econ doe

Market Structure: Oligopoly

# of Firms: A Few Type of Product: Similar, but slightly differentiated. Barriers: High.

Market Structure: Monopoly

# of Firms: One Type of Product: Unique. (No substitutes for it.) Barriers: High.

Why are Most Collusive Oligopolies Short Lived?

- collusive oligopolies are strictly illegal under antitrust laws. - for collusion to work, firms must agree to restrict output to a level that will support the profit‑maximizing price.

Collusion

- when firms act together to restrict competition - Illegal in US - Same disadvantages as monopoly - Goods are overpriced. - Goods are under-produced. - Consumers lose out from a misallocation of resources.

In PC, MR [2] P. For a MONOPOLIST, MR [3] P.

2. = 3. <

Then, it chooses the price. It charges the [2] price that consumers are willing and able to pay for the quantity (Q*). (i.e. from the Demand curve).

2. highest

Economies of Scale

A situation in which goods can be produced more efficiently and cheaply by larger companies.

Which of the following is NOT generally true about a profit-maximizing monopolist?

A. The monopolist faces a perfectly elastic demand curve.

A price-discriminating monopolist will tend to charge a lower price to students if it believes that students:

A. have a lower willingness to pay than other demanders.

If a regulatory board wanted to make sure that a natural monopoly chose a price resulting in the efficient level of output, it should set a price equal to:

A. marginal cost.

Efficiency in Oligopolies

Allocatively and Productively inefficient Dynamically efficient - supernormal profits are invested in process and product innovation

X-inefficiency is said to occur when a firm's

Average costs of producing any output are greater than the minimum possible average costs

Mutual interdependence means that:

D. firms must anticipate the possible reaction of rivals to their own economic behavior.

Problem #1 with monopoly, when price of good exceeds marginal cost, this results

Deadweight loss

3 problems with monopoly

Deadweight loss, lack of innovation, rent-seeking

In moving down the elastic segment of the monopolist's demand curve, total revenue is

Increasing and marginal revenue is positive

Tangency Solution

a long-run equilibrium situation in which the firms downward sloping demand curve is tangent to its LRATC curve; 0 economic profits are earned.

oligopoly

a market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition

cartel

an alliance of firms that collude to restrict output and inflate price

In a typical cartel agreement, the cartel maximizes profit when it:

behaves as a monopolist.

oligoply

few firms homogeneous or differentiated not easy to access, restricted or prevented

The key defining feature of an oligopoly is that...

firms are strategically interdependent.

Many communities have granted monopoly rights to cable companies. This is an example of a monopoly created through:

government licensing.

Graphically, the marginal revenue curve of a monopolist:

lies below the demand curve of a monopolist.

Firms may be tempted to cheat on cartel agreements by:

lowering price and increasing output.

Total cost equals the sum of fixed costs and average costs.

true

the monopolist can potentially continue to earn economic profits in the long run.

true

mutual interdependence

when a firm shapes its policy with an eye to the policies of competing firms

benefits of a monopoly

-provides incentives for research and development -if firms were required to charge Marginal costs, then goods that have a large fixed cost would never be profitable

If marginal revenue on the tenth unit of output equals $4 for a non-discriminating, profit-maximizing monopolist, then price:

. is greater than $4.

An oligopoly firm is generally characterized by:

. its consideration of rivals' reactions, the possibility of realizing economic profits in the long run.

If a monopolistic competitor wants to increase its output, it can... What is the change to the demand curve if it takes this action?

...cut its price. (Movement ALONG its demand curve to the right.)

If a monopolistic competitor wants to increase its output WITHOUT cutting its price, it can... What is the change to the demand curve if it takes this action?

...engage in nonprice competition (like advertising). (SHIFT its demand curve to the right.)

In the SR, firms in monopolistic competition...

.can make profit > 0, profit < 0, or profit = 0.

List characteristics of pure monopoly

1) Determines price, is the price taker. 2) Demand curve is downsloping, not horizontal. 3) P > MR for each level of output after the first. 4) The firm is the entire industry. 5) No supply curve. 6) Potential long-run economic profit. 7) Doesn't result in allocative efficiency. 8) Single seller in market. 9) No close substitutes for product. 10) Entry to industry by potential competition is blocked. 11) Might engage in nonprice competition by advertising to increase demand for product.

In MONOPOLY, the firm has some power over the price. 1) The firm first chooses the quantity (Q*) based on where [1].

1. MR = MC

Requirements for Price Discrimination

1. The firm must have a DOWNWARD-sloping demand curve. (Some people willing to pay more than others.) 2. The firm must be able to identify which consumers are willing to PAY MORE. (Which consumers have a more elastic / inelastic demand.) 3. The firm must be able to prevent low-price customers from reselling to high-price customers. (Ex. Receiving a discounted ticket and reselling it to people who typically buy full-priced tickets.)

Recall: A supply curve tells us the quantity producers are willing and able to supply to the market at each market price. A monopolist ________ have a supply curve because the ________ is based upon the slope of the Demand, MR, and MC curves.

1. does not 2. profit maximizing quantity

What are the three reasons that a market might have a monopoly? Give two examples of monopolies and explain the reason for each.

A market might have a monopoly because: (1) a key resource is owned by a single firm; (2) the government gives a single firm the exclusive right to produce some good; or (3) the costs of production make a single producer more efficient than a large number of producers. Examples of monopolies include: (1) the water producer in a small town, who owns a key resource, the one well in town; (2) a pharmaceutical company that is given a patent on a new drug by the government; and (3) a bridge, which is a natural monopoly because (if the bridge is uncongested) having just one bridge is efficient

pure monopoly

A monopoly in which there is only one seller, there are no substitutes for a product or service, getting into and out of the market is difficult, and there is almost complete control over prices

Cartels are thought to be inherently unstable because:

B. each cartel member can privately profit from increasing production beyond agreed-upon levels.

f a profit-maximizing monopolist finds that marginal cost is increasing and exceeds marginal revenue, it will:

B. increase price and decrease output.

Under conditions of oligopoly markets, firms generally don't like to compete based on price. Why?

Because competing on the basis of price can set off a price war among competitors and significantly reduce profits to the firm.

Price discrimination

Business practice of selling the same good at different price to different customers

If an oligopolist reduces the price of its product relative to its competitors:

C. some customers will switch from rival firms to buy from him.

An example of an oligopoly is

C. the tobacco industry.

Market Structure: Monopolistic Competition

Competition # of Firms: Many Type of Product: Similar, but slightly differentiated. Barriers: None to Minimal.

A firm is a natural monopoly if it exhibits the following as its output increases:

Decreasing average total cost.

List & explain barriers to entry that shield pure monopolies from competition

Economies of scale, patents, licenses, pricing strategies & advertising, & control of essential resources.

x - inefficiency

Effect monopoly has on economy. Monopoly has output level higher than lowest possible cost of production, meaning long run AC higher at every level of output in contrast to pure competition

Rent-Seeking Behavior

Effect monopoly has on economy. When a company lobbies the government for loan subsidies, grants or tariff protection. These activities don't create any benefit for society, they just redistribute resources. Trying to gain money or increase market shares without actually creating a product or selling anything. In form of legal fees, lobbying, and public relations expenses. All add nothing to output but do increase monopoly cost.

Which of the following statements characterize an oligopoly market?

Firms are aware that their own economic behavior will influence the decisions of rivals.

Which of the following is true of monopoly but not true of perfect competition?

Firms can potentially earn economic profits in the long run.

Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain

Government-created monopoly comes from the existence of patent and copyright laws. Both allow firms or individuals to be monopolies for extended periods of time—20 years for patents, the life of the author plus 70 years for copyrights. But this monopoly power is good, because without it, no one would write a book or a song and no firm would invest in research and development to invent new products or pharmaceuticals.

monopolies, General about MR and Demand

In a competitive market, the marginal revenue curve equals the demand curve. However, in a monopoly, the MR curve is less than demand curve. In a monopoly, in order to sell more (increase Q), P has to decrease. This is because there is a downward sloping demand curve. When Q increases, P decreases along the downward sloping demand curve

Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by

MC = MR (marginal cost equals marginal revenue)

order of monopoly problem

MR= qm= Pm= TY= CSm= DWL- Pc= Qc= CSc=

Natural monopoly

Monopoly that aries because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Allocative inefficiency due to unregulated monopoly is characterized by the condition

P > MC

There is allocative inefficiency in a monopoly because...

P > MC. (In other words, MR > MC.)

Which of the following is always TRUE for monopolies?

P > MR

Fair-Return Price

P=ATC, Gov. regulation method on monopolies to reduce misallocation of resources & try to control prices. Where price level is determined by the intersection of ATC & demand schedule. Covers cost of production, earns normal profit, but not an economic profit. May cause less efficient allocation of resources, however.

Oligopolistic, or concentrated, industries are likely to be inefficient; name briefly the 4 reasons for this

P>MC; not in society's best interest; promise of new and exciting products; international trade

For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price P, marginal revenue MR, and marginal cost MC?

P>MR and MR=MC

Long-Run Equilibrium in Monopolistic Competition

TR = TC Profits = 0

Describe why a monopolist might prefer to charge different prices in different markets

To maximize profits in each market produce where MR = MC. Higher price charged in markets with less elastic demand, lower price charged in markets with more elastic demand.

Which of the following best explains why a monopolist's marginal revenue is less than the sale price?

When a monopolist reduces price in order to sell more units, it must lower the price of some units that could otherwise have been sold at a higher price.

Describes the two problems that arise when regulators tell a natural monopoly that it must set a price equal tc marginal cost.

When regulators tell a natural monopoly that it must set price equal to marginal cost, two problems arise. The first is that, because a natural monopoly has a marginal cost that is always less than average total cost, setting price equal to marginal cost means that the price is less than average total cost, so the firm will incur a loss. The firm would then exit the industry unless the government subsidized it. However, getting revenue for such a subsidy would cause the government to raise other taxes, increasing the deadweight loss. The second problem of using costs to set price is that it gives the monopoly no incentive to reduce costs.

Efficiency in Monopolies

X inefficiency - the lack of competition may give a monopolist less incentive to invest in new ideas. Even if the monopolist benefits from economies of scale, they have little incentive to control their costs. Allocative inefficiency - The monopoly price is assumed to be higher than both marginal and average costs leading to a loss of allocative efficiency and a failure of the market. Productive - According to their diagram they are productively inefficient. However they may face economies or diseconomies of scale.

Three airlines account for most of the air traffic in and out of a local city. If the three airlines joined together in setting fares and air travel schedules, economists would say that they were acting as:

a cartel, as the three airlines together would attempt to coordinate policies in the local market to jointly maximize profits.

mutual interdependence

a firms profits depend on the actions of the firm aswell as the reaction of other firms

price leadership

a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policty

cartel

a formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically

monopolistic competition

a market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price and in which there is considerable nonprice competition

collusion

a situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition

A price-taking firm and a monopoly firm are alike in that:

both maximize profits by choosing an output where marginal revenue equals marginal cost.

Efficiency in monopolistic competition

competition Allocatively inefficient - prices are above marginal cost Productively inefficient - saturation of the market may lead to businesses being unable to exploit fully economics of scale, this causes average costs to be higher Advertising and marketing could be said to be a waste of scarce resources Debate over the social costs of packaging and negative externalities is linked to monopolistic competition. Dynamically efficient in the SR?Associated with extensive consumer choice and innovation in the short run. In the long run only normal profits are made and so it is not possible X efficient - High levels of competition mean that firms have to be relatively x efficient to minimise costs. Efficiency in Monopolies

nonprice competition

competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers promotional expenditures (such as advertising, selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs.

At his current level of output, a monopolist has a Marginal Revenue of $10, a Marginal Cost of $6, and an economic profit of zero. If the market demand curve is downward sloping and his marginal cost curve is upward sloping, the monopolist:

could increase profit by increasing output.

The demand curve of a monopolist is:

downward sloping and above the marginal revenue curve.

A natural monopoly is likely to arise when:

economies of scale exist over the relevant range of demand.

The deadweight loss from monopoly arises because

monopoly arises because Some potential consumers who forgo buying the good value it more than its marginal cost.

Under which one of the following market structures are sellers most likely to consider the reaction of rival sellers when they set the price of their product?

oligopoly

Interdependence among firms is characteristic of:

oligopoly markets.

factors that facilitate collusion

product homogeneity similar cost technological stability a stable demand relatively inelastic demand a few firms

Pure monopoly assumptions

single seller in market unique product no price discrimination

assumptions of perfect monopoly

single seller in market unique product no price discrimination no entry

The interdependence among oligopoly firms arises because:

small number of firms produce a large share of industry output.