Economics California Topic 4 Quick Study Guide

What is the main benefit cited by the American Airlines?

A faster-growing airline

What are the benefits of natural monopolies, and why do governments regulate them?

A new innovation can cut fixed costs and make small companies as efficient as one large firm. They regulate them because government actions themselves cna create barrier to entry in markets and thereby create monopolies.

Suppose government deregulation of an industry leads to the failure of several companies in that industry. Does that mean deregulation was a mistake? Why or why not?

California experienced a massive energy crisi in 2000 that forced the state to pay extraordinarily high rates for electricity. Many attributed this crisis to private energy companies, such as Enron, that may have used these rules to create an electrical storage. This would be a mistake because it lead to bankruptcy and several executives facing criminal charges reinstating the limits of competiton.

How might members of an oligopoly engage in collusion?

Collusive agreements set prices and output at the levels that would be chosen by a monopolist.

Using reliable sources, identify an industry that you think needs more or less government regulation in order to promote competition. Write a letter to your congressperson urging him or her to support regulation or deregulation. Support your argument with concepts you have learned in this lesson, and make sure that your organization and style are appropriate to your purpose and audience.

Dear Congressman, Firstly let's consider the benefits of government regulation. Regulations can help ensure fair business practices, protect consumers from harm, and prevent monopolistic behavior. By setting clear rules and standards, the government can level the playing field and encourage healthy competition. This can lead to innovation, lower prices, and improved quality of goods and services. I believe you know exactly how to promote competition the right way and will leave the rest of this in your hands. Thank you, Sofia Mantoen

What is the purpose of deregulation?

Depending on the degree, the government's action allowed - or forced - firms in these industries to compete by eliminating many price controls and barriers to entry.

What role does differentiation play in monopolistic competition?

Differentiated products of firms have some control over their selling price because they can differentiate, or distinguish their goods from the other products in the market.

Why might a company seek to establish a monopoly in its industry?

Given the law of demand, this means that the quantity of goods sold is lower than in a market with more than one seller.

Regulation and Deregulation

Government passes antitrust laws Laws are used to regulate industry New laws limit unfair business practices Deregulation promotes competition

What is the purpose of antitrust laws?

In 1890, Congress passed the Sherman Antitrust Act, which outlawed mergers and monopolies that limit trade between states. This and other laws gave the government the power to regulate industry, to stop firms from forming cartels or monopolies, and to break up existing monopolies.

What is the defining feature of pure competition?

In pure competition, the market is in equilibrium, and all firms sell the same product for the same price.

Lesson 3: Monopolistic Competition and Oligopoly

Involves competition among firms selling products that are similar, but not identical. Products are distinguished through differentiation, such as branding. Firms engage not only in competition through pricing, but also in non-price competition, or competition over the quality of goods, level of service, status, or location. Prices in competition are higher than in pure competition because no exact substitutes exist for products. The other is a market structure in which a small number of firms control the market and can influence prices by adjusting supply. Under this, firms may engage in collusion, or an agreement to illegally set prices and production levels.

Lesson 1: Pure Competition

Is a market structure in which a large number of firms produce identical products, no buyer or seller has a large enough share of the market to influence the price, buyers and sellers are well informed, and the firms must be able to enter or leave the market easily. Under this , the profits are greatest when producers' marginal cost just equals the price.

Lesson 2: Monopolies

It exists when barriers prevent potential competitors from entering a market with a single supplier. Economies of scale, in which costs fall as output increases, typically natural, markets that run most efficiently with a single supplier. Governments generally regulate the natural ones, in return for allowing firms to control them, so that excessive profits do not hurt consumers. Patents, which give inventors exclusive rights to income from their inventions, create temporary ones to reward creativity. These can maximize profits at higher prices and lower quantities supplied than firms in a competitive market.

Is government intervention to prevent the formation of monopolies consistent with free markets? Why or why not?

It is not to prevent the formation of monopolies because they create barriers to entry in markets and thereby create monopolies by issuing a patent.

Based on the graph, how did the merger change the domestic air travel market?

It reduced the number of big airlines

The graph below shows the percentage of cable broadband subscribers for leading cable providers in 2015. Was cable broadband an oligopoly in that year? Why or why not?

It was not for that year because it barely dominates any profitable firms at all producing only 5% of the output instead of the usal 70%-80% of the output in this kind of market.

Market with Pure Competition

Many buyers and sellers participate Sellers offer identical products Buyers and seller are well informed about products Sellers are able to enter and exit the market easily

Why would the firms in an oligopoly be more likely to earn excess profits than a large number of firms engaged in monopolistic competition?

This presents a big challenge to government, because these firms often seem to work together as a monopoly, even when they are not actually doing so using government regulations to act like more like competitive firms.

What are the defining features of an oligopoly?

Acting on their own or as a team, the biggest firms in an oligopoly may well set prices higher and output lower than in a purely competitive market.

Use examples of monopolistic competition to explain why companies prefer it to pure competition.

An example of this type of competitive market is the market for jeans. All jeans can be described as denim pants, but in stores, buyers can choose from a variety of brand names, styles, colors, and sizes.

Comparison of Market Structures

Number of Firms Perfect Competition Many Monopolistic Competition Many Oligopoly A few dominate Monopoly One Control Over Prices Perfect Competition None Monopolistic Competition Little Oligopoly Some Monopoly Complete Barriers To Entry Perfect Competition None Monopolistic Competition Low Oligopoly HIgh Monopoly Complete Examples Perfect Competition Wheat,shares of stock Monopolistic Competition Jeans,books Oligopoly Search engines, movie studios Monopoly Public water

Lesson 4: Government Regulation and Competition

Oligopolies and monopolies have market power, because they can set prices above the level that would exist in more competitive markets, or they may set prices below market levels to draw rivals out of business, a practice known as predatory pricing. Antitrust laws enable them to prevent the formation of anti-competitive conditions such as monopolies or collusion, or to force the breakup of monopolistic firms. Deregulation is a process in which they seek to increase it by eliminating them that stands in the way.

How does a monopoly exercise market power?

These markets have only one seller, but any number of buyers with barriers to entry as the principal condition that allows these to exist.

Who would benefit more from pure competition compared to other forms of competition, producers or consumers? Explain.

Producers because they supply the goods and services for a competition that is quite simply, the effort of each supplier to be the one who meets the demand of as many consumers as possible.

Describe the basic characteristics of pure competition, monopoly, monopolistic competition, and oligopoly, and explain the similarities and differences between these market structures.

Pure competition has many buyers and sellers, identical products, informed buyers and sellers,easy market entry and exit. Monopolies have economies of scale, natural monopolies, technology and change. Monopolistic competition has many firms, few artificial barriers to entry, little control over price, and differentiated products. Oligopoly has barriers to entry, cooperation and collusion, and cartels. The similarities are barriers to entry and the differences are the changes in price.

In a two-to three-paragraph essay, evaluate the two sources' points of view and explanations for the merger. Assess the authors' claims,reasoning, and evidence, Determine which source best confirms what you have learned in your text about monopoly,oligopoly, and antitrust regulation. Note discrepancies among the sources, and note where the text leaves matters uncertain.Intergrating information for these sources and your text,analyze the issues surrounding this merger.

The Department of Justice and District of Columbia filed a civil antitrust lawsuit. This challenged the proposed $11 billion merger. That was between the US Airways Group Inc. and American Airlines' parent corporation, AMR Corp about it resulting in the creation of the world's largest airlines. The incoming chief executive offer of the merged airline ses the benefits of the merger. These benefits are that it would deny millions of customers access to a more competitive airline that will offer customers what they want. This would deliver significant benefits to consumers,communities, and employees. The US Department of Transportation has a range of domestic market shares in passenger miles, of airlines in 2014-2015.The JetBlue has 5.3%,Others has 25.0%, and American(merged with US Airways) has 20.1%. Last, the United has 14.7%, Delta has 16.9%, and Southwest has 18.0% passenger miles as of airlines from 2014-2015 according to the US domestic market shares.

How are decisions that maximize profit in a monopoly different from those in pure competition?

The differences between pure competition and monopolistic competition arise because monopolistically competitive firms sell goods that are similar enough to be substituted for one another,but not identical.

What are the benefits of natural monopolies?

The government action ensures that resources are not wasted by building additional plants when only one is needed to let government control the prices it can charge and what services it must provide.

What is the main concern cited by the Justice Department?

The size of the merger

Under what conditions might a company with market power decide to engage in predatory pricing? Why might a company with market power decide against predatory pricing?

To set a market price below their costs for the short term to drive competitors out of business. Economists are skeptical about most of the claims of this, because the predator loses money each time it drives an endless series of rivals out of businsess.

Why are start-up costs a barrier to pure competition?

When the beginning prices in a market are high, entrepreneurs are less likely to enter that market. As a result, markets that involve higher beginner prices are less likely to be pure markets.