Econ Test 3

true

A monopolist maximizes profit at the quantity where the slope of its total revenue curve equals the slope of its total cost curve.

Interlocking Directorate

A person serves on the board of directors of two or more competing firms

Exclusive Dealing

A supplier prohibits its customers from buying from other suppliers

Consent Decree

Accused party, w/o admitting guilt, agrees not to do whatever it was charged w/ if the government drops the charges

total welfare

Consumer surplus + Producer surplus

Barriers to entry

May allow monopolies to earn profit in the LR

true

Minimum-wage laws are a form of price regulation by government.

true

Oligopolies often sacrifice economies of scale as they expand product variety.

Horizontal Merger

One firm combines w/ another firm that produces the same type of product

true

Price discrimination that substantially lessens competition is prohibited by the Clayton Act.

MR=0

TR is maximized when:

false

The Clayton Act prohibits all horizontal mergers, regardless of their economic consequences.

true

The Sherman Antitrust Act makes it unlawful for firms to collude to restrain trade.

In order to sell an additional unit of its product, a monopolist must decrease price on all units

True

Tying Contract

a seller of one good requires a buyer to purchase other goods as part of the deal

Trade is higher than domestic price

export

It is harder to explain the behavior of firms in oligopoly than in other market structures because in oligopoly

firms base their decisions on what their rivals do

Trade is less than domestic price

import

If a firm is a natural monopoly, its

long run average cost declines over the full range of the market demand

If a monopolistically competitive firm raises its price, it

loses some, but not all, of its customers

Trade is same as domestic price

no change

To achieve allocative efficiency, firms

produce the output consumers want most

Firms achieve productive efficiency in the long run by

producing at their minimum long-run average cost

false

the defining characteristic of oligopoly is product differentiation

Price Leadership

-A form of tactic collusion is called price leadership -a large firm acts as a leader and establishes prices/policies -smaller firms simply follow suit -avoids price competition -Obstacles: -antitrust laws -product differentiation -no guarantee others will follow -barriers to entry -cheating on the agreement w/ many firms this is difficult

Social Regulation

-Aimed at improving health and safety -control over unsafe working conditions, dangerous products -health care reform -employees must get certain amount of breaks

Antitrust Division and FTC

-Challenges any merger in an industry that meets two conditions 1: If the HHI exceeds 2500 2: If the merger increases the index by more than 200 points

Economic Regulation

-Control over price, output, entry of new firms, quality of service -In industries in which monopoly appears inevitable or even desirable -Control over natural monopolies -local electricity, transmission, local phone service, subway system, waste management -land and air transportation

Challenges of Maintaining a Cartel

-Differences in avg cost -many firms in the cartel -low barriers to entry -cheating on the cartel agreement -technological change which can introduce new and cheap sources of supply

maximize their profit

-Even if a firm is receiving an economic loss, they can still...

Monopoly

-Firm that is the sole supplier of a good which has no close substitutes -barriers to entry: -legal restrictions (patents, copyrights, licenses) -economies of scale -control of resources (DeBeers and diamonds)

Advertising Game

-Firms can set a moderate or large advertising budget -If your budget is higher than your competitors you may steal some customers -if budgets are the same, you have the same amount of customers

Monopolistic Competition

-Firms that are partial monopolists compete by providing imperfect substitutes -a firm is a monopoly w/ respect to its brand, but there are close substitutes so it doesn't operate in monopolist marker -f.e. soda, clothing brands -many producers -free entry differentiated products (close substitutes) -some control over price (monopolistic part) -firms act independently -maximize profit at MC=MR

Perfect Price Discrimination

-First degree -least common -imagine if a monopolist could charge each person their exact willingness to pay -all welfare creating transactions occur, but all welfare is producer surplus

Sherman Antitrust Act of 1890

-First national legislation in the world against monopoly -Prohibited trusts, restraint of trade, monopolization -Vague and ineffective -extended by the Clayton Anti-Trust Act of 1914.

Prisoner's Dilemma

-Game in which each player has a dominant strategy that leads them toward a Nash Equilibrium which is suboptimal for the group -has a dominant-strategy equilibrium

HHI

-Herfindahl-Hirschman Index -Measure of market concentration

Perfectly Competitive Demand Curve

-Horizontal line at market price -perfectly elastic

Clayton Act of 1914

-Improved the Sherman Act -outlawed anticompetitive practices not prohibited by the Sherman Act -Price Discrimination -Tying contracts -Exclusive dealing -Interlocking directorates -Buying the corporate stock of a competitor

Perfect Competition

-Many buyers and sellers -Firms sell a commodity -standardized product -fully informed buyers and sellers -no barriers to entry

Deadweight Loss

-Measure of amount of inefficiency from a monopoly

Antitrust Policy

-Prevents Monopoly -Fosters competition in markets where competition is desirable -outlaws monopolies and cartels

Celler-Kefauver anti-merger act

-Prevents one firm from buying physical assets of another firm if the effect is to reduce competition -Prevents horizontal and vertical mergers

Nash Equilibrium

-Profile of strategies so that each player is getting the highest payoff possible conditional on the actions of the other players -each player is playing a best response

Types of Regulation

-Social Regulation -Economic Regulation -Anti-trust policy

2nd Degree Price Discrimination

-This is when you can determine which type a person is -set a price each for each type -student discounts -senior discounts -f.e. membership to AAA, or some other org

3rd Degree Price Discrimination

-This is when you can't determine which type a person is -develop different priced bundles to sort types -cell phone data plans -quantity discounts on larger packages

Unit Elastic

-When MR=0 -Revenue is maximized

Vertical Merger

-a merger in which one firm combines with another from which it had purchased inputs or to which it had sold output -Occurs when two or more firms, operating at different levels w/in an industry's supply chain, merge operations

Dominant Strategy:

-a strategy that gives a certain player a higher payoff than any of their other strategies, no matter what the other players do -if a player has one, they must play it -one doesn't need to exist

Collusion

-agreement among firms to increase economic profit by: -dividing the market -fixing the price -Illegal in the U.S.

Coordination Game

-any game in which players do best by matching the other's action -may have multiple Nash Equilibria

Natural Monopoly

-economies of scale leads to: -downward sloping LRAC curve (decreasing MC)

Federal Trade Commission Act of 1914

-established a federal body known as FTC -enforcement of antitrust laws -included commissioners, economists, and lawyers

Cartel

-group of firms that agree to some form of collusion, coordinate their production and pricing decisions to reap economic profit -illegal in the U.S. -maximize profit by allocating output among cartel members to the MC of the final unit produced by each firm is the same

Tit-for-tat

-in game theory, a strategy in repeated games when a player in one round of the game mimics the other player's behavior in the previous round; an optimal strategy for getting the other player to cooperate

Oligopoly

-market structure w/ a few firms -firms understand that profits are dependent on other firms, so their behavior is interdependent -can sell differentiated or undifferentiated goods/services -few firms, many buyers -some control over price -some barriers to entry -economies of scale -product differentiation -govt. regulation -less barriers than monopoly, but more than monopolistic comp and perfect comp

Price Discrimination

-monopolist engages in this if it charges different "types" of people different prices -requires: -ability to prevent/limit reselling of the product -knowledge of different types of consumers -ability to charge different prices easily/at low cost

Game Theory

-study of the interactions of intelligent decision makers -firms can play different strategies -each firm is a player -each firms profit depends on their action and on the actions of the other firms

Inelastic

-when MR<0 in Monopoly -lowering price decreases revenue

Elastic

-when MR>0 in Monopoly -lowering price increases revenue