Final Exam!

Question 1

(Chapter 17) Explain how vertical integration “may be used strategically to raise the price of inputs for competitors.”

Answer 1

Manufacturers may use vertical integration to maintain products’ high-quality images or to ensure that their retailers provide adequate services.

Discourages entry, thus increasing barriers to entry

Question 2

(Chapter 17) Using evidence from the section Application 17.4: Free Riding and the Internet, explain how perfume companies used RPM to try to avoid this outcome–the problem of people using the personal service that brick-and-mortar stores provide, but then purchasing the good at a lower price online.

Briefly summarize Carlton and Chevalier’s results regarding RPM in the perfume industry.

Answer 2

Perfume companies refuted this by making online prices equal or higher (in retail price or with S/H costs) than those in brick-and-mortar stores. Carlton and Cevalier found that this act to lower free-riding was a common occurrence in the perfume industry, finding that their claim was consistent (more so for speciality, exclusive, and limited products).

RPM solves free-rider problem

Question 3

(Chapter 17) Analyze how Toys “R” Us facilitated collusion among toy manufacturers using RPM.

Answer 3

Toys “R” Us ended up colluding with toy manufacturers by creating agreements so they basically get first bids on popular toys and selling closeouts before warehouses, who generally sold toys at significantly lower prices. By doing this, they were able to sell toys at the higher prices and reducing the supply of toys in warehouses to lower their marketshare.

Question 4

(Chapter 17) Analyze how resale price maintenance to induce service can result in positive and negative welfare effects.

Answer 4

Effects are ambiguous. Agreements are aimed at increasing presale services that have neutral welfare effects, but services could also cause demand to shift out depending on the reservation prices of the consumer. For example, society can be better or worse off when service is used to increase wholesale profits but not retail profits.

Question 5

(Chapter 17) Explain what resale price maintenance (RPM) and the problem of double marginalization each are.

Explain how RPM can eliminate “the problem of ‘double marginalization’ and improve welfare compared with successive stages of monopoly.”

Answer 5

RPM: An agreement where manufacturer sets a minimum or maximum price.

Problem of Double Marginalization: Double marginalization is when upstream and downstream monopolists charge prices above marginal cost since the marginal revenue curve becomes equal to the demand curve. Consumers and producers are substantially worse off as prices are higher compared to monopoly results because deadweight loss increases.

RPM can improve welfare through vertical integration where firms can maximize profits by seeing a maximum retail price, which ultimately eliminates the problem of double marginalization as well as it increases welfare for both the consumers and producers.

Question 6

(Monopsony) Analyze how monopsony bargaining power can help explain wage dispersion.

Answer 6

Wage dispersion violates the law of one wage in perfectly competitive markets.

Under monopsony, wage dispersion accounts for varying factors such as geography, experience, and company. Wages are not based on productivity and can be different for two employees doing to same amount of work.

Question 7

(Monopsony) Analyze how monopsony bargaining power can help explain the market provision of general training.

**(in a perfectly competitive model, it would only be rational for labor to invest in general training for themselves–not for employers to pay for general training for their workforce)

Answer 7

Workers aren’t paid their marginal product under monopsony. There’s no incentive to pay for their general training, but employers have incentive to pay for the training since there’ll be a return on investment and also allows them to pay lower wages.

Question 8

(Monopsony) Analyze how monopsony bargaining power can help explain racial pay gaps.

Answer 8

Reservation pay - what is your next best option?

Idea is say there’s a racist and non-racist employer (racist employer pays more for white people). Non-racist employer wants to be able to pay black people more, but in response, also needs to pay white people more than black people wages to also capture the white-employee market
non-racist employer reacts to how the racist employer pays their employees
minimize costs. every additional dollar they can save from wages is one more for profit

Question 9

(Monopsony) Analyze how monopsony bargaining power can help explain how minimum wages often do not lead to decreases in employment.

Answer 9

Setting a “price floor” prevents monopsonist from cutting labor and wages. In turn, minimum wage actually increases employment, which affects employer’s ability to maximize profits.

Question 10

(Chapter 10) Using evidence presented in this chapter, identify two facts about an industry’s pricing behavior might lead you to suspect that the firms were fixing prices and explain how/why these facts would be associated with price-fixing.

Answer 10

1) Price uniformity - when a firm publicly announces their price ahead of time to tell other firms how to set their prices. This is associated with price-fixing because firms are communicating with each other to reach some agreement that ultimately affects the market.
2) Converging prices at different rates - when firms increase their prices at different times. This is associated with price-fixing because there’s a distinct correlation in the changing rates of prices.

Question 11

(Chapter 10) Explain how the use of a basing point pricing system can result in suboptimal economic performance.

Analyze which buyers are hurt by a basing point pricing system.

Explain why single basing point systems were generally unstable and most industries ultimately adopted multiple basing point systems.

Answer 11

x

Question 12

(Chapter 10) Distinguish the difference between collusive and barometric price leadership.

Answer 12

x

Question 13

(Chapter 9) Explain why the bigger the increase is in demand (the more demand shifts out or to the right), the harder it can be for firms to maintain collusion.

Answer 13

x

Question 14

(Chapter 9) Explain how the elasticity of demand can affect the ability of firms to collude.

Answer 14

The more elastic the demand is, the harder it is to collude.

Question 15

(Chapter 8) Explain what it means for there to be a Cournot-Nash equilibrium in oligopoly behavior.

Answer 15

x

Question 16

(Chapter 7) Explain what game theory is and why it is often used to model oligopolistic behavior.

In your response, explain how in perfect competition changes in one firm’s production do not have an external effect on other firms, but in an oligopoly they do.

Answer 16

x

Question 17

(Chapter 5) Analyze how consistent the real-world evidence presented is with the prediction that under the contestable markets hypothesis, “potential competition may be more important than actual competition and that even a completely monopolized market may perform as if it were perfectly competitive in structure.”

Answer 17

Look back at cases that support this statement (hanig says cases don’t really support it)

Generally doesn’t work out, so just looking at potential competition keeps prices low doesn’t actually do so

Find one or two cases to support argument

Argument, evidence, analysis

Question 18

(Chapter 5) Explain how in the “dominant-firm price leadership model… the dominant firm’s market share declines continuously over time.”

Answer 18

Dominant firm sets monopoly price, so everyone sets their prices to monopoly price since everyone are price-takers, allowing smaller firms to reinvest profits and grow in market share

Question 19

(Chapter 4) Firms often cite cost-savings as one of the primary reasons to merge with or acquire another company.

Using the theory developed in section 4.3, explain how a merger could in fact decrease costs, yet result in an increase in prices.

(i.e. why aren’t the cost savings passed on to consumers?)

Answer 19

x

Question 20

(Chapter 4) In section 4.3, an argument is presented for why antitrust enforcement agencies may want to allow mergers even when they have the potential to raise prices for consumers.

Describe the conditions under which authorities may want to allow mergers that make consumers worse off.

Answer 20

x

Question 21

(Chapter 3) We often think of monopolies in a negative light. But in section 3.4.2, three positive reasons are given for why it may actually be good for society overall to have firms act as monopolists.

Identify each reason and explain how each can improve overall social welfare.

Answer 21

answered, didn’t save

Question 22

(Chapter 3) Many economists have a bias or predisposition towards perfectly competitive markets. Some, arguably fewer, have a bias or predisposition towards free markets (i.e. no government regulation). This begs the question of how the two can be different.

Using one of the assumptions of perfect competition from the list we developed this semester, explain how a market that is free may not necessarily be perfectly competitive.

Use a real world example (from the text or any other source (your own personal experience is totally fine)) to illustrate how sometimes your chosen assumption of perfect competition can be violated in otherwise free markets.

Answer 22

answered, didn’t save

Question 23

(Chapter 2) In our first class, we briefly discussed how executive compensation in large corporations in the U.S. has reached a staggeringly high level. For example, the Chief Financial Officer of Comcast, Michael Cavanagh, received $17,622,186 in 2017. If he works 50 weeks a year, for 80 hours per week (13.3 hours per day), that corresponds to approximately $352,443.72 per week (working for seven days would put him in the top 1 percent of income earners in the U.S.), $4,405.55 per hour, or $73.43 per minute.

Explain how the practice discussed in section “2.3.1 Separation of Ownership and Control” can help explain this result.

Answer 23

Answered, didn’t save

Question 24

(Chapter 2) In your own words, explain what opportunism is. Explain how opportunism and high transaction costs can cause firms to produce goods themselves rather than rely on outside suppliers.

Answer 24

Opportunism is when firms maximize utility through deceiving or confusing others. Transaction costs increase with contracts that attempt to minimize or eliminate opportunism, so firms choose to produce goods themselves instead.

Question 25

(Chapter 1) Briefly summarize how antitrust violations are enforced in the U.S. and analyze how significant punishments can be.

Answer 25

Antitrust violations are enforced through the antitrust division of justice and Federal trade commission through criminal suits, fines, and jail time. Punishments are relative to the size and worth of the company. For example, for a large corporation worth billions of dollars, fines could reach $100 million, which is relatively small.

Question 26

(Question from class) When we studied Chapter 3 on Competition and Monopoly, we learned that there are identifiable situations in which having a monopoly can improve overall welfare in society as measured by changes in total surplus (the sum of changes in consumer and producer surplus). For example, it is much more efficient (less costly for society) to have one company lay cable or fiber for high speed Internet access instead of having many high speed Internet providers (ISPs) lay cable (think of the costs of having every company lay cable to the same addresses).

Analyze how government policies being endogenous with respect to (a function of) firm conduct may result in more losses to society than if government policies were exogenous with respect to firm conduct. Specifically, consider the case of a natural monopoly where the most efficient outcome would be one that results from average cost pricing.

Analyze why this outcome might be challenging to achieve with government policies that are endogenous with respect to firm conduct.

Answer 26

Endogenous - a function of
Exogenous - not a function of

Government policies are a function of firm conduct

Argument against free market. Free markets tend to be characterized by natural monopolies

if policies were exogenous, solution would give highest total surplus

if policies are endogenous, prices can increase (see also one note)

SEE ALSO EXAM 1