Unit 3 Study Guide: Market Structures: 3


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Vocabulary Terms

Anti-trust laws
Public or natural
Market concentration
Monopolistic Competition
Market power
Perfect Competition
Barriers to entry
Price leadership/price makers & price takers
Product differentiation
Market failure
Monopoly power
Public good
Non-price competition
Vertical and horizontal combination
Diseconomies of scale
Economies of scale

Individual Questions

1. What is the difference between a price maker and a price taker?

2. A frequent argument in support of government-produced goods is that they are vital to social welfare and therefore their provision cannot safely be left to the “whims” of the marketplace. Does this explain why parks and libraries are usually municipal services, whereas food and medical care are usually secured through the market? Can you suggest a better explanation to account for these cases?

3. Why must an effective price fixing agreement between sellers include such restrictions on sales as output limitations or geographic divisions of sales territories?

4. How does monopoly affect market performance?

5. Some states have established legal minimum prices for liquor sold at retail. Do you think this eliminates competition among retail liquor stores? Why do you think retailers in such states often lend glassware without charge to customers planning parties?

6. There are three elements that must be present for a firm to be engaged in predatory pricing (1) below cost, (2) in order to eliminate rivals, and (3) with the intention of raising prices afterward to recoup. What factors would make the last step of the process difficult to complete? Under what kinds of circumstances would it be relatively easy?

7. Why don’t monopolists try to establish “the highest price possible”, as many people allege? What would happen to sales? to profits?

8. Why do oligopolistic firms sometimes collude to increase profits, and what problems do they encounter?

9. Why are some service stations, restaurants, and clothing examples of monopolistic competition?

10. What criteria are used to evaluate the amount of competition in a market?

11. What is a monopsony and how does this market structure impact pricing, production, and innovation?

12. What are horizontal and vertical organizations? Explain the difference between a monopoly and natural monopoly?

13. It has been argued that the development of the railroad in the middle of the nineteenth century substantially reduced the market power of many American manufacturing firms. Explain.

14. Is AMTRAK a monopolist? If you want to travel by train between cities in the U.S., you are likely to find that AMTRAK provides the only such service. Why is it nonetheless misleading to refer to AMTRAK as a monopolist? Is “intercity rail passenger service” a commodity for which there are no good substitutes?

15. One often reads that there are “only three firms in the industry” (or five firms, or eight firms), and that this is too few for competition to be effective. How would you define an industry? Do firms in different industries (however defined) compete with one another? Are all the firms within a single industry (however defined) in competition with one another?

16. If monopolies are undesirable, as almost everyone seems to assume, why do governments so often try to protect particular sellers against the competition that additional entrants to the industry would provide?

a. Why does the U.S. government prohibit people from competing with the Postal Service in delivery of first-class mail?

b. Why do cities almost always impose stringent restrictions on those who would like to provide a transportation service to compete directly with the city-owned or -licensed urban bus service?

17. The Seattle City Council stopped setting taxicab rates in May of 2000. Soon thereafter efforts began to compel the city to resume regulation. Are you surprised to learn that those efforts were financed and promoted by the owners of taxicabs? Do you believe their statement: We’re doing it to keep the people from being ripped off’?

18. Mergers of two or more competing firms, as well as of firms that are not in competition with one another, have been increasing in recent years. We know that new investment adds capacity to the supply of goods and services. It also may increase competition. Expansion by merger, on the other hand, does not add to supply or capacity, and it may reduce competition. Mergers however may result in greater efficiency in the future.

a. Explain how mergers may result in greater efficiency.

b. Support the argument that mergers lead to greater inefficiencies.

c. When would you favor, and when would you oppose, mergers?