Micro Exam 3 Essay Q's

Discuss specific cases that lead to an increase in the concentration and market power from deregulation.

1. Railroads: When alternative forms of transportation were becoming increasingly popular, regulated prices prevented railroads from adapting their prices and services to meet consumer demands. After deregulation, railroad companies were able to increase their share of total freight traffic by reducing their rates and improving service. The railroads prospered by reconfiguring routes and services, cutting operating costs, and offering lower rates. 2. Telephone Service: Satellites made it easier and less costly for firms to provide long-distance phone service. When deregulation occured, long-distance rates dropped significantly and the quality of service also improved within the industry as a whole and advancements 3. Airlines: Entry regulation was abandoned and because of this, the number of carriers increased greatly which intensified the competition. Many companies exited the industry due to being unable to match lower fares and increased service which allowed some major carriers to increase their market share. When American Airlines and the U.S. Airways merged, the concentration ratio jumped to 80%.

Discuss specific firm behavior that reduced the level of competition in an industry. What are the opportunity costs of greater concentration?

Acquisitions, patenting, and barriers to entry reduce competition in an industry. Some barriers to entry include patenting (receiving permission to to use the patented process or developing an alternative is very expensive, distribution control (Frito Lay paying a high price for shelf space),

Explain how market power is measured.

The determinants of market power are number of producers, size of each firm, barriers to entry, and availability of substitute goods. When only one or a few producers/suppliers exist, market power is automatically conferred. The standard measure of market power is the concentration ratio. This ratio relates the size of firms to the size of the product market. Additionally, for most firms, market power and firm size go hand in hand; more often than not, market power is associated with larger firms.

Explain why firms do not engage in the efficient amount of environmental protection. (FIX THIS)

The fact that the power plant imposes costs on others in the form of air and water pollution is irrelevant to its profit-maximizing decisions; behaviors are guided by comparions of revenues and costs, not the welfare of the environment. Even though it's ideal that private costs encompass all social cots, that is not always the case. Additionally, people want to maximize their person welfare, and don't hold as much regard for the other costs. The efficiencty decision leads to the use of high-sulfur coal. The polluter benefits by substituting external costs for private cost which means that market incentives encourage environmental damage.

Discuss the effects of technological change on the elimination of natural monopolies.

There are many examples of this. One is the slow, but near elimination of cable. Since streaming is becoming more popular with apps like Netflix, Hulu, and Disney+, less people are getting cable. In the same way, it is possible for the electric companies to become less profitable because solar energy is becoming more and more popular. Additionaly, in the telecommunication world, communication satellites made it easier and less costly to provide long distance service. Soon, long distance service as well as other phone line services became popular.

What is the main structural advantage of a natural monopoly? What is the price-output combination of an unregulated natural monopoly?

This is an industry in which one firm can achieve economies of scale over the entire range of market supply. This is because the firm has such prevelant economies of scale that it will naturally dominate its industry. Because of this, they are able to produce the products customeres want at the lowest price. The company will act like a monopoly which means that they will produce at an output where MC=MR and they look to the market demand curve to see what price to charge.

Explain the difference in focus between government regulation and government antitrust policy.

Antitrust policies are government interventions to alter market structure or prevent abuse of market power. Antitrust is focused more on enforcing the law and anti-monopoly practices, prohibiting mergers and acquisitions that reduce potential competition, and forbidding market behavior that is anticompetitive. It aids in maintaining and keeping a healthy competitive environment. Government regulation on the other hand focuses on behavior and seeks to change market outcomes directly by imposing specific limitations on price, output, or investment decisions on private firms.

If monopolisitcally competitive firms have some control over the prices they charge, why do they experience zero economic profits in the long run?

As long as other firms can enter the industry, the disappearance of economic profits is inevitable. This is due to their low barriers to entry, because other firms are able to enter, they will have that competition that can drive away profits. This eliminates long-run profits and reduces the demands for the output of existing firms.

Explain the differences between external costs, private costs, and social costs and how the presence of external costs leads to market failure.

External costs are the difference between private costs and social costs. Private costs are the resource costs incurred by the specific producer. Social costs are the total costs of all the resources used in a particular production activity. The presence of external costs leads to market failure because when there are external costs, the market mechanism won't allocate resources efficiently. This leads to a suboptimal mix of output and the wrong production processes.

Describe the typical demand curve facing an individual firm in perfectly competitive, monopoly, and monopolistically competitive markets. Explain what the shape of each firm's demand curve indicates about the market power each firm possesses.

Perfectly Competitive: It's a horizontal line at the price because the demand curve is perfectly elastic. This is because all of the firms deal with identical products. Mopoloy: The curve is downward sloping like the market demand curve because the monopoly is the only firm in the industry and there is no competition; the market demand curve is the monopolist's demand curve. Mopolistically competitive: The demand curve is sloping downwards because they don't have much control over the market price. They have more of an elastic demand curve than monopolies since they have substitutes unlike monopolies.

Why is there an emphasis on nonprice competition in oligopoly markets rather than on lowering prices to gain market share?

Price reductions destroy the ability to increase market share at the old price if an oligopoly chooses to lower prices. One firm's decision to lower prices means that other firms will follow suit which means increased output, but smaller profits. When one oligopolist increases market share by cutting prices, a general reduction in the market price will occur. Nonprice competition is preferred because it can allow for producers to strengthen brand loyality and make it expensive for new produces to enter the market through advertising. Nonprice competition allows for more benefits unlike price wars.

State the advantages and the disadvantages of output regulation.

Regulated minimums are designated so that consumers get the benefit of more output but also at a lower price. Unfortunately, this may result in a decline in quality because cost-cutting is the only way to increase profits when the rate of output is fixed and the price is on the demand curve. Since there's no competition, consumers have to accept whatever the monopolist offers.

Explain the behavioral and structural approaches to government antitrust policy. Identify one practical problem with each approach.

The behavioral apprach attemps to identify anticompetitive behavior by firms such as coordination, predatory pricing, and price leadership. A problem with this approach is the limited public sector funds to identify and prosecute violations. The structural approach prohibits mergers and acquisition to reduce potential competition and assumes that a market is highly concentrated meaning that firms with market power will do what is in their best interest. A problem with this approach is that the firm with power should not be penalized due to its successes.

Economists say that excess capacity in monopolistically competitive markets is "the cost to society of variety." What is the cost that economists are talking about, and why is this cost the result of having a variety of goods and services?

The cost to society is the goods and services that could have been produced with the resources that are wasted because monopolistically competitive firms do not produce at the minimum ATC in the long run. This cost exists because, in equilibrium, monopolistically competitive firms do not produce at the minimum ATC. The same level of industry output could be produced at lower cost with fewer firms, allowing for resources to be used for more desirable purposes.