Chapter 11: Monopoly and Antitrust Policy

Question 1

How to measure size of firms and amount of competition amoung them?

Answer 1

• Calculate four-firm concentration ratio: calculate market share of the 4 largest firms.
• Calculate HHI: square the market share of each competing firm (percentage of total sales) in the industry then sum the resulting numbers.

Question 2

How to identify a natural monopoly on a graph, how does it happen?

See fig. 11.1

Answer 2

the demand curve intersects the LRAC curve when it is falling/ATC is falling at MR = MC.
* Happens when fixed costs are relatively large compared to variable costs.

Question 3

Ways that government regulate natural monopolies

Answer 3

1. Split the firm into 2, this would raise AC and price.
2. Set a price ceiling at the the socially efficient price (MC = D), this would cause firms to lose money.
3. Set fair-return price and quantity (D = ATC), this would result in 0 econ. profit, would not be socially optimal.

Question 4

Cost-plus regulation

Answer 4

when regulators permit a regulated firm to cover its costs and to make a normal level of profit.

Question 5

Price cap regulation

Answer 5

(price ceiling) when the regulator sets a price that a firm cannot exceed over the next few years.

Question 6

What is the HHI for?

Answer 6

To measure the concentration of market (monopoly) power within an industry; to identify the type of market.

The higher the HHI, the nearer the industry is to a monopoly.

Question 7

Why is competition a good thing?

Answer 7

Bc it provides consumers with lower prices and a variety of innovative products.