2 basic conditions
    (1) interdependence--moves affect each other
    Ex: whopper ads hurt mcdonalds
    (2) uncertainty--can't predict rivals' responses

    Joint profit maximization
    Agreement among firms to avoid competition.

Formal collusion = cartel, like OPEC     Why collusion is hard:     (1) allocating production cuts     (2) enforcement     (3) production by outsiders     (4) substitutes     All told, very difficult to make collusion work.

    Government policies for oligopoly industries:

    promote competition with antitrust laws
    Sherman Act (1890)
    Clayton Act (1914)

    Best approach where possible

    Basic goal: workable competition
    Prohibit behavior if can do harm and can't do much good
    Ex: Block anticompetitive mergers (Live Nation and Ticketmaster?)

3. Income distribution and redistribution

Learning objectives: Illustrate and account for income differentials. Determine the efficiency and equity effects of market-determined income levels. Explain some of the arguments pertaining to government policies in labor markets, including economic discrimination.

We have 1000s of ways to spend our income--that goes on in product markets
We have only a couple ways to earn our income: labor and capital income
So labor and capital markets are extremely important

    a. Supply and demand in resource markets

    Recall resource market for labor: DL from firms--higher wage makes firms want to hire fewer workers 
    SL from households--higher wage makes households want to work more hours

Computer programmers	Teachers
graph demand for workers by firms	graph the supply of workers

    What shifts demand? (example here: makes it shift up/right?)
    (1) higher demand for the firm's output
    (2) higher worker productivity
        due to (i) Technological improvements (ii) Education and training

    What shifts supply?  (here: to the right)
    --A larger pool of potential workers
        overall: due to a larger working-age population
        In specific industries: due to (i) easier job qualifications, (ii) nonpecuniary (nonmentary) benefits; (iii) reduced employment opportunities elsewhere

    b. Wage differentials
    Note: there is not just one wage for everyone for all of us
    Wages and therefore incomes are all over the charts

   Why? Wage differentials....
    --differences between workers affect labor demand
    --differences between jobs affect labor supply

Two important examples:
(1) non-pecuniary job characteristics	(2) education
Economists	Professional work
Private industry v. academic economists

    Result: no surprise to see similarly capable workers earning much different wages.
    Examples: Repetitive: 4% premium / Stressful: 1% premium

c. Government policies regarding labor markets

   (1) Income redistribution policies

    Example 1: Progressive taxation
        tax a higher percentage of high incomes than low incomes

    Example 2: Anti-poverty programs
        food stamps, welfare programs, etc.

    These may --> trade-offs between efficiency and equity

    Example 3: Earned income tax credit (refundable)
    Efficiency effect: must work to qualify
    Equity effect: targeted specifically to the poor (unlike the minimum wage)

    Public finance course covers the topic

    (2) Anti-discrimination policies
    (McConnell and Brue, Contemporary Labor Economics)

    Economic discrimination exists when some workers with exactly the same qualifications as others receive inferior treatment in the marketplace. 
    Focus here: discrimination in labor markets

    Economic discrimination is both inequitable and inefficient. 
    Obviously unfair--prejudice can make some people poorer or worse off than others
    Wasteful too: we could be a more productive society if we let individuals work to their full potential, and discrimination keeps us from doing that. 
    Estimate: racial discrimination alone reduces our nation's output by about 4 1/2%

    Economic concerns: 
    (1) how do we detect economic discrimination?
    (2) how can we account for economic discrimination?

    (a) Measuring economic discrimination

    The problem: we can't measure economic discrimination directly. 
    What we see are wage differentials. 
    Not all wage differentials are due to discrimination

    To measure discrimination, we have to factor out other differences in workers and jobs. 
    The residual difference in wages might be discrimination

    Loosely, for women and blacks, discrimination seems to account for about 1/2 of observed wage differentials

    These estimates are controversial: 
    Some say discrimination is not as large as 1/2 the observed wage differential. 
    Ex: researchers control for number of years of study but not major field 
    Others say it is larger. Women and minorities choose less education and a less profitable major because they know they will be discriminated against.

    (b) Accounting for economic discrimination

    Regardless of the economic system a society adopts, there is always a political risk of discriminatory policies. 
    Society as a whole loses from the wastefulness of economic discrimination, but privileged groups can gain at the expense of discrimination victims
    White males can gain from discrimination against women and nonwhites. They have better job opportunities and get paid more. 
    That's not capitalism, that's the politics of special interest groups. It applies to anti-semitism in the former USSR just as much as it applies to racism here.

    The economics question is, do markets make things better or worse?

    Markets help reduce some forms of discrimination...
    (Ex: discriminating employers tend to be out-competed by non-discriminating employers)

    ...but not others

    Ex: consumer discrimination

    Suppose consumers are prejudiced against women computer consultants? 
    Customers pay more for services offered by males
    Males are "worth more" to employers because consumers pay more for their services. 
    In this case, the market rewards producers for discriminating unless there are a large number of non-bigoted customers. 
    Tends to force victimized groups into occupations where consumers can't tell who made what they're buying.

    This is the hardest discrimination to get rid of. But note: markets do not create the problem; but free markets might not be able to get rid of it.

    --the crowding model of discrimination

    These days, wage discrimination, paying different wages for identical work, is illegal 
    But unaccounted for income differentials persist.

    Ex: men v. women: discrimination appears to show up mainly in terms of what occupation women are in.

    Historically, > 1/2 of women are in 4 professions: clerical, teaching, nursing, food services.

    The "crowding model" attempts to explain it. It implies that discrimination shows up these days in the types of jobs that different groups of workers have access to.

Engineers	Nurses

    Engineers vs. Nurses: Without discrimination, wages equalize. 
    Because of discrimination, victimized groups lack access to engineering jobs
    Women blocked from engineering "crowd" into nursing: S shifts left for engineers and S shifts right for nurses

    The problem is not that markets are being used, but that access to markets is being denied. 
    Affirmative action is a policy that attempts to break down entry barriers into the preferred jobs.

    END OF MATERIAL FOR MIDTERM, PROBLEM SET 3