Ch.12: Regulation of Firms w/ Market Power

T/F: Price fixing is not illegal. It is just maintaining of prices at a certain level by agreement between competing sellers.

False

T/F: You can all get together to raise the price of Gas.

False

What will happen to firms in the market in the LR. (Marginal cost Pricing)

Firms will exit

Antitrust law prevents _____. Which are agreements between firms to jointly increase prices and decrease output.

Trusts

T/F: Natural monopolies are not economies of scale.

False

A firm that can produce for an entire market at a lower cost than a market w/ many producers.

Natural monopoly

Average cost pricing output is not ________. P > MC and society would like more produced.

Allocatively efficient

The goal of natural monopoly regulation is to

Allow a monopoly to exist when cost conditions are such that a large firm can produce at lower costs, and to encourage them to produce an amount that is closer to economic efficiency than they would produce on their ow

Legislation that restricts deliberate formation of monopolies and prevents firms from engaging in anticompetitive practices

Antitrust Law

_________ focuses on preventing price fixing, mergers, predatory pricing, tying of products, and other practices when those activities reduce the competitiveness of a market.

Antitrust law

If large firms have large economies of scale , it may be best to let them exist and not apply___.

Antitrust law.

Regulators of a natural monopoly concerned most with the monopoly's profits will set prices equal to ________. A. Marginal cost B. Average cost C. The price that would be charged in a perfectly competitive market D. Marginal revenue E. A level that will result in the monopolist producing the quantity where average costs are at a minimum

Average Cost

Set the price equal to the average cost at the corresponding quantity demanded

Average cost pricing

A firm engaged in predatory pricing will set its price in which of the following ways? A. Below the marginal cost B. Below the average variable cost in the short run C. Below the average cost to drive out competition and then increase price D. Below the marginal cost even if it has many competitors and is a price taker

Below the average cost to drive out competition and then increase price

A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry. Other similar measures, that indicate the degree of market power and competitiveness, are often used.

Concentration ratio

Mergers can sometimes be socially beneficial if they do which of the following? A. Reduce competition in the market B. Enhance the quality of the products C. Increase costs D. Increase market pricing power of oligopolies

Enhance the quality of the products

______is the % of industry sales sold by the four largest firms in the industry.

Four firm concentration ratio

Mergers between firms that are in the same industry.

Horizontal mergers

Regulators of a natural monopoly concerned most with economic efficiency will set prices equal to ________. A. Marginal cost B. Average cost C. The price that would be charged in a perfectly competitive market D. Marginal revenue E. A level that will result in the monopolist producing the quantity where average costs are at a minimum

Marginal cost

Setting the price of a natural monopoly equal the marginal cost at the given quantity demanded.

Marginal cost pricing

Microsoft and Internet Explorer set a "better than free" Price for the purpose of weakening rivals and maintaining an operating system monopoly. They realized that charging for internet explorer would generate additional revenue but chose not to in order to prevent rivals from revenue.

Predatory Pricing

When a firm lowers prices with some or all customers & earns a loss in order to drive competitors out of the market. Prevent entry by potential rivals. This allows the firm to increase its market power and eventually raise prices.

Predatory Pricing

A firm that lowers prices with the purpose of driving competitors out of a market, increasing its own market power, and eventually reducing output and raising prices is engaging in predatory pricing.

Predatory pricing

Examples of natural monopolies or economies of scale?

Public utilities, phone lines

If the merger results in a high concentration index merged firms will be able to ___prices and ____profits.

Raise, increase

___________________(HHI) measures the sum of squares of market shares of all firms in the market and gives greater weight to the largest firms (Used by FTC).

Sum of square concentration index.

Consider a profit-maximizing firm with significant economies of scale that is subject to marginal cost pricing regulation. The regulation will produce ______________ production from the standpoint of economic efficiency and the firm will ______________ economic profits. A. Too much; not earn B. The correct amount; not earn C. Too much; earn D. Too little; earn E. Too little; not earn

The correct amount; not earn

In the oil industry, John D. Rockerfeller's firm the standard oil company. Aggressively bought refineries and oil companies. This is an example of__.

Trust

The purpose of government regulation of natural monopolies is to do which of the following? A. To allow monopolies to exist B. To allow monopolies to exist when they can produce at higher costs C. To allow monopolies to exist when they can produce at lower costs D. To not allow monopolies to exist because they always fail

To allow monopolies to exist when they can produce at lower costs

What is the purpose of antitrust law?

To prevent a few or one firm from gaining a large share of market

A profit-maximizing firm facing economies of scale that is subject to average cost pricing regulation will produce ______________ from the standpoint of economic efficiency and ______________ economic profits. A. The correct amount; earn B. The correct amount; not earn C. Too much; not earn D. Too little; earn E. Too little; not earn

Too little; not earn

T/F : Natural monopolies cannot achieve economic efficiency.

True

T/F: Each firm is free to set their own prices, charge the same as competitors as long as the choice was not based on agreement or coordination with other firms.

True

T/F: Firms earn normal profits. Average cost pricing. Firms has an incentive to stay rather than exit in LR.

True

T/F: There may be instance where free markets will not work to achieve economic efficiency

True

What kind of merger is this? Vertical or horizontal? A firm producing laptops merges with a firm producing laptop processors

Vertical

Mergers between two firms at differing stages of the production process.

Vertical mergers

When does illegal price fixing occur?

Whenever 2 or more competitors take action to raise, lower or stabilize the price of a good w/out reason. (Per the FTC)

The reason to regulate a natural monopoly is that a natural monopoly ______________ produce an economically efficient amount of output, ______________ charge a higher price than the perfectly competitive industry, and ______________ have lower average costs than a perfectly competitive industry. A. Will not; may; will B. Will; will; will C. Will not; will not; will not D. Will not; will; will E. Will; will not; may

Will not; may; will

What do firms do when average cost prices? Economic profits are =

Zero

What can firms do when Average cost pricing? Charge a ____ & ___ fee. Firms dont make lossses

service, usage

If two firms are competing, one firm raising prices will ____sales to the competing firm.

lose

Marginal cost pricing, but MC < AC -What does this mean for firms they are making an economic ___.

loss

Electricity, natural gas, water, and cable-TV companies are ________ and are regulated by federal, state, or local regulatory agencies.

natural monopolies

Natural monopolies: Because they are economies of scale they can lower ____ and ____ output to drive out competitors

prices, increase