micro final

argument for market power

large firms can sometimes produce more efficiently than small firms because of economies of scale in production

monopoly marginal revenue

less than price, equal to change in total revenue/change in quantity

When a new firm enters a monopolistically competitive market,

market price will decrease

perfectly competitive demand curve

horizontal, perfectly elastic

market failure

imperfection in the market mechanism that prevents optimal outcomes

oligopolistic behavior

includes tacit collusion

State and evaluate the arguments made for concentration of market power.

(1) Monopolies have greater ability to pursue research and development since they are sheltered from the constant pressure of competition and have the resources with which to carry out expensive R&D. The problem with this argument is that monopolists have no clear incentive to pursue R&D. (2) The lure of market power creates a huge incentive for invention and innovation. The problems with this argument are that innovators can make substantial profits in competitive markets before the competition catches up and that the presence of barriers to entry can actually dissuade entrepreneurs from following up on promising ideas. (3) If economies of scale exist, large companies can produce goods more efficiently than smaller firms. However, some firms and industries won't be subject to economies of scale, and even when economies of scale exist, there is no guarantee that consumers will benefit. (4) Monopolies have to worry about potential competition and will behave accordingly. Critics point out that the absence of existing rivals inhibits product and productivity improvements-monopolists change their behavior only in the face of actual competition, not potential competition.

characteristics of monopoly

- marginal revenue less than price - demand curve is same as market demand curve - positive profits in long run - productively inefficient due to ATC being greater than minimum ATC - prices set at output where mr = mc

monopolistically competitive

- no profit in long run, when demand = ATC and MR = demand - top four hold 20-40% market share - use nonprice competition

monopoly demand curve

A monopolist is the only firm in the industry. Therefore, market demand curve = monopolist demand curve. It is downward sloping.

Describe how monopolists use barriers to entry to maintain their pricing power.

Monopolists use patents, monopoly franchises, control of key inputs, lawsuits, acquisition, and economies of scale to keep from facing competition and thus maintain their pricing power. Patents are created by the government and give the patent-holding firm 20 years of exclusive rights to produce a particular product. Monopoly franchises are also created by the government and give a single firm the right to supply a particular good or service. If firms control key inputs, they can lock competing firms out of the market. Lawsuits create a barrier to entry when a monopolist alleging patent or copyright infringement derails competition by absorbing critical management effort, cash, and time. Monopolies can acquire other firms in the industry to reduce competition. Finally, some monopolies may persist because of economies of scale-that is, they have a substantial cost advantage over smaller firms.

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. This implies that the same level of industry output could be produced at lower cost with fewer firms, freeing resources for more desirable purposes.

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 amount of market power each firm possesses.

The perfectly elastic demand curve facing a perfectly competitive firm indicates that the firm has no market power. If the firm raises its price above the market price, it will lose all of its customers. The increasing inelasticity of the demand curves for the monopolistically competitive and the monopoly firms show increasing market power-that is, an increasing ability to raise prices without losing a significant proportion of customers.

Herfindahl-Hirschman Index

The square of the percentage market share (!!) of each firm summed over the 50 largest firms (or summed over all the firms if there are fewer than 50) in a market.

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

Two approaches to identifying potential antitrust violations are the behavioral and the structural approaches. The behavioral approach attempts to identify anticompetitive behavior by firms (e.g., coordination, predatory pricing, and price leadership). Practical problems associated with the behavioral approach include limited public sector funds to identify and prosecute offenders and difficulties in proving violations have taken place. The structural approach assumes that if a market is highly concentrated, antitrust violations have probably occurred-that is, firms with market power will act in their own best interests. Practical problems associated with the structural approach include the view that a firm should not be penalized just because it has been successful (without any evidence of wrongdoing) and the fact that the emphasis on existing market structure does not take into account potential competition (e.g., contestable markets and international competition).

Diagram a model of a monopoly experiencing economic profits. In your diagram show the monopolist's ATC, MC, MR, and demand curves. In addition, indicate the profit-maximizing output and price and the output and price that would prevail under marginal cost pricing. Using this diagram, explain why it is not in the monopolist's interest to use marginal cost pricing.

Yes, the marginal cost pricing outcome is the output and price where demand = MC. It is not in the interest of the monopoly to practice marginal cost pricing because MC MR for the additional units produced between the profit-maximizing output and the output where demand (price) = MC.

mr curve is below demand curve if

a firm must lower its price to sell additional output

market power

ability to alter the market price of a good or service

nonprice competition examples

advertising, more on-time flights, increased frequency of flights

cartel challenges

allocating market share, coordination, replicating monopoly outcomes

excess capacity

experienced by monopolistic firms when firm is producing LESS than the minimum ATC output rate - to eliminate: require firms to set price = marginal cost

theory of contestable markets

monopoly may not be a problem if potential competition exists

economies of scale

occur when a firm increases efficiency by investing in a larger plant or more equipment. over the entire range of market output, long run ATC is downward sloping.

production efficiency

output level that minimizes ATC

allocative efficiency

output level where price = marginal cost

predatory pricing

selling a product below cost to drive competitors out of the market

total profit

shown on graph as rectangle between y axis, the point on the ATC curve above MR = MC, and the demand curve

monopoly franchise

sought after by a firm in order to keep a market from being contested

marginal cost pricing

the offer (supply) of goods at prices equal to their marginal cost - NOT used by unregulated monopolist