deliver this as soon as we can. And with that, I will open it up to questions and discussions. And I'll highlight the two top concerns here from the quality team. The floor is open. So the top concern here is community MRs are not being picked up. This has resulted in some comments on Twitter. We have addressed the comment and we have been transparent and showed him we're working to address this, but I will welcome any suggestion here from the team to address this challenge. We have an issue out there. This is Dan, by the way. We have an issue out there that I believe is part of the issue triage repository regarding assigning any issue that's older than an amount of days to a random developer or quality member. So that's at least a start, I think, because that would be useful to have our bot give us random people these issues so they don't fall by the wayside. So, Micah, first of all, I think this is a great FGU with lots of links in it and a good overview of the work. So well done, you and Mark for such a great FGU. I wonder a bit, the community MRs, do you think we need more MRs coaches or do you think it's more healthy to have all of our developers from time to time participate in that and do what Daniel just suggested, assign it to someone? I think we need both sit. I think MRs sometimes can be a single source of failure where somebody goes on vacation and we need to make sure we have more than one or even three people on one area. And then we would love to have other people also contribute. I think all of engineering, everybody can contribute and then everybody engineering should be a champion of that value. So I think rotating new members that haven't coached before have them also participate and that will also help them with their career path as well as they get to teach other people. So David here, thanks, Mic for raising this one. I had some comments on the issue related to on the one that you've pointed on the FGU. I think these are great ideas. I mean, I especially appreciate the fact that this shouldn't be something that the quality team has to deal with. I like the idea that this expanding is to the whole engineering teams in the company. I do have a question though. I mean, even if we expand the assignments to other engineers, how can we make sure that still we have this regular cadence that the issues are picked up? I mean, everyone is busy, but we want to make sure that we respond to this community request. At least if it's just to say, hey, we've seen your contribution, we appreciate it. We're going to work on it. Thanks, David. Yeah, we have some mechanism and I think it's already linked in the issue. So I think it's currently at six months, right, Mark? I think we want to tighten it up to a month or even shorter than that where if there's an MR with no activity on it, we would pick it up and then notify the team. Yeah, we really need to reduce that threshold there because by that time, it's either quite out of date or the community contributors have forgotten about it. So yeah, we definitely need to reduce that. So John has a comment. John may have a comment around using NLP. So we do have something that our contributors have suggested. I think if you click on the link, and I think there is a project out there by a contributor that's using TensorFlow based on our issues that we already tried. He implemented like a machine learning service that can suggest issues. The team is currently working on it and we're looking to validate if this is accurate or not. But from our preliminary evaluation, it's roughly 70% accurate. So that's also another venue that we can pull this in. And it's a community contribution, which is even even better. Are there any other more questions or discussions? What's the average experience for people contributing to GitLab? I contribute to GitLab, but I've heard people rave about the experience. I don't hear a lot of negative stories, but it sounds pretty dire if you've made a merger crash and you don't hear anything for a month. That's a very bad experience. What is the average experience for people? I don't think we have that number right off the bat. I think we should probably have some metrics around what are the average time to close for an MR that's not been submitted by our team. But the comment from, I think this is one of our lowlights is, I think the comment on Twitter wasn't really helpful. I think he created an MR and it was close to two months that nobody looked at. We actually added the labels, but I think some of our teams were on vacation, which is also why I said that we need more than one person looking at an area. So it's multiple things that needs to go into help fix this. But for that specific scenario, it was two months until the MR got picked up by somebody, which is At GitLab, we always say product schedules the teams because we've tried where it's a boss is not always fun, but having multiple bosses is really bad. If you have product asking you this and then you also need to take into account helping community contributions doing a refactor, etc., it shouldn't be the engineers that have to balance that. That's the problem of the product manager. Should we involve product more in they have to basically assign this community merger class to the engineering team and say, look, this is going to be part of this release because otherwise we get this struggle. Like what do I work on? The work that the product manager assigned to me or the work that the quality team assigned to me or something else. We have to have a single person that weighs the priorities that knows well this month we got this super important customer thing happening. So we have to delay two weeks. But next month, okay, it's normal steady state. I'm going to make sure that every merger class is picked up within a day. Do you think of that? Yeah, I think that's great. Is it okay if I also add to the handbook where in the list of prior decisions we add shepherd in community contributions as part of that? Yes, I figured that should be on there. I just refactored those prioritizations. It should be together with new features and refactors. This is something that the PMs have to take into account. Got it. I'll take up the change to the handbook and then now I'll send it up for review. Thank you. So we have roughly seven minutes left. I'll ask around again if people have any more questions or discussions. Otherwise I'll end the call and then I'll see you on the team call. So there's no more. Have a great rest of the day. Have a good evening where you are. I'll see you on a team call and see you the next time in the next FGU. Thank you.


Our subject for this afternoon is competition and monopoly, and this is a particularly important subject for applied economic analysis because the notions of competition and monopoly or competitive and monopolistic, monopolized, have been widely abused not only in the academic literature but certainly in the popular literature as well. So you often hear policymakers and pundits discourse on one market being more competitive than another and what the government needs to do to assure that markets are competitive about the worst thing that you can say about a firm these days is that it has monopoly power or market power. To accuse an entrepreneur of possessing or exploiting market power is about the worst thing that you can say. As we'll get into later there's a vast apparatus of antitrust law and other forms of competition policy within countries and across countries designed to remedy alleged defects in the competitiveness of markets and these policies can have very serious and harmful effects on economic performance as we'll see in just a few moments. What I want to do is start where I always like to start with the basics, the fundamentals, some of the most simplest cases that we can use to illustrate sort of principles of pricing as they relate to characteristics of markets, characteristics of buyers and sellers, numbers of buyers and sellers and so on. What do we mean by competition? What is a competitive or less competitive situation? The common sense notion of competitive or competition implies some kind of rivalrous behavior that a competition is a rivalry. We talk about the intense competition between the Auburn University football team and the University of Alabama football team. We say that Roger Federer and what's Nadal's first name? Rafael Nadal who played in the French Open earlier this weekend I guess. Our fierce competitors, and they've been going at it, these two have been battling each other as numbers one and two in the rankings for a very, very long time. We might talk about Ford and General Motors or Toyota and Honda as competing fiercely in the markets for automobiles. We have a sense of some very active and dynamic and rivalrous behavior. You also might think of sort of a legal or political economy notion of competition, meaning simply freedom, that competition exists when people are free to compete with each other, free to try to compete with each other. So there's American Idol is holding a competition to determine the best performers and anyone can try out and get smashed by Simon and all the rest of it. But there's no law that says that Italian Americans from New Jersey can't compete in American Idol although maybe there should be. So Joseph Lerner could give it a shot if he wanted to. There's no law that says I can't try to write computer programs if I want to and offer them for sale. Get into some subtleties of forms of legal barriers such as patent, intellectual property and so on. But we might think of a situation being competitive as one in which anybody who wants to can try can give it a shot. It's not competitive if there are rules or restrictions on who may enter or who may not enter. Right now of course it's not saying that defining competition as freedom to compete does not mean freedom to be successful in competition of course. There's no law that says I can't try to be an opera singer but if you've ever heard me sing you know that I'm very unlikely to be successful in the market for operatic performances because of rampant discrimination against people with dark hair. It's completely unfair. Consumers decide, right? Consumers decide which producers they wish to patronize and thus which producers are successful in the marketplace. So complaining that no one wanted to buy your product does not constitute a legitimate complaint about a lack of competition. Okay? Well if competition is simply the freedom to compete in the marketplace what is monopoly the absence of such competition well historically right the common law notion of monopoly is simply an artificial grant of privilege by the monarch by the state. Okay so monopoly typically referred to you know the British East India Company. So the British Crown said only this particular organization the East India Tea Company may legally export tea from the Far East to the British Isles. If anyone else tries to do so they would, they would be illegal. They would be, they would be fined or imprisoned. Okay? The cable company here in Auburn is, is it Charter, Charter Communications been helping Professor Salerno set up his new high definition television and he had to go and exchange his cable receiver box and with some difficulty and as you know if you've ever dealt with the cable company in your town or a regulated public utility you know they do not typically excel in customer service right. So it isn't the case that Charter Communications won a process of rivalrous competition for Joe Salerno's cable dollars, TV dollars here in Auburn rather the city of Auburn has granted Charter a monopoly. Okay so they're the only firm that can legally provide you know wired cable service in the city so they have a monopoly because the state gave it to them. Okay that's conventionally what has been meant by monopoly. Now in the 20th century for as we'll see in just a moment the term monopoly the concept of monopoly has been transformed from meaning an exclusive privilege granted by the state to any situation in which one firm or a small set of firms is large in the market okay. So monopoly has come to mean in many in contemporary economic discourse any seller who has a large share of the market. So Walmart has monopoly power it is said. Now there is no law that restricts me from trying to offer you know discount goods and services. Walmart doesn't have a legal monopoly privilege but many people say well it's big and it can charge whatever prices it wants and it can drive small mom and pop stores out of business therefore it's a monopolist. It's a completely different notion of monopoly. We'll get into this notion in just a bit later. Economic discourse today is dominated by attention to particular imaginary constructions or imaginary constructs hypothetical constructs related to market characteristics in particular the model of so-called perfect competition as opposed to models of non-perfect or imperfect competition such as monopoly okay. I want to spend a little bit of time this afternoon talking about the model of perfect competition the model of the other models of imperfect competition including monopoly and explain some of the problems with those models okay. Remember that in causal realist analysis we do not oppose the use of imaginary constructions per se. Indeed some imaginary constructions are vital for understanding key parts of the real economy the so-called evenly rotating economy for instance is a vital mental tool for allowing us to understand conceptually the distinction between profit and interest. However these particular imaginary constructions are not only not useful but completely misleading and harmful in setting up a hypothetical state of affairs that does not illuminate any aspects of actual market transactions. In fact misleads us and deceives us as to how market transactions actually take place okay. Well let's start out with a very simple notion of call it monopoly pricing quote unquote okay. In other words how do the prices of goods and services that are exchanged in real markets differ depending on various characteristics of those markets. For example suppose for some reason we won't say what the reason is there's only one seller in a particular market remember when I was talking the other day about the car radios suppose there's only one car radio in existence that I could possibly use to replace my broken one and maybe there are other people who also seek car radios to replace their broken ones so just for whatever reason it's suppose there's only one seller how does that affect the equilibrium price and quantity as opposed to a condition where there are many sellers sellers with different characteristics okay. Well Carl Manger devotes some attention in his 1871 book principles of economics to this very kind of question and it turns out that Manger and his followers in the early generations of the Austrian school also in the UK and in the US in the late 19th and early 20th centuries developed a pretty coherent account of how equilibrium prices and quantities vary with market conditions. Unfortunately what happened is there were two extremely important books published in the 1930s by John Chamberlain and not John William Henry William Henry I've forgotten which Chamberlain by Mr. Chamberlain Professor Chamberlain and Joan Robinson I do remember her first name two British economists who published books on so Edward Chamberlain thank you published books on the theory of competition in the 1930s and they advocated a radically new approach which has been described as the imperfect competition or monopolistic competition approach people sometimes speak of the imperfect competition revolution or the monopolistic competition revolution brought about by their thinking which has for the most part though not exclusively come to be incorporated in sort of the 20th century mainstream neoclassical consensus and so the theory of Manger and his followers was completely forgotten this theory was revived in Mises book Human Action in 1949 and revived and further developed by Rothbard in man economy and state in 1962 Rothbard took a slightly different approach placing particular emphasis on the role of legal restrictions in the determinants of a market structure but even among contemporary Austrian economists this Mangerian tradition has not received as much attention as perhaps it should so let's go back to the very beginning go back to the simple kinds of pricing examples that we studied the other day because it turns out we've already looked at some examples of so-called monopoly pricing okay here's one of the examples from the other day excuse me where there's one seller possessing one unit of a good or servicing question this is my car radio example and assume that the seller has a minimum selling price of $150 he would not sell that good for anything less than $150 suppose there are five buyers each of whom has a maximum buying price a reservation price is given in this demand schedule right well we said the other day that this the good will end up going to the most capable buyer or the buyer with the highest reservation price highest willingness to pay at a price between below his reservation price but above that of the next most capable buyer but assuming that those prices are above the seller's reservation price okay we know trade cannot take place at a price below $150 because then the seller would rather hold on to it okay the trade can't take place at a price below $275 because then you'd have two buyers bidding against each other so the B1 will bid the price up above B2's reservation price so that B2 will drop out of the market equilibrium price will be somewhere between B1's maximum of $300 and B2's maximum of $275 okay this is exactly exactly the same copy and paste job from the other day okay let's try a few slightly different variations suppose you have one seller who possesses multiple units of the good all valued at the same price for the seller okay so the seller has three radios each of which he would be willing to sell for $150 a pop okay what would happen here well because there are at least there are three buyers potential buyers all of whom are willing to pay more than $150 right so B1 B2 and B3 can all get a radio okay they can all get a radio and the price the equilibrium price again must lie it can't be above $250 okay because then B3 would drop out right it can't be below $225 otherwise B4 would want to come in and the other three buyers would have to bid it away from B4 okay so the equilibrium price will be somewhere between $250 and $225 okay well so we've already seen now that we still have only one seller in the market we still have a monopoly seller so quote unquote but now the monopoly seller has three units available for sale rather than two okay and because the seller wishes it would like to unload all three units as possible competition among buyers the this price will the price will be lower than it would if there were only one unit for sale okay because the seller has to attract more than just B1 he has to be able to make a deal with B2 and B3 as well okay another case suppose you have five sellers all of whom have the same reservation price $150 okay what happens here well because the least capable buyer B5 is willing to pay more than these the reservation price of these sellers $150 all five units of the good can be exchanged okay so assume you have five sellers each of whom has one unit all five units can be transacted so all five buyers will be satisfied what will end up purchasing a unit of the good right and the equilibrium price will lie somewhere between the least capable buyers willingness to buy $200 and this reservation price of the sellers $150 okay how about this case again I'm assuming we have five units of the good five we have five sellers each of whom each of whom has a single unit available for sale but they have very high reservation prices say $240 okay what's going to happen here well you can see by looking at the buyers willingness to pay that not all five units can be purchased okay because neither before nor B5 is willing to pay a price high enough to attract a unit away from to induce one of these sellers to give up a unit of the good okay so what happens in this case well only three transactions will take place right so the first three the three most capable buyers will end up with a radio the two least capable buyers will not and the equilibrium price will lie somewhere below the the the last of the capable buyers reservation price 250 and the reservation price of the sellers 240 because the price can't go below 240 here even though there even though B4's valuation is only 225 okay the price can't go below 240 otherwise the sellers will drop out okay what if you have multiple sellers each of whom offers has a good or service for sale but they have different reservation prices okay well now we're back to the analysis of the marginal pairs that we studied two days ago okay so this is the same example that we looked at that we looked at originally we haven't we have bilateral competition competition amongst buyers competition among sellers okay so this is the case that we looked at before where there will be four transactions and the equilibrium price lies below the reservation price of the first excluded buyer B5 and above the reservation price excuse me above the reservation price of the first excluded buyer B5 and below the reservation price of the first excluded seller s5 okay what's the moral of the story here okay what's the point of these examples well that equilibrium prices and quantities do depend on characteristics of the buyers and sellers in the markets no doubt about it okay but it's not simply the numbers of buyers and sellers that matter okay it's not the numbers of buyers and sellers in the market that affect these equilibrium prices and quantities it's the it's the entire schedule of valuations on both the buyer and seller sides it's the reservation prices of the buyers and the sellers that matter okay we've looked at an set of examples here where we we kept the buyers reservation prices the same and we've varied the number of sellers and the district the levels of reservation prices and the variation in reservation prices among sellers okay and we saw for example that you know if if all sellers have the same reservation price and that's below at least some buyers reservation prices then equilibrium prices are decreasing in the number of sellers of the things equal holding constant the characteristics of the demand side and so on right but notice is you could flip that around and do a completely symmetric analysis what economists sometimes call monopsony rather than monopoly meaning a reduced reduced competition among buyers so if you had a single buyer but a lot of sellers right so if you if we if we assume that all these buyers have the same reservation prices and that's those are above the reservation prices of at least some sellers then equilibrium prices are increasing in the number of buyers of the things equal okay so it isn't the case that having fewer participants in the market necessarily means that prices will be higher okay having fewer participants in the market could could make prices lower it depends on whether we're talking about variations in the supply side or on the demand side okay the more general point is that we cannot simply count we can't do a head count and say well gosh having five firms in the market is better than having four firms in the market and having six firms in the market is better than having five firms in the market okay so much more complicated story depending on the characteristics of buyers and sellers subjective valuations and it's interesting that a lot of antitrust policy is based on incredibly simple naively simple models in which you have large numbers of perfectly identical identical sellers or numbers of perfectly identical buyers and so on okay also note that there's nothing in this analysis that suggests any we haven't given any basis for some kind of normative evaluation of those different cases that I put up different examples right well there are ones in which buyers and sellers have different subjective valuations is one of those cases better than another case is is social welfare higher in one of those cases than another case well we have no scientific basis for saying so right remember as we discussed before all that we can say in cases like these right is that as long as buyers and sellers are free to transact voluntarily and no no transactions are coerced meaning someone is forced to buy something at a price higher than his reservation price or someone is forced to sell something at a price lower than his reservation price then any arrangement of transactions is welfare maximizing in the only scientifically meaningful sense of welfare maximization because we don't have any grounds whatsoever for some sort of competition policy or antitrust policy based on the the the analysis that we that we've just walked through and that's very important what about so-called perfect competition okay are any of the examples that I've just gone through examples of perfect competition if not what's imperfect about them does it matter what should be done about it okay well as I said before the the model so-called perfect competition like the other models of like the contrasting models of imperfect competition are imaginary constructs or constructions but they're not particularly useful ones they're bad ones it turns out okay well what what are in these imaginary constructions well the the the kind of standard textbook approach to market structure is to say well you can take any we take any hypothetical market and characterize it according to four dimensions okay first would be the characteristics of the product are the products offered by different sellers perfect substitutes there is each seller is selling a product that's identical to that of every other seller or are the products slightly different or do does a seller have a completely unique product okay so you know sacks of wheat are more or less homogeneous so you can say well the wheat market is one in which you have lots of sellers selling wheat and buyers don't distinguish between Farmer Jones's wheat and Farmer Smith's wheat it's just all wheat okay of course that isn't technically true because there are lots of different grades and categories of wheat and that's even less so today because you have genetically modified wheat and non-genetically modified wheat so there actually is a lot of variety but assume that there is some category of wheat within which all products are homogeneous you can imagine a market for slightly differentiated products like soft drinks okay so Coke and Pepsi aren't identical but to most people they're pretty similar now I just give you a hint as to something that makes this kind of analysis very tricky is I mean in the southern United States particularly in Georgia where I used to live I have very very strong opinions about Coke and Pepsi okay they would say Pepsi is not not even remotely a close substitute for Coke okay whereas there are people in other parts of the world who would think Coke and Pepsi are pretty much the same and if you don't drink soft drinks at all you would you have no reason to differentiate among them right now what that tells us right away is that I'm planting a little seed that will nourish a little bit later is that you know it's not the objective characteristics of the product some kind of you know scientific or technical attributes that that make product want to make a pair of product substitutes or or complements or homogeneous or or differentiated right it's it's a subjective characteristic okay so whether a product is homogeneous or not depends on the how it's perceived by consumers not the chemical composition of the product okay well you can also think of a market which is a completely unique product you know the iPhone and if you guys planning to get a new the new iPhone from Apple it looks it looks extremely cool I mean it's a phone right but to some people it's a completely unique phone I mean can do all those have you seen the ads that all the different things that can do it's extremely cool if anyone listening out there would like to send send me one I mean some people say well that's a unique product so Apple has a monopoly on the iPhone no one else makes the iPhone well I mean there's sense in which that's true right okay but so already we've seen there's never a scientific distinction here also notice that when we studied pricing and exchange before right we defined a market we defined a market as being one in which goods and services units of goods and services that are perceived as perfect substitutes are being exchanged right okay so the market for sacks of wheat or for bottles of water or for car radios but we're assuming that consumers that that that b1 doesn't care if he gets s1s radio or s2s radio or s3s radio he just wants a radio okay if he thinks that s1s radio is different from s2s radio well then s1 and s2 are not selling in the same market there's no it doesn't make sense to talk about an equilibrium price in that market because the market because no unified market okay so market is defined as one in which homogeneous units of a good and service are being exchanged in the analysis that we presented in the last few days okay but in the standard sort of textbook analysis you can have a market with slightly differentiated products okay how many buyers and sellers in the market and how big are they are there lots of buyers and sellers what the model of perfect competition requires that products being exchanged are perceived as homogeneous and there's not only a lot of buyers and sellers there's really a lot of buyers and sellers there's an infinite number of buyers and sellers okay infinity literally an infinite number of buyers and sellers are technically speaking the model says what happens to price and quantity as the number of buyers and sellers approaches infinity it's a calculus notion of what happens in the limit okay but so for a market to be perfectly competitive there would have to be an infinite number of buyers and sellers I haven't seen many of those around here maybe you have conditions on entry and exit okay so is this a market in which anyone can freely enter and exit or are there barriers to entry now in the state in this kind of sort of textbook analysis what's meant by a barrier to entry is not necessarily a law a law of saying you can't be in this market would be that could constitute a barrier to entry but but anything that limits you from sort of magically instantaneously being in the market is considered a barrier right so I mean it is objectively true that while there's no legal reason that I couldn't set up a discount store today to compete with Walmart I'm practically constrained because I do not at present have the capital resources necessary to purchase a huge storefront I could try to borrow the money but I actually can't get to the bank before it closes today because I have to lecture here until 3 30 and the bank closes at 4 and I don't even have a bank account with a bank in this state in in the sort of mainstream approach that would constitute an entry barrier okay I can't compete with Walmart because I don't literally have the funds in my pocket right now to set up a store okay or Walmart has a brand advantage people already know the name Walmart okay when you buy something from Walmart you assume that it is going to be of reasonable quality because if they sold you you know faulty products or or you know food products that were filled with poison or whatever that you wouldn't people wouldn't want to shop at Walmart again right so that would hurt Walmart's long-run profitability so established sellers who have a brand has consumers have some confidence in that brand well nobody knows what Peter's discount store sells okay I don't haven't established a reputation with consumers they might be reluctant to buy my products so I can't compete with Walmart the argument goes they have a brand name advantage that I don't have okay so no we're getting into we're getting away from the realm of legal restrictions and into one in which anything that prevents me from doing sort of whatever I want to do constitutes a barrier to entry okay so it's a little bit a little bit fanciful right there's also conditions on information the perfectly competitive model assumes that everyone has perfect information I know exactly who all the other market participants are where they are I know all the relevant characteristics of the good or serve them question and so on okay perfect information in the in the textbooks you typically find four different market structures described perfect competition monopolistic competition described by these English economists in the 1930s we mentioned before oligopoly and perfect monopoly or a pure monopoly ironically while the imperfect competition theories the monopolistic competition theories of the 1930s were the ones that sort of led to the demise of the mangarian approach the imperfect competition or monopolistic competition models now are almost themselves forgotten so most of the textbooks have dropped the section on monopoly monopolistic competition which was there when I was an undergraduate and now they just discussed perfect competition oligopoly and monopoly and oligopoly has become a much more popular model because they're typically analyze using concepts from game theory which is a very trendy and fashionable approach to mathematical economic analysis okay so perfect competition a market is perfectly competitive if it satisfies particular requirements on these four competition for four conditions homogeneous product infinite numbers of buyers and sellers free entry and exit in the sense that we just discussed and perfect information if any of those is lacking the market is not perfectly competitive and it's one of these one of these three other one of these three alternatives okay what what what does the firm do in this hypothetical perfectly competitive market what's the situation facing the firm well the firm seeks to maximize assume that the firm seeks to maximize its money profit where profit is defined as the difference between total revenues and total costs right so the firm if the firm faces a marginal cost curve that is upward sloping in other words if the cost of producing an additional unit of output by increasing one or more variable factors is increasing in the quantity of output okay that itself can be derived from the principle of diminishing returns which we discussed the other day right to produce if I remember if I if I add have my flower pot with the corn right if I add each time I add an ounce of fertilizer I don't get a proportional increase and a consistent and even increase in corn so if I want to get 10% more corn and then another 10% more corn than another 10% more corn right I have to add more than just 10% more fertilizer I gotta add 20% and then 30% and then 40% so I have to continually increase the the degree to which I add my variable factors to get a constant increase in output right so to produce additional units of output the marginal cost is increasing the cost of producing a marginal unit rises as I produce more and more okay what's supposed to be what's unique about the perfectly competitive firm is that it is alleged to face a demand curve that is completely flat or in the language that Joe used on Monday I think it was or Tuesday perfectly elastic okay so it's assumed that the perfectly competitive firm faces a perfectly elastic demand curve okay what's a perfectly elastic demand curve well it's one in which for any quantity that the firm wishes to sell it can sell as many units as it wants at the prevailing price PPC for perfect competition without ever driving the price down right in other words the wheat farmer can bring as many bushels of wheat to market as he wants and he can sell everyone without ever having to lower the price below the prevailing market price PPC okay PPC now how is that even conceptually possible well in the story in the standard story remember the this perfectly competitive firm despite having you know actual finite costs and producing an actual not specific quantity remember how remember how big this guy is and how many of these sellers are there infinity so each one is how small each one is infinitely small relative to the total amount produced okay so the theory is this guy is so teeny teeny teeny tiny he's like in you know the honey I shrunk the kids movies so he's like this teeny tiny little farmer who's about this big right and he produces teeny tiny little bushels of wheat okay getting into some pretty fanciful territory here and no matter how many he sells he's so tiny that nobody even notices has has literally zero effect on the market price which is a sermon determinants of the big grown-up adult wheat market okay so the theory is well what's this what's this producer gonna do well he's gonna expand his output queue his quantity up to the point where the revenue he receives from selling an additional unit of output is equal to what it costs him to produce an additional unit of output so he maximizes his profits by choosing the quantity producing the quantity at which marginal revenue is equal to marginal cost but because his demand curve is perfectly elastic the revenue he receives from selling one more unit his marginal revenue is always the same amount it's a constant number it's a constant okay simply given by the market price if wheat sells for ten dollars a bushel then each additional bushel of wheat he brings to market adds ten dollars to his revenues okay you might wonder as an aside will where does the where does the price come from then if every producer sort of takes the price as exogenously given well what determines the price then well in the standard answer is it's the interaction of all of these infinitely many infinitely small buyers and sellers that determines the price okay so individually each one is too small to affect the price but collectively their actions determine the price it's a little bit paradoxical in fact it's it's quite like the paradox of voting okay why do people vote well I mean you know I can vote for the candidate of my choice but I know that it's the probability that my vote will affect the outcome not only in a national election even in a state or local election is effectively zero okay certainly in a presidential election right with the with the tens of millions of votes that will be cast the probability that the outcome will hinge on my vote is zero okay and indeed the probability that the outcome will be determined by any one person's vote is effectively zero so if no one's vote affects the outcome then what determines who wins well it's all the votes right now now sensible people when they think about this come to the conclusion that there's no reason to vote okay or it's perfectly legitimate for me to vote but I'm doing so only because it makes me feel good okay I get some subjective utility out of expressing my preference and wearing a little sticker or a button and you know it's just that's a fun thing it's I enjoy participating in the democratic process it's perfectly fine but if I think that my casting of vote is going to determine the winner then I'm then I'm nuts okay ironically what we have here though in the perfectly competitive model is firms who know that their actions have no effect on the outcome but yet continue to participate anyway okay they're not producing because they get utility out of it they're producing because they want to maximize their profits and so on because there's a lot of peculiarities about the model okay now let's talk a little bit about a little bit more about this concept of marginal revenue okay marginal revenue is simply the addition to total revenue from producing one more unit of output okay if the firm faces a perfectly elastic demand curve in other words a horizontal demand curve marginal revenue is pretty easy to calculate right because if the market price of wheat is ten dollars a bushel each time I sell another bushel of wheat I add ten dollars to my revenues okay the situation is not so easy for a firm facing a downward sloping demand curve for its product okay and there are a couple different ways to think about this when I teach this to my to my undergraduate students I said well first let's just let's just make up some numbers and we'll use it let's use a numerical example and just calculate the marginal revenue from selling various quantities of output and see what happens okay so look take you know sort of simplest demand curve you can imagine just a straight line with a slope of one so imagine that at a price of ten dollars a unit the quantity demanded by consumers is one at a price of nine dollars a unit the quantity demanded by consumers is two and so on okay so we're plotting a line you know that even humanities majors could could understand I'm just kidding right so we so we'll just calculate well what's the total revenue received by the seller from producing either one unit two units three units four units and so on right well if I produce one unit I sell it for ten dollars I have ten dollars of total revenue right if I produce two units to sell two units I have to lower the price to nine dollars each okay and so I get eighteen dollars of revenue to sell three units I can't charge any more than eight dollars each so I get twenty four dollars and so on right so this gives me my sort of total revenue schedule total revenue as a function of the quantity produced what's marginal revenue well it's simply the difference between the total revenue I receive producing n units and the total revenue I would receive from producing n minus one units well or minus one plus one or minus one yeah so in other words you know where do I get these numbers well if I produce one my total revenue is ten if I produce if I produce two my total total revenues eighteen so producing the second unit added eight dollars to my revenues okay producing the third unit added six dollars to my revenue twenty four minus eighteen producing the fourth unit added four dollars to my revenue twenty eight minus twenty four and so on right you see that the marginal revenue is not constant as it was for the perfectly competitive firm remember the farmer added ten dollars to his revenue each time he produced additional unit this firm here facing a downward slipping demand curve is adding less to its revenue each time it produced if each time it produces a unit then it did when it produced the previous unit okay so yeah I'm adding marginal revenue is still positive greater than zero at least up to the sixth unit so my total revenue is growing as I increase my output from one to six but it's growing at a smaller rate it's increasing at us at a decreasing rate by decreasing amount each time okay in fact I even get to a point where when I produce six units I can charge five dollars each for them I get thirty dollars of revenue if I produce a seventh unit I have to lower the price to four dollars a unit and I only earn twenty eight dollars in revenue my total revenue actually went down when I increased output from six to seven lowering price from five to four okay does anyone remember what does that tell me about my demand curve beyond a quantity equal to six economics majors don't you can't answer right Joe talked about the relationship between he told us something about pricing and total revenue I'm sorry yeah has to do with elasticity right so if I lower my if I cut the price from five to four I increase my output from six to seven but my total revenues go down okay yeah I'm selling more units but I'm getting less for each one that I sell okay and below five dollars unit or beyond six quantity equal to six the amount I add to my the effect from selling an extra unit is outweighed by the fact of getting less per unit so I actually end up making less money in total okay so we know that beyond Q equals six this demand curve is inelastic okay the demand schedule is inelastic right from quantity equal one to six however demand is elastic it's elastic how do I know because as I increase output from one to six lowering price from ten to nine nine to eight eight to seven right as I cut price my total revenue increases how can that be I'm cutting my price how can my revenue go up because when I cut my price I sell more units right and in the elastic part of the demand curve the effect of selling more units outweighs the fact that I'm getting less per unit in the inelastic region of the demand curve the fact that I'm getting less per unit outweighs the fact that I'm selling more units and my total revenue falls okay so news we took the simplest demand curve that we could think of just a straight line with a slope of one and you see that that demand curve has multiple regions right it part of it is elastic to the left of Q equals six it's elastic to the right of Q equals six it's inelastic right there's a sort of crossover point right in the middle where the textbooks they call that the point of unit elasticity yeah I'm related to this model but I'm just trying to understand like the P stands for price mm-hmm so what I'm confused about is is this this demanded marginal revenue is it measuring production and how we price what we produce or is it measuring retail relations and how we price what people are buying because for example I'm thinking of this as a similar model to a used bookstore I've seen function where people put the date that the book came into the store in the front of the book and each three each time three months past they cut the price of the book another percentage and so it's almost dirt cheap and then you say well how could they be making money well they're increasing the volume if the if the product is staying on the shelf too long because he wants a dusty dirty old book but my point is that this is this is a discussion of things that are produced and that you that the capitalist produces himself and then price it or is it prices for retail yeah summer price is that distinction important like whether you produce right the question refers to what is this simply a model of exchange or does it include production and exchange that I don't think the distinction is relevant here okay right all we're saying is that consumers consumer demands are such that if I wanted to sell five units I cannot charge more than six dollars per unit because this is not a is not a single good the price of which is lowered over time yeah imagine again the the entrepreneurs thinking through this hypothetically right I've estimated the demand curve to look like this demand curve okay I believe that this is what the demand curve looks like so I think that if I want to sell five units I can't charge more than six dollars each if I want to sell six units I can't charge more than five dollars each otherwise people won't buy them okay if I if I only want to sell three units I can charge as much as eight dollars a piece okay so we haven't said anything about the entrepreneurs costs of production if that's what you're asking and we're just just we're all only talking about the revenue side here okay so yeah I think it's this is all sales revenues are just sales or sales receipts so they're saying you know how much revenue am I gonna have in my pocket if I try to sell this many if I try to sell that many we haven't said how much he has to pay for his factors of production you're only looking at his receipts or his revenues okay oh so going going back to our story why is this relevant to our story well go back to the previous analysis of the firm seeking to maximize its profits but assume that it does not face a perfectly elastic demand curve for its product but rather it faces a demand curve that looks something like this it faces a downward sloping demand curve for its product in other words it cannot sell as many units as it wants without lowering the price okay to sell more units you have to lower the price per unit okay we have a picture that looks something like this okay once again we've depicted an upward sloping marginal cost curve but rather than a horizontal or perfectly elastic demand curve for the firm's product we depicted a downward sloping demand curve okay so this could be like the downward sloping demand curve from the previous slide so if this seller wants to sell an additional unit of output he has to lower the per unit price okay and as we saw in the previous diagram previous chart if the demand curve is downward sloping then the marginal revenue curve is also downward sloping and it's steeper than the demand curve okay the marginal revenue curve lies below the demand curve and is steeper than the demand curve you know why is that again I said when I introduced this in class I asked people just to crank through the numbers like this okay and if you just plot that MR curve it's going to look something like the MR curve I've got there right it bisects the horizontal axis at Q equals 6 so if you just crank through the numbers you and plot points you realize well for that kind of a demand curve the MR curve has got to look something like that one but sometimes it's hard for people to see intuitively why is that why does the MR curve lie below the demand curve and why is it steeper than the demand curve well the easiest way to understand is the following that remember the seller we're talking about market clearing or equilibrium prices right so in the in the market the seller has to charge the same price to each buyer okay nobody would pay more than what some other buyers paying so that the market okay so if I'm currently selling three units and charging eight dollars a piece for them and then I produce a fourth unit at seven dollars a piece I don't add seven dollars to my revenues so why not you you're adding a fourth unit and it sells for seven dollars each but remember if I want to sell four units rather than three I have to lower the price not only on that fourth unit but on all the other units that came before okay to sell one more unit I have to lower the price on every unit which is why as we move down the demand curve where I'm selling in larger and larger quantities to sell one more I have to lower the price on these lots and lots of units that came before it which is why eventually my total revenue begins to fall as I expand output as the inelastic part of the demand curve okay so that's why the marginal revenue curve lies below the demand curve and has a steeper slope okay what is this firm gonna do well once again it wants to maximize its profits by producing up to the point where marginal revenue is equal to marginal cost okay however so if I go to where the marginal cost curve and marginal revenue curves intersect that gives me this quantity here so call this the monopoly quantity okay what price will the firm charge well doesn't have to charge the price where the MR and MC curves intersect because what's the highest price I can charge and still be able to unload this many units I can go all the way up to my demand curve okay so I can charge a price as high as this price PM and still be able to sell this many units right notice that with the downward sloping demand curve in the standard model in equilibrium the firm is charging a price that's higher than what its actual marginal cost is at that quantity to produce the QM unit it the marginal cost was this much and the price I can charge is this much people some of us talk about a markup of price over marginal cost with the downward sloping demand curve the firm can charge a price that exceeds the marginal cost of production whereas with a perfectly elastic demand curve the price that's charged is equal to the marginal cost of production so what you might wonder is this good bad or indifferent well the standard analysis is to say to put it in really complicated language good bad okay that's the essence of sort of contemporary competition theory infinitely perfectly competitive firms with perfectly elastic demand curves are good and firms with facing downward sloping demand curves having market power are bad right why because the monopoly firm the firm facing the downwards with the downward sloping demand curve produces because it's in the elastic part of the demand curve produces less than it then it could produce to be able to increase the price over marginal cost right instead of instead of producing here where price is equal to marginal cost the firm deliberately restricts output produces less than that to be able to charge a price that exceeds marginal cost okay and that's the alleged welfare loss or inefficiency associated with downward sloping demand curves okay what can we say about this well the first and most obvious thing to say is that every firm faces a downward sloping demand curve every actual firm faces a demand curve that is at least downward sloping in some parts or in other words no no real firm in a finite world can face a perfectly elastic demand curve right the assumption of perfect elasticity assumes infinitely divisible units okay so that firms can be infinitely small output levels relative to the total can be infinitely small and so on but in fact firms all real firms produce discrete units of output okay not one gazillionth of a bushel of wheat okay not one hundredth of a bottle of water but discrete units okay so there are no there are no perfectly elastic demand curves in reality okay so then it so any sort of analysis that says well if a market is not characterized by firms with perfectly elastic demand curves there's something wrong with it and we need to fix it well I mean that's not much of a guide because every market will have something wrong with it and need needs to be fixed doesn't know what the fix ought to be okay so no market is adequate according to the standard and you sometimes hear people even well-trained economists being a little bit sloppy on this point and saying well yeah of course perfect competition is an ideal we could never reach but we should try to get as close to it as we can so market a has 50 firms in it and market be only has 40 firms in it so therefore market be a market a is closer to perfect competition than market be that's actually not not that's completely incorrect okay the model of perfect competition doesn't say that you know if you start out with a perfectly elastic demand curve and then as it gets a little bit more elastic sorry a little bit less elastic then you know sort of incrementally consumer welfare goes down just a little bit each time no it's a discrete it's a completely discrete kind of analysis okay I mean we don't know according even to these criteria whether a market with 50 firms is better or worse for consumers than a market with 40 firms okay it's not a continuous kind of analysis even though it's sometimes sloppily described that way another point which again we can say in a value-free scientific sense is that there's something a bit odd about the notion that it's wrong for firms to produce less than some specified quantity okay that well firm should you know be better if they were producing this higher quantity and it's wrong that they were strict output to QM they should be forced to increase it somehow okay well if the seller is maximizing his profit at quantity QM right then selling any additional units beyond QM means that the seller is being required to exchange units in return for less than his reservation price okay so some transactions that would not occur as voluntary exchanges that are not mutually beneficial are being coerced by law as it were okay well I mean why should the seller be required to produce more than QM by doing so we're necessarily requiring the seller to engage in transactions that he or she would not otherwise engage in thus in a meaningful sense we've reduced overall welfare okay in the sense that we're not we're requiring we're coercing particular transactions okay it's easy to see this in you know a case of you know movie star you know Brad Pitt or something right Brad Pitt doesn't appear in every single movie he could possibly appear in right he he only sells some of his labor services he doesn't work 365 days a year right if he were to appear in every single movie every single TV show every single commercial every single radio spot that he could possibly do well then you would start seeing Brad Pitt everywhere and the value of having Brad Pitt you know seeing him one more time would would would go down okay he'd be less desirable if he were sort of everywhere okay so I mean Brad Pitt he doesn't you know he picks and chooses what he wants to do okay he reduces the total quantity of his labor that is made available for sale to increase the average value of his labor services okay so it can increase the price that he charges well I mean should we require him to appear in more movies I mean again imagine a law that says if you're a movie star you know with certain characteristics you must be in 25 movies a year even if you only want to be in 24 well I mean that sounds a lot like slavery to me that society or the state is forcing this guy to be in this movie it is want to be in it's hard to see how that would be sort of a socially desirable policy but yet if we say well the Microsoft corporation should be required to produce more copies of Windows than it willingly is producing is there any essential difference well yeah because Microsoft was a big bad evil company and Brad Pitt well he's okay analytically it's the same case the same kind of case okay another point is even if you believed that you know it's sort of a bad thing that firms face downward sloping demand curves gee it wouldn't it be nice wouldn't it be better if demand curves were perfectly elastic well I mean where is the elasticity of demand coming from where does the position and shape of the demand curve come from it's not just sort of doesn't just drop from the heavens right the demand curve for any good or service reflects consumers preferences for that good or service okay consumers can willingly change their demands they can make a firm's demand curve is elastic or any elastic as they want through their decisions to purchase or to refrain from purchasing okay this touches on a point that we that we made earlier right people often say that well what it means to have a very steep demand curve it means that there are a few close substitutes for your product okay so the more substitutes are available the more elastic your demand curve the demand curve facing that firm will be okay so there's lots of different kinds of bottled water out there that's and there's lots of close substitutes for bottled water there's tap water there's bottle juice there's soft drinks and so on okay so a bottled water producer can't charge too high price right but you know Apple's iPhone it's a unique product so Apple can charge whatever price it wants or it can charge a really really high price because there are a few close substitutes well again what constitutes a close substitute it isn't given by engineers that's not an engineering term it's a consumer valuation term right what you know it is you know is this cell phone a substitute for an Apple iPhone or not well it kind of depends on you depends on you and me it depends whether whether we whether we think there are substitutes or not okay so the whole notion of the availability of substitutes is a subjectively perceived economic concept not a technological one okay sure give me another example is as with so-called potential competition okay imagine a seller imagine to say you define a particular market say the iPhone market say you define the market so narrowly that only Apple makes the product yeah there are other cell phones and hand held computers and blackberries and things but they're not as good they're not really substitutes for the iPhone even if that were true even if consumers did not perceive any of the competing products as being good substitutes does that mean that Apple can charge whatever price it wants well suppose it charged a thousand dollars per iPhone or two thousand dollars per iPhone right even if no one else is currently making a product that consumers regard as a close substitute if Apple charges a price that's high enough what's that going to do what what incentives is that give to competitors yeah I mean to try to produce something that's a close substitute to persuade consumers that their product is a substitute to produce new products that are very similar to the design okay so Apple has to think not only about what its current rivals are doing but what potential rivals might be doing okay we can see that with a really simple numerical example right here's a case similar to the ones that we looked at before I suppose there's a unique seller of the commodity there's one seller with a single unit of the good five potential buyers right and say the seller has a very high reservation price two hundred ninety dollars okay well only one unit of this good can be will be exchanged there's only one unit to exchange be one will get it at a price somewhere below three hundred and two ninety but suppose the seller believes that there's another potential seller out there someone who isn't currently in the market maybe is geographically you know just spread is in another another area but could come into the market if if desired and suppose that other seller has a reservation price of 280 can you see that suppose there's a potential s2 out there who would be willing to sell for 280 and s1 knows that right well now the equilibrium price for this transaction is going to be between 300 and 280 not 290 why because if the if s1 charges a price anything above 280 then s2 will jump into the market and take away that sale okay so the exist the incumbent seller can he can't charge a price above what the potential seller is going to the potential potential seller who could enter the market but hasn't yet done so would accept okay so so sellers are constrained by the preferences of potential sellers not only actual sellers okay is a great it's a very important example of this has to do with so-called predatory pricing right which is where and a large firm that has a cost advantage over smaller firms because of scale economies and so on according to the story you know prices so low that the smaller firms can't compete at that low price so the large firm uses prices really low to drive the small firms out of the market once they're gone then the large firm has a monopoly position and can jack up the price to whatever it wants okay this is what for example standard oil was accused of doing in the late 19th and early 20th centuries right the early antitrust laws were claimed to alleviate problems associated with so called predatory price cutting well be one of the one of the I mean the there's a theoretical problem here which turns out to be backed up very close by the empirical evidence that is supposed that a firm tried that strategy it tried to price lower than other firms could afford to drive them out of the market suppose it's successful in doing so it's charging these really low prices to force other firms out of the market if it then tries to raise prices what are other firms going to do they're going to jump back in right as people say well Walmart you know they they build a Walmart on the periphery they go to some small town and they build a Walmart on the outskirts and they price all the mom and pop stores out of business then they can charge monopoly prices except that they never do you know they charge low prices and indeed a lot of the small mom and pop stores can't compete and once once the small mom and pop stores are gone what does Walmart do it continues to charge low prices okay because if it were to raise its price the mom and pop stores would would come back into the market okay just in the standard oil case there was Johnny Rockefeller indeed was trying to drive some of his rivals out of the market by pricing low but if you think about you know something like it like an oil refinery okay what does it mean to be driven out of the market to go bankrupt in the oil industry well there's some you know there's Rockefeller Rockefeller has his refinery here there's some rival who has a refinery here and so Rockefeller price lowers his price to try to drive this guy out of business he succeeds and so the owner of the second refinery is goes bankrupt well there's still a refinery sitting there right the physical assets are there and another potential refinery owner could buy those assets for a song right he could buy those assets in bankruptcy court really cheap yeah of course of course but the point is the point is there lots of assets out there that can be used the only way you could avoid it is to purchase every single oil refinery that could conceivably come into existence okay so the point is there are lots of assets out there for potential competitors to acquire right and what Rockefeller found what actually happened to Rockefeller is that people quickly realized that he was trying to buy out competitors to do precisely what what you describe so what happened is people started building oil refineries just so Rockefeller would buy them out and they charge such a high price that Rockefeller complained to his colleagues about being blackmailed he said he was he was his his strategy of so-called predatory pricing was driving him bankrupt because people were building all these factories just so he would try to under price or buy them out okay he couldn't afford to do it anymore okay let me talk a little bit about about the more specifically about the role of government here you know I said at the very beginning of the of the discussion that an alternative conception of monopoly the the classical common law notion of monopoly is a special privilege that is granted by the state there are lots of obvious examples of this a patent okay if you file a patent on a particular product or process the state says that no one else can produce a closely similar product or use the same process for the duration of your patent for 17 years or whatever otherwise they go to jail you can sue them or find them they can they can be imprisoned okay so a patent is a government granted monopoly of finite duration okay exclusive grants charters concessions the grant the exclusive rights given to the East India tea company by the British crown the exclusive rights given to charter communications by the city of Auburn and so on would be obvious examples of government granted monopoly we talked about occupational licensing the other day right license compulsory licensing of attorneys and physicians and so on is a way of granting monopoly status or quasi monopoly status to those who hold the license and restricting entry by those who do not international trade policy can have a monopolizing effect right I think I think Joe was talking about the automobile industry you know in the 80s where US automakers persuaded Congress to impose restrictions on Japanese imports right thus what does that do to the demand curve facing American automobile producers it makes it less elastic right gives them a steeper demand curve than the otherwise what would have by eliminating a potential source of competition potential competing products okay the article on your reading list by Suda Shinoi does a nice job of pointing out some less obvious sources of monopoly privilege even some sort of tax and regulatory policies that we don't normally associate with with competition policy have an anti competitive effect in the sense of granting giving special privilege to particular firms a progressive taxation and estate taxes and other policies that limit the accumulation of capital benefits incumbent producers who have already amassed large amounts of capital okay anything that makes it costly costlier for a new entrant to accumulate capital to compete with an incumbent is giving the incumbent an advantage a competition advantage interestingly a lot of labor and environmental restrictions by design or or or not end up conferring monopoly privilege on particular firms one of the classic examples is in the environmental area the Clean Air Act of 1970 which required factories to reduce emissions of particular kinds of they weren't called greenhouse gases back then but sulfur dioxide for example by requiring factories to install expensive equipment you know smokestack scrubbers and to use higher cost but more environmentally friendly production technologies however the legislation exempted or grandfathered in under the old rules in incumbent producers okay so obviously this is a way that incumbents and naturally incumbent energy producers were very big supporters of the Clean Air Act because it imposed imposed costs on potential competitors right there's a state mandated entry barrier the Americans with Disabilities Act is another example requiring you know designated parking spaces and ramps and specially outfitted restrooms and so on for Americans with disabilities you might think that businesses would have been opposed to these kind of you know so a very sort of onerous or draconian set of regulations requiring every firm to have certain accommodations for the disabled because it's costly to firms however if you look at the legislative history of the Americans with Disabilities Act lobby groups representing large firms the National Association of Manufacturers and so on were very strongly in favor of the legislation whereas lobby groups representing small firms were much more likely to oppose the legislation why because complying with the requirements of the ADA is much easier for a large firm that already has a staff of lawyers and so on and can install wheelchair ramps and so on at a cost that's a much lower percentage of the firm's overall sales overall capital expenditures than a small firm for whom those restrictions may be very costly relative to the size of total operations okay so in large firms were happy to to raise the cost of their smaller rivals through the regulatory process thus giving them monopolistic privilege okay now we turn now to just say a few words about antitrust policy itself it's very messy and complicated you know among economists who would describe themselves as pro-market or free market economists you find two different views about the role of the state as it relates to competition and monopoly the view that has been expressed here this week and the view that you find in for the most part in the causal realist tradition is that the role of government should be simply to refrain from granting monopoly privilege okay don't give exclusive licenses and charters and protections to particular firms and competition will will will flourish okay however there's another view associated with some other sort of pro-market generally pro-market economists which is that monopoly does tend to arise naturally on the market even in the absence of government intervention and that therefore government intervention is required to eliminate monopoly or to reduce monopoly or in other words markets will not be competitive quote-unquote unless certain government policies assure that competition prevails so for instance if a firm gets really large and has a large percent of sales in an industry has a large market share the government should step in and break it up into a set of smaller firms if a large firm is charging prices that seem quote-unquote too high the government should step in and force it to lower its prices if two or more firms appear to be getting together and setting prices collectively colluding over price the government should should forbid them from doing so okay this second view is really based on the on a misuse as it were of the model of perfect competition that we looked at earlier right what what what has happened is that some economists have made the perfectly competitive model not simply imagine an imaginary construction that could be used to illustrate the effects of this or that but but rather as a normative benchmark as a description of the ideal state of affairs to which markets should have to conform so when we look at any real-world market obviously we'll find that it does not meet the requirements in the of the perfectly competitive model but according to this tradition the government should try to make it as close to that as it can if a market has five firms we should try to make it have ten firms that's ten firms we should try to make it have 20 firms we should try to force prices down quantities up make sure firms don't collude try to eliminate naturally occurring barriers to entry and so on okay there are numerous problems with that approach as we'll see in just a moment you know what are some of the most important antitrust laws the Sherman act of 1890 which outlaws so-called restraints on trade the Clayton act of 1914 outlaws price discrimination meaning charging different prices to different consumers and so-called tying or bundling namely attaching the sale of one product to the sale of another so if you want to buy product a for me you also have to buy product B for me this is one of the things that Microsoft was accused of doing in is the great Microsoft antitrust saga the mid 1990s that it was you know tying its Internet browser its web browser Internet Explorer to Windows the operating system and requiring people who buy Windows to use Internet Explorer rather than Netscape Navigator or some alternative right there's a whole a number of fallacies associated with that kind of reasoning but the basic argument was that Microsoft should be required to sell every every product that it makes independently with no restrictions yeah man as well I think actually Bill Gates wrote a editorial in the Wall Street during the New York Times it was the New York Times saying basically this is this would be like a law that says the New York Times cannot it should allow people to buy just the sports section or just the editorial page and by requiring people to buy the whole paper this that's unethical and illegal anti-competitive bundling should be outlaw you should be able to buy each word independently for a few pennies each if you want then the other legislation during the New Deal such as the Robinson Patman Act which outlaw so-called predatory pricing which we discussed just a few moments ago we're almost out of time so let me just mention some problems whoops okay yeah there's a number of sort of practical problems with the implementation of any kind of antitrust policy well the first is that any such policy ignores it assumes that if a firm is large and has a large share of the market it must be because there was some imperfection in the structure of that market right so if a firm is very successful it must be because there are entry barriers because it has monopolistic privilege because it has large market share whereas having a large market share is typically the result of being a good performer offer offering better products and services than your rivals being able to produce at a lower cost in your rival I mean isn't just magic or coincidence that Walmart is so big right it got to be big for a specific reason because that as you have incredible and incredibly efficient supply chain and a number of sort of innovations in warehousing and distribution that allowed it to price lower than its rivals okay we talked earlier about you know what is a substitute and what isn't okay so even the very notion of trying to say well Walmart has you know 50% of the market it's not totally coherent I mean what is the market is the market other large discount retailers like Kmart and Target is it all retail stores does it include Sears and JC Penney and does the department stores does it include hardware stores or does it include grocery stores I mean what kind of stores are included right I mean as you broaden the set of stores that are included in the market obviously the share of the market that Walmart has gets smaller and smaller and we're thinking about this a lot what during the days of the Microsoft antitrust case where you frequently read newspaper articles that well Microsoft has 90% of the market for desktop computers well I mean is that really true I mean Microsoft may have had 90% of the operating system market for IBM PC compatible desktop computers right so do you include Macs in that calculation well if so then Microsoft's market share is a little bit smaller do you include you know Unix workstations well then Microsoft's market share gets a little smaller do you include you know blackberries and handheld PDAs which are computers in a sense well in literally they're computers do you include them well then Microsoft's market share gets even smaller do you include big mainframe computers do you include Joe Salerno's old slide rule if you define the market as computing devices well that's what a slide rule is okay the point is simply that the definition of the market is arbitrary rather than no scientific test for market definition okay so it's just a value judgment in the part of the antitrust authority there's a sort of interest group explanation for a problem with antitrust as well namely that many if not most antitrust suits in some industries most antitrust suits are filed not by regulatory agencies but by competitors right so antitrust provides a mechanism for less efficient firms to complain about their more efficient competitors and try to get the government to intervene to bail them out okay I'll just close with this classic quote from little book called Tom Smith and his incredible bread machine which is what in my day would have been called a comic book but I think now would be called a graphic novel graphic short story there's a really funny story on an innovator who runs up against the antitrust authorities but there's a great scene where the antitrust regulator the antitrust official makes this speech to the young entrepreneur he says you're gouging on your prices if you charge more than the rest so if you charge more than your competitors your price gouging but it's unfair competition if you think you can charge less predatory pricing second point that we would like to make to help avoid confusion don't try to charge the same amount that would be collusion okay so you know there's this sort of there's kind of a legal problem of that antitrust laws are sort of ex post facto meaning there's no way to know ahead of time whether you violated them or not okay because there's no sort of statement about what antitrust there's no objective criteria to know whether you are engaged in monopolistic practices or not it's decided ex post by a court so you can't avoid the illegal behavior because it's not defined a great article on that aspect of antitrust ironically was written by famous economist named Alan Greenspan back in his younger days before he became a leading government official back when he was sort of a free market economist okay I've already gone over my time so let's have some questions in discussion wow I've answered all your questions and objections right can you already smell the pizza is that you can smell the beer already yes yeah okay the question is is a subject that deliberately didn't mention the presentation is but let me rephrase the question a little bit among Austrian economists there are some differences of opinion about what constitutes monopoly so Rothbard argues that there can be no monopoly except for an exclusive government grant exclusive government privilege Mises and Israel Kershner as well have argued that that's mostly right but there are a few very special cases where monopoly prices could emerge even on the free market and there's some disagreement among Austrian economists on this point and it's difficult to explain what I'll do is just refer you to some some writings on that there's a piece first let me say it's a little bit difficult to discern exactly what Mises position was because he changed it a little bit his discussion of monopoly in the first edition of human action the 1949 edition is different from the discussion it's their subtle changes in the third edition where his position is a little bit he takes over stronger almost more Rothbardian position in the early in the first edition as slightly softer position in the later edition but there's an article by Mises that was published originally published only in French isn't that right Joe the 98 piece it was not published at all there's an unpublished paper previously unpublished paper that was only recently discovered and it's in the quarterly Journal of Austrian economics in 98 right which explains Mises own position in more detail Joe has also written a paper on the history early history of monopoly theory among Austrian economists has that been published yet there's it is in the QJ yeah okay it's if you just do a Google search for Austrian monopoly theory from Manger to Mund the last person Joe deals with it was a economist named Vernon Mund M-U-N-D you can you can Google it and it explains some of these subtleties in a little bit more detail that's pretty good non-answer isn't it any other questions you would like me not to answer okay thank you


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Good day everybody and welcome to my update for this week. I want to start off by reminding you all about the dryness that still exists across much of Victoria. I know I've been talking about that a lot in the last couple of weeks, but it is unseasonally dry. While the fire danger period in many parts of the state has lifted or about to be lifted, there are still parts of the state that are extending well into May. So I just ask you to keep doing the great work you do, engaging with the communities, ensuring that they understand what their responsibilities are in terms of using fire outdoors where they can or can't have a fire and how they have that fire safely should they need to have one. Importantly, ask them to register the fire so we can avoid unnecessary call-outs. This Saturday is St Florian's Day, International Firefighters Day. It's a worldwide day of recognition for the fantastic work that you all do as firefighters in protecting the community, particularly here in Victoria, protecting Victorians. So thank you for that. If you've got events on on a day, I wish you all the very best for those. Enjoy it and enjoy each other's company. On Sunday, of course, we have our annual CFA Firefighters Memorial Day at Hillsville and I'll see many of you there where we'll pause and reflect together on those that have paid the ultimate sacrifice in the line of duty. So it will be a moving day, but also a great opportunity to remember, to gather and recognise those firefighters that have lost their lives. Tuesday of this week, I had travelled to Canberra for the National Firefighters Memorial Service on the banks of Lake Burley Griffin. That was a great opportunity as well. I was there alongside all other commissioners and chiefs from across Australasia and families of those people whose names are being added to the wall. And while that was a very sad time for those families, it's also a very moving and appropriate way to recognise the sacrifice that their family members had made. So very well done. The memorial is there in Canberra. If you ever get the opportunity to go and have a look at it and reflect, I'd encourage you to do so. It's a great monument to those firefighters from across Australasia that have made the ultimate sacrifice in the line of duty as well. Also this weekend, we've got country round the VFL. So that's on Sunday at the MCG in the Geelong versus Essendon match. There'll be a range of activities on there that if you get the opportunity to go along to and take part in, that'll be great. They've got Animal Nursery, a free country festival outside the MCG prior to the game. And during the commencement of the game, there'll be 80 CFA members on the MCG with the Guard of Honor and unfurling the Australian flag. So those members that have been selected to take part in that, congratulations. I know you'll enjoy the experience and you'll represent CFA very well. So thanks everybody and stay safe.