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Chp 10 instructor - Chapter 10 COMPETITIVE MARKETS QUESTIONS AND ANSWERS Q10.1 Historically the Regional Bell Operating Companies(RBOCs had a

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Chapter 10 COMPETITIVE MARKETS QUESTIONS AND ANSWERS Q10.1 Historically, the Regional Bell Operating Companies (RBOCs) had a monopoly on the provision of local voice phone service. Regulation has now been eased to permit competition from Competitive Local Exchange Carriers (CLECs), cable companies, satellite operators and wireless competitors. Is the local phone service market likely to become a vigorously competitive market? Q10.1 ANSWER The local voice phone service market is not one likely to support dozens of competitors in each local market, but competition among the few can become vigorous in this market. Market structure is described in terms of the complete array of industry characteristics that directly affect the price/output decisions made by firms. Primary elements of market structure include: the number and size distribution of actual sellers and buyers as well as potential entrants, the degree of product differentiation, the availability and cost of information regarding prices and output quality, and conditions of entry and exit. All of these elements of market structure can have important consequences for the vigor of competition in the local voice phone service market, and for the price/output decisions made by firms. The technology for voice phone service that is clear and reliable can be offered by many firms. Thus, product quality is becoming homogenous. Brutal price competition is sure to erupt in this market as voice over the Internet (VoIP) service becomes widely available. Q10.2 One way of inferring competitive conditions in a market is to consider the lifestyle enjoyed by employees and owners. In vigorously competitive markets, employee compensation tends to be meager and profits are apt to be slim. Describe the perfectly competitive market structure and provide some examples. Q10.2 ANSWER Perfect competition is a market structure characterized by a large number of buyers and sellers of an essentially identical product, where each market participant's transactions are so small that they have no influence on the market price of the
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20 Chapter 10 product. Individual buyers and sellers are price takers. This means that they take market prices as given, and devise their production strategy accordingly. Free and complete demand and supply information is available in a perfectly competitive market, and no meaningful barriers to entry and exit are present. As a result, vigorous price competition is prevalent, and only a normal rate of return on investment is possible in the long-run. Excess profits are possible only in periods of short-run disequilibrium before rivals are able to mount an effective competitive response. Examples of perfectly competitive markets include: agricultural markets for corn, wheat, soybeans and other grains; commodity, stock and bond markets; and unspecialized input markets (e.g., unskilled labor), among others. Many retail markets, like gas stations, are also vigorously competitive. Q10.3
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This note was uploaded on 03/08/2011 for the course ECONABA 635 taught by Professor Leiter during the Summer '10 term at Andrew Jackson.

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Chp 10 instructor - Chapter 10 COMPETITIVE MARKETS QUESTIONS AND ANSWERS Q10.1 Historically the Regional Bell Operating Companies(RBOCs had a

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