Module 5

Question 1

______ refers, strictly, to a situation where there is a single firm (or producer) in a market.

Answer 1

“Monopoly”

Question 2

__________: the ability to set prices above cost without meaningful competitive retaliation.

Answer 2

substantial pricing power

Question 3

In a perfectly competitive market, price typically falls to where firms earn ______.

Answer 3

zero profits (that is, prices equal marginal costs)

Question 4

Monopolists typically price above _________.

Answer 4

marginal cost (a monopolist has the ability to set prices above cost without meaningful competitive retaliation)

Question 5

Optimal pricing requires that firms price where _______ = ________.

Answer 5

Marginal Revenue = Marginal Cost

Question 6

In a competitive market, the ________ is the same as the demand curve.

Answer 6

marginal revenue curve

Question 7

For a monopolist, the marginal revenue curve is _____ than the demand curve.

Answer 7

lower

Question 8

The marginal revenue that a monopolist generates by lowering its price reflects both the _____ from attracting new customers (the “volume” effect) and the ____ from lowering prices to existing or inframarginal customers (the “price” effect).

Answer 8

gain; loss

Question 9

Just as a monopoly has power to raise prices, a buyer can have power to _____ prices if it is the sole buyer in the
market.

Answer 9

reduce

Question 10

The analysis of monopoly pricing rests on the assumption that the firm ______ the same price for every unit of the
good, to every customer.

Answer 10

charges

Question 11

_________: charge different prices to different consumers, or set different prices for different units of a product.

Answer 11

“price discriminate”

Question 12

________ price discrimination involves setting a different price for each consumer, or for each unit of the
product.

Answer 12

Perfect (or first-degree)

Question 13

Perfect price discrimination eliminates _________ and _________, and the producer captures all of the value.

Answer 13

deadweight loss; consumer surplus

Question 14

________ involve firms setting a per-unit price for a product (sometimes equal to $0) and charging a fixed fee to capture additional surplus.

Answer 14

Two-part tariffs

Question 15

Two-part tariffs are an _______ (and relatively easy) way for firms to price discriminate.

Answer 15

effective

Question 16

Other approaches to price discrimination include: (a) firms charging different prices based on __________ of consumers (e.g., whether the consumer is a student or senior); (b) firms relying on ________ to price discriminate.

Answer 16

observable characteristics; self-selection

Question 17

In order to price discriminate, a firm must be able to ______ buyers with high WTP from purchasing at the _____ prices.

Answer 17

prevent; lower

Question 18

Price discrimination could also be prevented by
competition from other firms, or if customers with low WTP could purchase the product and ______ it to customers with higher WTP.

Answer 18

resell

Question 19

_________ is another way for firms to effectively price discriminate.

Answer 19

Price bundling

Question 20

Price bundling is more effective when

consumers’ preferences for the products are ________.

Answer 20

heterogeneous

Question 21

Firms in nearly every market attempt to avoid the “perfectly competitive outcome” through _______.

Answer 21

differentiation

Question 22

______ differentiation occurs when firms differ in attributes that all customers value similarly – that is, when some firms produce a version of the product that is perceived as “better” by all customers, or when firms differentiate by lowering prices.

Answer 22

“Vertical”

Question 23

_______ differentiation occurs when firms differ in attributes that different customers value
differently (e.g., location, color, etc).

Answer 23

“Horizontal”

Question 24

If firms are __________, some customers will prefer a product from one firm and others will prefer the product from another.

Answer 24

horizontally differentiated

Question 25

How are these related?
1. Differentiating on factors that matter either to a firm’s consumers or its suppliers (thereby creating more value, or
creating value for a different set of consumers, than its competitors);
2. Searching for ways to differentiate horizontally, not only vertically
3. Differentiating in ways that are robust to competitor reaction.

Answer 25

Effective principles of competitive differentiation

Question 26

Differentiation protects firms from price _______.

Answer 26

competition; The reason is that a firm that is differentiated from its competitor faces a familiar trade-off when lowering price: on the one hand, it allows the firm to capture a greater share of the market from the competitor, but it does so at the cost of reducing prices to the firm’s existing customers.