ECO 2023 - Unit 3

Clayton Antitrust Act

1914 act designed to strengthen the Sherman Antitrust Act of 1890; certain activities previously committed by big businesses, such as not allowing unions in factories and not allowing strikes, were declared illegal.; outlawed mergers and acquisitions (where the outcome would be to "substantially lessen competition" in an industry), price discrimination (where different customers are charged different prices for the same product), and tied sales (where purchase of one product commits the buyer to purchase some other product).

perfectly competitive firm

A ____ acts as a price taker, so we calculate total revenue taking the given market price and multiplying it by the quantity of output that the firm chooses.

patent

A ____ gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time. In the United States, exclusive patent rights last for 20 years. The idea is to provide limited monopoly power so that innovative firms can recoup their investment in R&D, but then to allow other firms to produce the product more cheaply once the patent expires.

pollution charge

A ____ is a tax imposed on the quantity of pollution that a firm emits. A pollution charge gives a profit-maximizing firm an incentive to determine ways to reduce its emissions—as long as the marginal cost of reducing the emissions is less than the tax.

Trademark

A _____ is an identifying symbol or name for a particular good, like Chiquita bananas, Chevrolet cars, or the Nike "swoosh" that appears on shoes and athletic gear.

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms; where the barriers to entry are something other than legal prohibition. A ____ occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. Economists call this situation—when economies of scale are large relative to the quantity demanded in the market—a natural monopoly. Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place.

Oligopoly

a state of limited competition, in which a market is shared by a small number of producers or sellers. Oligopolistic markets are those which a small number of firms dominate. ex: Commercial aircraft

intellectual property

a work or invention that is the result of creativity, such as a manuscript or a design, to which one has rights and for which one may apply for a patent, copyright, trademark, etc.

restrictive practices

practices that reduce competition but that do not involve outright agreements between firms to raise prices or to reduce the quantity produced; practices that do not involve outright agreements to raise price or to reduce the quantity produced, but that might have the effect of reducing competition. Antitrust cases involving restrictive practices are often controversial, because they delve into specific contracts or agreements between firms that are allowed in some cases but not in others.

demand curve

the ____ that a perfectly competitive firm faces is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price. In contrast, the demand curve, as faced by a monopolist, is the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

While a monopolist can technically charge any price for its product, the price is constrained by ________________.

the demand for the firm's product the market demand

monopolistic competition

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products. Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical. ex: Mall of America

Celler-Kefauver Act

In 1950, the _____ extended the Clayton Act by restricting vertical and conglomerate mergers. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. In the twenty-first century, the FTC and the U.S. Department of Justice continue to enforce antitrust laws.

Prisoner's Dilemma

The ______ is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. It applies well to oligopoly.

antitrust laws

The laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones, are called ____.

All of the following statements are true about cost-plus regulation except:

With cost-plus regulation, the government sets the price level several years in advance.

Tying sales

____ happen when a customer is required to buy one product only if the customer also buys a second product. Tying sales are controversial because they force consumers to purchase a product that they may not actually want or need.

Market-oriented environmental tools

_____ offer a mechanism for providing either the same environmental protection at lower cost, or providing a greater degree of environmental protection for the same cost.

Sherman Antitrust Act

an 1890 law that banned the formation of trusts and monopolies in the United States

Demand for cartel output depends on ______________ between firms and is explained by the kinked demand curve.

competition

cost-plus regulation

government regulators in idaho set the price of electricity based on the explicit costs of the electric power company, then add an extra amount to assure a normal return on the firms investment. this procedure is called:

The marginal costs of reducing pollution are generally _____________. The marginal benefits of reducing pollution are generally ____________.

increasing; decreasing

payoff table

table showing the expected payoffs for each alternative in every possible state of nature

How does a negative externality affect the equilibrium price and quantity if a firm takes the additional external costs into account?

the supply curve will shift to the left

A monopoly is a firm that sells all or nearly all of the goods and services in a given market. What determines if a firm is a monopoly producer?

If a firm produces a product without close substitutes, then we can consider the firm a monopoly producer in a single market.

Nash equilibrium (noncooperative equilibrium)

a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen

To maximize profit, firms produce at the level of output where:

MR = MC same for competitive firm

minimum resale price maintenance agreement

an agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price

Which of the following are barriers to entry that contribute to the emergence of an oligopoly market?

high start-up costs patents to a few companies for products in the same market

All of the following statements about property rights and environmental law are true, except:

When the government undermines property rights by prohibiting a landowner from using his land in a way that may violate environmental policy, it is incentivizing the landowner to protect the environment.

bundling

where a firm sells two or more products as one. Bundling typically offers an advantage for consumers by allowing them to acquire multiple products or services for a better price.

In the context of limiting pollution, command-and-control regulation _______.

usually requires the same standard for all polluters, and often the same pollution-control technology as well

Which of the following fits the term imperfect competition?

a condition of the industry that falls between the extremes of monopoly and perfect competition

product differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

additional external cost

additional costs incurred by third parties outside the production process when a unit of output is produced

kinked demand curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

predatory pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market

imperfectly competitive firm

a firm that has at least some control over the market price of its product

market failure

a situation in which a market left on its own fails to allocate resources efficiently

In the 1980s, the FTC (Federal Trade Commission) followed these guidelines:

-If a merger would result in an HHI (Herfindahl-Hirschman Index) of less than 1,000, the FTC would probably approve it. -If a merger would result in an HHI of more than 1,800, the FTC would probably challenge it. -If a merger would result in an HHI between 1,000 and 1,800, then the FTC would scrutinize the plan and make a case-by-case decision.

A study by the Environmental Protection Agency looked at the costs and benefits of the Clean Air Act from 1970 to 1990. This study found that a middle-range estimate of health and other benefits of cleaner air were valued at $22 trillion. This amount was about __________________ than the costs of reducing pollution, which was around $500 billion, in the same period.

44 times higher

To decide the action of the FTC, we must first calculate the HHI of the market after the top two firms merge. To do this, add their market share, 24% and 17%. The new, merged firm's market share will be 41%. Now we can calculate the HHI for the entire market: (41)2+(9)2+(6)2+(4)2+(22×20)=1,894

According to the historical guidelines, if a merger would result in an HHI of more than 1,800, the FTC would challenge it. In this scenario, the merger would be challenged by the FTC as it would be a threat to market competition and potentially harmful to customers.

exclusive dealing agreement

An ______ between a manufacturer and a dealer can be legal or illegal. It is legal if the purpose of the contract is to encourage competition between dealers.

natural monolopy

An industry that realises such large economies of scale that single-firm production of that good or service is most efficient.; A _____ arises when average costs are declining over the range of production that satisfies market demand. This typically happens when fixed costs are large relative to variable costs. As a result, one firm is able to supply the total quantity demanded in the market at lower cost than two or more firms—so splitting up the natural monopoly would raise the average cost of production and force customers to pay more.

merger

Combination of two or more companies into a single firm; A corporate ____ occurs when two formerly separate firms combine to become a single firm. Mergers can also be lateral, where two firms of similar sizes combine to become one.

Which of the following best describes the condition that leads to a natural monopoly?

Economies of scale are large relative to quantity demanded in a market.

monopoly

If perfect competition is a market where firms have no market power and they simply respond to the market price, ____ is a market with no competition at all, and firms have a great deal of market power.

allocative efficiency

In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost (P=MC), both in the short and long run. This outcome is why perfect competition displays _____: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production.

trade secrets

Information owned by the company by which the company gains a competitive advantage

Government passed the ______________________ to limit the power of large, consolidated firms that were run by trustees as if they were a single firm.

Sherman Antitrust Act in 1890

Historically, when an endangered species is discovered on private land, what has typically been the reaction of the government under a command-and-control approach to environmental law?

The government prohibits the property owner from using his or her land.

productive efficiency

The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. This outcome is why perfect competition displays _____: goods are produced at the lowest possible average cost.

acquisition

When one firm purchases another, it is called an _____. An acquisition may not look just like a merger, since the newly purchased firm may continue to operate under its former company name.

Consider a member firm in an oligopoly cartel that is supposed to produce a quantity of 10,000 and sell at a price of $500. If this firm raises its price to $600, how does the kinked demand curve explain the market responses to this price increase?

When price by one firm increases on the kinked demand curve, that firm's demand drastically decreases. Output demand for the firms that kept price low will increase.

Barriers to entry

_____ are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting. Once an entrepreneur or firm has purchased the rights to all of them, no new competitors can enter the market.

market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Duopoly

an oligopoly consisting of only two firms

Externalities

economic side effects or by-products that affect an uninvolved third party; can be negative or positive

external costs

harmful impacts of market transactions are borne by people not involved in the transaction

examples of barriers to entry

high advertising dollars high capital expenditures distribution access switching cost product identity economies of Scale patents government regulations exclusive access to an important intput tech innovations

All of the following are examples of regulatory capture during the deregulation of the airline industry except:

the airlines did not provide most of the information on which the regulatory board made decisions.

collusion

By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide the profit among themselves. When firms act together in this way to reduce output and keep prices high, it is called _____. A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price is called a cartel.

predatory pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market in which a firm uses the threat of sharp price cuts to discourage competition. Predatory pricing is a violation of U.S. antitrust law, but it is difficult to prove.

Globalization

the process by which businesses or other organizations develop international influence or start operating on an international scale.

copyright

A _____, according to the U.S. Copyright Office, "is a form of protection provided by the laws of the United States for 'original works of authorship' including literary, dramatic, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural, and audiovisual creations."

false

A monopolistically competitive industry displays productive and allocative efficiency in the short run and long run.

a legal monopoly

Under U.S. law, no organization but the U.S. Postal Service is legally allowed to deliver first-class mail. This is an example of what?

game theory

a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. _____ has found widespread applications in the social sciences, as well as in business, law, and military strategy.

legal monopoly

a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright; where laws prohibit (or severely limit) competition.

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms Similarly, a ____ will arise when the quantity demanded in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve.

payoff matrix

a table that shows the payoffs that each firm earns from every combination of strategies by the firms

accounting profit

although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive down economic profits to zero in the long run. Remember that zero economic profit is not equivalent to zero accounting profit. A zero economic profit means the firm's _____ is equal to what its resources could earn in their next best use.

market power

the power to raise price above marginal cost without fear that other firms will enter the market the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Total profit is the sum of marginal profits. To find total profit at output level Q=5, add the marginal profits through Q=5.

750+750+450+0+(−250)=$1,700

cartel

By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide the profit among themselves. When firms act together in this way to reduce output and keep prices high, it is called collusion. A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price is called a ______.

Deregulation

The combination of improvements in production technologies and a general sense that the markets could provide services adequately led to a wave of _____, starting in the late 1970s and continuing into the 1990s. This wave eliminated or reduced government restrictions on the firms that could enter, the prices that they could charge, and the quantities that many industries could produce, including telecommunications, airlines, trucking, banking, and electricity.