Chapter Questions
How do monopolistic competitive markets differ from competitive markets? If monopolistically competitive firms are making economic profits in the short run, what happens in the long run?
Describe the assumption underlying the kinked demand curve model. Describe why marginal cost can vary, but price remains constant.
How many firms constitute an oligopoly? What else characterizes oligopoly markets?
When economists speak of "mutual interdependence" in oligopoly markets, what do they mean? Why is mutual interdependence such an important element of oligopoly markets?
What makes the strategies so different for repeated games than for one-off games?
Why is it difficult for cartels to effectively maintain high prices over the longer term?
Google has a huge share of the search activity on the Internet, as well as the online advertising revenue it generates. Microsoft had roughly the same percentage for operating system sales on microcomputers when the government filed its antitrust suit. Why hasn't the government filed a similar suit against Google?
Holding the industry constant, why does a monopolist earn more profits than a firm in an oligopolistic setting? Why does the oligopolist earn more than a monopolistic competitor?
"Monopolistic competition has a little of monopoly and a little of competition, hence its name." Do you agree? Why or why not?
We saw in the last chapter that the HHI (Herfindahl-Hirshman index) is used by the Department of Justice to measure industry concentration. Since domestically we have virtually no monopolies, some would argue that the $\mathrm{HHI}$ is really used to measure the degree of oligopoly. However, the $\mathrm{HHI}$ represents domestic concentration, and many of the products we purchase are made globally and sold in the United States by foreign firms. Has global competition made these HHI estimates less meaningful? Are old-line American oligopolies (autos, steel, and airlines) more like monopolistic competitors today? Why or why not?
In both competitive and monopolistically competitive markets, firms earn normal profits in the long run. What enables oligopoly firms to have the opportunity to earn economic profits in the long run?
As new firms enter a monopolistically competitive market, what happens to the average total cost curve for existing firms? What happens to the individual firm demand curve? What happens to individual firm profits?
The 1982 Export Trading Company Act and the 1918 Webb-Pomerene Act permit export cartels in the United States. Export cartels are groups of firms that can legally collude, set prices, and share marketing and distribution of their products in foreign countries. These cartels must register with the government, and their activities cannot affect domestic competition. Economic theory suggests that cartels are entities that exist to maximize monopoly profits for members. Given this, why would the United States permit these cartels to exist?
When trying to get tickets to a Broadway show recently, my wife may have had a chance to see game theory in action. Tickets for shows 6 months away went on sale online at 6:00 in the morning and she was there at 6:02. Every time she requested seats in a good area, she was informed they were unavailable, but others in much worse locations were available. No matter what day or which show, less attractive alternatives were suggested. Can you think of a game theory explanation that might suggest why this was happening?
Why does the U.S. Department of Justice successfully sue a cartel of leading foreign producers of LCD flat screens for price fixing in 2008, but not go after the OPEC (Organization of Petroleum Exporting Countries) cartel?
As we have seen, cartels face a difficult time holding their group together. According to The Economist (March 31, 2007, p. 84), "Co-ordinating a price is one thing; sticking to it is another. Companies face the same dilemma that has undone countless hypothetical prisoners in economics textbooks." How is the incentive structure that leads to cheating in a cartel similar to that of the Prisoner's Dilemma?
John Gapper titled his article "Little Laptops Snap at the Oligopoly" (Financial Times, June 16, 2009, p. 9), and makes the point that netbooks (small, light, cheap laptop computers) are putting competitive pressure on the "three-way alliance