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Market Failure and Government Intervention

… The Justice Department, which is seeking to block Oracle's $7.7 billion bid for PeopleSoft, said the merger would eliminate "head to head" competition between the two companies, reducing competition in the market for high-end systems large The government said Oracle had failed to prove that current or future competition from Microsoft Corp., Lawson Software Inc. or American Management Systems Inc. "would be timely, likely, and of sufficient magnitude to replace the competition lost because of the transaction."


... Oracle, Redwood Shores, Calif., acknowledged the PeopleSoft, along with SAP, are its primary competitors for customers of large "enterprise suites" of applications, such as for managing financial and human-resources systems. But it said other providers, even those who target medium-sized companies or offer only specialized software systems, constrain its pricing behavior.

"Sometimes these other vendors compete for only a piece of a deal, sometimes teams of vendors compete for the whole. Regardless, all such firms influence and constrain the pricing of the suite vendors," Oracle argued. "This typically occurs because 'marginal customers,' the most elastic, defect to other rivals, and it often takes only a relatively small fraction of the total customer base to defect before a price increase would be unprofitable."

It certainly seems strange that Oracle would want to brag about its inability to change prices.  But the Justice Department is trying to maintain competitive forces precisely to limit how much Oracle charges for its services.1

In reading the Wall Street Journal, you will find that the first section contains many stories about the plans, strategies, wars, and cooperation among firms who have the market power to change prices.  That’s why they are in the first section; because they have the power to alter the lives of all of us, and that is news worth printing and attracting attention in the first section of the newspaper.  On the other, hand in the third section, the Wall Street Journal will have pages and pages of information on competitive markets in which none of the players have much market power.  In the pages on commodities, stocks, futures, and many other competitive markets, no one would want to buy if they felt that the market could be manipulated to their disadvantage.  There is not likely to be much market power in those markets, and the members in those market are not likely to be as well known.  Prices will be set by the market rather than by specific companies in the market.

As in the above article, antitrust agencies typically are the way to solve problems of market power.  However, when market power is so great because only one firm serves a market, the government may come in and regulate prices and output.  If that doesn’t work, the government may simply nationalize the industry and provide the product or service itself- something the American government has done frequently during wartime.

B.  Externalities

           A social optimum should occur where net social benefits are maximized.  The net social benefit is the difference between social benefits and social costs.  The concept of social benefit

1 Government Sums Up Argument Against Oracle's Bid for PeopleSoft


July 9, 2004 1:47 p.m.

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