ECC1000 Lecture Notes - Lecture 10: Monopolistic Competition, De Beers, Recording Industry Association Of America Certification

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What is Special about Competitive Markets?

1. Allocative efficiency: competitive market output where demand equals supply,

maximising total surplus for the society (if no externalities)

2. Technical efficiency: Competitive firms operate at the efficient scale - minimum

ATC

How to make and sustain positive profits in a competitive market?

1. Cost Cutting Strategy

a. Produce at lower ATC than others

2. Product Differentiation

a. Main way

b. Competition is a matter of how close substitutes there are for your product

c. The more you successfully differentiate your product from competitors’, the

less elastic your demand gets

d. Successful differentiation is a source of market power

e. Monopolistic Competition model

Week 10 To do: Read Chap 15, 16, and 18 (pp 400-406), Complete Aplia test by

Sunday 23:30

Monopoly

Examples of Monopoly

●Alcoa (until 1940)

●De Beers (throughout the 20th Century)

○Used to produce almost all of the world’s diamond until 1900

○Presently accounts for about 35% of the total annual global diamond

production (others include Zaire, Russia, Botswana, Namibia and Australia).

○Throughout the 20th century, controlled over 85% of diamond sales by

forming a cartel

○Inviting a selected number of buyers called ‘sightholders’, offering a ‘sight’ (a

packet of pre-graded stones) on a take-it-or-leave-it basis.

●AT&T (until 1983 break up)

●Water Service

●Train

●Google

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Market Structure Triangle

●

Monopoly: Need Barrier to Entry

1. Government-created monopolies

a. Patent, copyright laws

i. Give you the rights to use this property for a specific period of time

b. Regulation eg Australia Post, utility companies

2. Exclusive ownership of key resources

a. Inputs to production eg Alcoa, De Beers

i. Alcoa - make aluminum and signed agreements with dams for

exclusive rights to use hydroelectric plant power to produce it making

it significantly more expensive more competitors

ii. De Beers owned the monopoly over distribution and owned most of

the diamond mines.

b. Distribution network eg cable tv before internet, canals before air and train

delivery

3. Natural monopoly aka economies of scale

a. A single firm can serve the entire market at a lower average cost than more

firms typically due to economies of scale

b. Examples: Distribution of gas, electricity and water

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d. Microsoft Example TFC = $5 bil AVC = MC = $2

Single Price Monopolist

●Must charge same price on all units to all customers

Profit Maximisation for Single Price Monopolist

●Condition for profit max = MR = MC (true for all firms!)

●For a monopoly, P > MR

○Price is average revenue P = AR (by definition!)

○Monopoly demand curve is market demand curve which is downward sloping

(Law of Demand). So AR = P decreases as Q increases

○Recall if average falls, then marginal less than average

○Conclusion MR < P

○Intuition: to sell another unit, monopolist must reduce price, so gets less on

previous units

●Conclusion from point 1 and 2: profit maximisation for a single price monopolist

results in price exceeding marginal cost: P > MC

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Document Summary

What is special about competitive markets: allocative efficiency: competitive market output where demand equals supply, technical efficiency: competitive firms operate at the efficient scale - minimum maximising total surplus for the society (if no externalities) Week (cid:544)(cid:543) to do: read chap (cid:544)(cid:548), (cid:544)(cid:549), a(cid:300)d (cid:544)(cid:551) (cid:625)pp (cid:547)(cid:543)(cid:543)-(cid:547)(cid:543)(cid:549)(cid:626), co(cid:299)plete aplia test by. Used to produce almost all of the world"s diamond until 1900. Presently accounts for about 35% of the total annual global diamond. Throughout the 20th century, controlled over 85% of diamond sales by production (others include zaire, russia, botswana, namibia and australia). forming a cartel packet of pre-graded stones) on a take-it-or-leave-it basis. Inviting a selected number of buyers called sightholders", offering a sight" (a. Give you the rights to use this property for a specific period of time: regulation eg australia post, utility companies, exclusive ownership of key resources a.

Related Questions

1).

A consumer spends more time searching for a good when her reservation price is:

increased.

reduced.

fixed.

None of the statements is correct.

2).

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.

Which of the following are Nash equilibrium payoffs in the one-shot game?

(0, 0)

(5, -5)

(-5, 5)

(10, 10)

3).

A risk-neutral individual would:

prefer $5 with certainty to a risky prospect with the expected value of $5.

prefer a risky prospect with an expected value of $5 to a certain amount of $5.

be indifferent between a risky prospect with an expect value of $5 to a certain amount of $5.

prefer a risky prospect with the expected value of $0.50 to $5 with certainty.

4).

Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using?

Price discrimination

Two-part pricing

Commodity bundling

Cross-subsidization

5).

The short run is defined as the time frame:

in which there are no fixed factors of production.

in which there are fixed factors of production.

less than one year.

less than three years.

6).

Fixed costs exist only in:

the long run.

capital-intensive markets.

the short run.

labor-intensive markets.

7).

Top of Form

Non-fed ground beef is an inferior good. In economic booms, grocery managers should:

increase their orders of non-fed ground beef.

reduce their orders of non-fed ground beef.

not change their orders of non-fed ground beef.

neither increase, reduce, nor maintain their current orders for non-fed ground beef.

Bottom of Form

8).

Which of the following pricing strategies is NOT used in markets with special cost and demand structures?

Peak-load pricing

Cross-subsidization

Transfer pricing

Low-price guarantees

9).

A perfectly competitive firm faces a:

perfectly elastic demand function.

perfectly inelastic demand function.

demand function with unitary elasticity.

None of the answers is correct.

10).

The special demand structure that induces a firm to use a cross-subsidization strategy is:

perfect substitution among products.

imperfect substitution among products.

independent demand for products.

interdependent demand for products.

11).

Which of the following factors reduces the need for government involvement in the marketplace?

The presence of externalities

The incentive to rent-seek

The need for public goods

Incomplete information

12).

Which of the following statements is true?

A mineral rights auction is not the same as a common-value auction.

An auctioneer is always indifferent between different kinds of auctions.

The Dutch and first-price, sealed-bid auctions are strategically equivalent.

An English auction always yields lower expected revenues than a second-price, sealed-bid auction.

13).

Which of the following is true concerning negative externalities?

Firms tend to produce more than the efficient level of output.

Society gains because firms do not pay the external costs of production.

Perfect competition is better than monopoly from the viewpoint of society even in the presence of negative externalities.

With negative externalities, a monopoly will always produce an output level less than is socially efficient.

14).

Which of the following is true under monopoly?

P > ATC

P > MC

P = MR

P = ATC

15).

Differentiated goods are NOT a feature of a:

perfectly competitive market.

monopolistically competitive market.

monopolistic market.

perfectly competitive market and monopolistic market.

16).

Producer surplus is measured as the area

below the demand curve and above the market price.

above the demand curve and below the market price.

above the supply curve and below the market price.

below the supply curve and above the market price.

17).

Jaynet spends $25,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm â one offer was for $105,000 per year, and the other was for $85,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 30 paintings per year at a price of $9,000 each:

a. What are her accounting profits?

$

b. What are her economic profits?

$

18).

You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1âs elasticity of demand is -2, while group 2âs is -4. Your marginal cost of producing the product is $40.

a. Determine your optimal markups and prices under third-degree price discrimination.

Instruction: Round your answers to two decimal places.

Markup for group 1:
Price for group 1: $

Markup for group 2:
Price for group 2: $

b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.

Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.

	At least one group has elasticity of demand less than one in absolute value.
	There are two different groups with different (and identifiable) elasticities of demand.
	We are able to prevent resale between the groups.
	At least one group has elasticity of demand greater than 1 in absolute value.

19).

You are the manager of a firm that receives revenues of $60,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between productY and X is -1.4.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Instructions: Round your answer to the nearest dollar. Include a minus (-) sign if applicable.

$

redtiger788

A consultant has advised Consolidated Fish, Inc., a perfectly competitive firm, that it should cut back its production in order to increase its profits. We can conclude from this that

CF's total costs must be greater than its total revenues.

CF's marginal cost must be greater than the price of its product.

CF's costs are increasing at a rate less than its revenues.

fixed costs are not being covered and CF should shut down.

If marginal cost is equal to marginal revenue

the firm should hold output constant.

the firm should expand output.

there is no way to determine if the firm should expand output, contract output, or hold output constant.

the firm should contract output.

Which statement is true?

The minimum point on the firm's marginal cost curve is the shutdown point.

The minimum point on the firm's average variable cost curve is the shutdown point.

The minimum point on the firm's average total cost curve is the shutdown point.

The minimum point on the firm's marginal cost curve is the break-even point.

As output expands beyond the break-even point, the vertical distance between the AVC and ATC will

remain constant.

get smaller.

get larger.

Total revenue divided by output equals

average variable cost.

marginal cost.

price.

average total cost.

A monopoly firm selling mustache wax to vain men in a small town is currently maximizing profits by charging a price of $5. It follows that the marginal cost of mustache wax

is equal to $5.

is greater than $5.

is less than $5.

None of these choices are true.

A firm can sell 14 units at $18, but to sell 15 units, the firm must cut the price to $17. The marginal revenue derived from selling the 15th unit is

-$18

$17

If total revenue is increasing as output is rising, then

marginal revenue must be greater than zero.

marginal revenue must be less than zero.

marginal revenue must be equal to zero.

price must be increasing.

Firms that had virtual monopolies, that is control over at least 80 percent of industry production, because of control over an essential resource include all of the following except

the DeBeers Diamond Company.

the Standard Oil Company.

the Ford Motor Company.

the International Nickel Company.

10.

Which statement is true?

None of these statements are true.

Most natural monopolies are government regulated or government owned.

All monopolies are bad.

All monopolies are good.

11.

Which is the most accurate statement?

There are virtually no oligopolies in the U.S.

The most important aspect of oligopoly is product differentiation.

There are a whole range of oligopolistic models, from a cartel to cutthroat competition.

An oligopolistic industry cannot have more than five firms

12.

Oligopolists have more control over prices than monopolistic competitors because

their prices are always set by the government.

since an oligopolist is the only competitor in the market, setting prices is no problem.

they can legally collude whereas monopolistic competitors may not.

with fewer competitors, they are able to monitor and determine their own prices much easier.

13.

The definition of monopolistic competition differs from that of perfect competition

in neither the number of firms nor the type of product.

in both the number of firms and the type of product.

with respect to the type of product.

with respect to the number of firms in the industry.

14.

The typical monopolistic competitor

may compete on the basis of physical differences, convenience, service, and ambience.

always competes on the basis of producing a product that is physically different from those of its competitors.

never uses price discrimination.

is a large firm.

15.

Which statement is true?

The monopolistic competitor may make a profit in the long run.

The monopolistic competitor has a perfectly elastic demand curve.

None of these statements are true.

The monopolistic competitor operates at the minimum point of her ATC curve.

16.

Which statement is true about the monopolistic competitor in the long run?

It will be breaking even.

It will be making a profit.

It may be making a profit or taking a loss.

It will be taking a loss.

17.

Which statement is true?

Most monopolistic competitors are large firms.

Monopolistic competitors produce goods or services for which there are no close substitutes.

None of these statements are true.

Monopolistic competitors usually operate at the minimum point of their average total cost curves.

18.

Which statement is false?

As the price of a good rises the consumer surplus decreases.

A person would maximize her total utility when she had no consumer surplus.

We will consume a service when its marginal utility is equal to its price.

A product's utility to a buyer is measured by how much the buyer is willing to pay for it.

1. A reason why there is more competition in the restaurant industry than in the music streaming industry is that restaurants

A.unlike music streaming? companies, have to abide by government sanitation rules.

B.have to cater to a variety of consumer tastes while music streaming companies do not.

C.have more elastic demand for their product compared to music streaming companies.

D.unlike music streaming? companies, do not have significant economies of scale.

2. Why would a government use a patent to block entry to some markets if this hinders competition especially when governments generally promote? competition?

A.Patents are justified because they are an important means for creating network externalities.

B.Patents encourage firms to spend money on research necessary to create new products.

C.Politicians sometimes succumb to pressure from lobbyists to grant favors to businesses for political reasons.

D.Patents are an important source of government revenue.

3.Suppose we can divide all the goods produced by an economy into two? types: consumption goods and capital goods. Capital? goods, such as? machinery, equipment, and? computers, are goods used to produce other goods.

Suppose a technological advance occurs that affects the production of consumption goods but not capital goods.

If a technological advance occurs that affects the production of consumption goods but not capital?goods, then the production possibilities frontier will

A.remain unchanged.

B.shift outward along the consumption goods axis.

C. shift outward along the capital goods axis.

D. shift outward along both axes.

The new production possibilities frontier will indicate that with the technological? advance, more (CAPITAL GOODS /// CONSUMPTION GOODS /// OF BOTH GOODS) can be produced.

4. Market failure is best described as

A.All of the above.

B.when consumption occurs at low social benefit.

C.when the market fails to produce the efficient level of output.

D.when the market fails to produce deadweight loss.

E.when production occurs at high social cost.

The market will fail when which of the following? happen????(Check all that? apply.)

A.When property rights are incomplete.

B.When there is a market surplus.

C.When there is scarcity.

D.When it is difficult to enforce property rights.

E.When there is a market shortage

5.In which of the following market structures is price discrimination? possible?

??????a. perfect competition

??????b. monopoly

??????c. oligopoly

??????d. monopolistic competition

A.?b, c, and d only

B.?a, b,? c, and d

C.c and d only

D.b and c only

6. How do market economies ultimately determine what goods and services are? produced, how the goods and services will be? produced, and who will receive the goods and? services?

A.The government determines what goods and services are? produced, how to produce? them, and who will receive them.

B.Firms determine what goods and services are produced and how to produce? them, and markets determine who will receive them.

C.Consumers determine what goods and services are? produced, firms determine how to produce? them, and equity determines who will receive them.

D.Consumers determine what goods and services are? produced, firms determine how to produce? them, and markets determine who will receive them.

E.Firms determine what goods and services are? produced,technology determines how to produce? them, and consumers determine who will receive them.

7. For monopolistically competitive firms is it always likely in the? long-run to have? zero-economic profit?

Monopolistically competitive firms in the? long-run

A.may continue to earn profit by convincing consumers their products are differentconvincing consumers their products are different.

B.will not continue to earn profit because the cost of production will rise as new firms enter the market.

C.will not continue to earn profit because monopolistically competitive firms produce identical products.

D.will continue to earn profit due to barriers to new firms entering the market.

E.may continue to earn profit by instead beginning to produce a product identical to competitors.

8. In monopolistically competitive? markets, what is a factor under a? firm's control that determines whether it will be? successful?

A. Upper A firm's ability to differentiate its productA firm's ability to differentiate its product.

B.Consumer preferences.

C.Factors that affect all firms in a market.

D.Chance events.

E.Both a and b.

9. From the list? below, select the necessary condition in order to achieve successsful price discrimination.

A. The seller must possess market power.

B. Buyers must have identical inelastic demands.

C. Transactions costs must be zero.

D.The buyer must possess market power.??

10.Suppose Dell is currently selling 3,000,000 computers per year. However, managers at Dell are considering whether to increase production by 300,000 computers. One manager explains that after increasing production by this? amount, total profit would be? $100 million. Given this? information, should Dell increase production by 300,000 computers??

A.?Yes, because Dell would earn a profit.

B.Information about the additional cost incurred from producing 300,000additional computers is required to answer this question.

C.?No, because increasing production by 300,000 computers would decrease the price of computers.

D.Information about the additional revenue earned and the additional cost incurred from producing 300,000 additional computers is required to answer this question.

E. Information about the total revenue earned and the total cost incurred from producing 3,300,000 computers is required to answer this question.

11. The Majestic box office sells tickets for the same play at different? prices: a lower price to those who opt for the seats at the back of the theatre and a higher price for those who purchase seats in the? front, around the stage. Which of the following statements is? true?

A. This is an example of product differentiation not price discrimination.

B. The theatre practices first degree price discrimination by setting prices based on willingness to pay.

C. Charging two different prices is an effective way to avoid an excess demand for play? tickets; the higher price lowers quantity demanded to some extent.

D. Since the cost of producing the play does not change with the seating? configuration, this is evidence of price discrimination based on market segmentation.

ECC1000 Lecture Notes - Lecture 10: Monopolistic Competition, De Beers, Recording Industry Association Of America Certification

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