Specifically example 202 chapter 8 competition and

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Unformatted text preview: ed Utah Pie Company charged that three of its competitors in Los Angeles were practicing price discrimination, which is deemed illegal by the Clayton Act. Specifically, EXAMPLE: 202 Chapter 8 Competition and Markets taxicab market in New York City. Who gains and who loses as a result of this barrier to entry? The beneficiaries are clearly the current owners of taxicab businesses. Because of such a high barrier to entering the taxicab business, the supply of taxis on the streets of New York City is less than it otherwise would be. If supply is lower than it would be, then prices are higher. In other words, the price of a taxi ride in New York City is likely to be less if a taxi medallion cost, say, $300 than if it cost $220,000. At the latter price, fewer people will be entering the taxicab business and expanding the supply of taxis for hire. The losers are (1) people who would like to enter the taxicab business but cannot and (2) the taxi riders who pay higher prices because of the somewhat restricted entry into the taxicab business. THINK ABOUT IT As a result of the high price of a taxi medallion, taxi fares are higher than they would be if taxi medallion prices were lower. Do you agree or disagree? the three competitors were charged with selling pies in Salt Lake City for lower prices than they were selling them near their plants of operation. The U.S. Supreme Court ruled in favor of Utah Pie. What were the facts? Were the three competitors from Los Angeles running Utah Pie out of business? Were they hurting consumers by charging low prices? Some econ- 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 203 omists have noted that Utah Pie actually charged lower prices for its pies than did its competitors and that it continued to increase its sales volume and earn a profit during the time its competitors were supposedly exhibiting anticompetitive behavior. These economists suggest that Utah Pie was simply trying to use the antitrust laws to hinder its competition. Now consider a case in which most economists believe that the antitrust laws were applied properly. For many years, the upperlevel administrators of some of the top universities—Brown, Columbia, Cornell, Dartmouth, Harvard, MIT, Princeton, University of Pennsylvania, and Yale—met to discuss such things as tuition, faculty salaries, and financial aid. There seemed to be evidence that these meetings occurred because the universities were trying to align tuition, faculty raises, and financial need. For example, one of the universities wanted to raise faculty salaries by more than the others but was persuaded not to do so. Also at these meetings, the administrators would compare lists of applicants to find the names of students who had applied to more than one of their schools (for example, someone might have applied to Harvard, Yale, and MIT). The administrators would then adjust their financial aid packages for that student so that no university was offering more than another. Richard Branson, CEO of Virgin Atlantic Airlines, testifies against an airline industry merger before a Senate subcommittee on antitrust in 2001. The U.S. Justice Department charged the universities with a conspiracy to fix prices. Eight of the universities settled the case by agreeing to cease colluding (making secret agreements that effectively reduce competition) on tuition, salaries, and financial aid. MIT pursued the case to the U.S. Supreme Court. In 1992, the Supreme Court ruled against MIT, saying that it had violated antitrust laws. 1. Define: a. barrier to entry b. natural monopoly c. price searcher d. antitrust law the monopolist searching? 4. A company advertises its product in a deceptive manner. Which antitrust act would apply to this action? Reviewing Facts and Concepts Critical Thinking Defining Terms 2. When it comes to determining the quantity of goods to produce, how is a monopolist like a perfect competitor? 3. A monopolist is a price searcher. For what price is 5. Firm A is a perfectly competitive firm, and firm B is a monopoly firm. Both firms are currently earning profits. Which firm is less likely to be earning profits in the future? Explain your answer. Applying Economic Concepts 6. The demand for the good that firm A sells does not rise or fall during the month. Firm A raises its price at the beginning of the month and lowers its price at the end of the month. What might explain firm A’s pricing behavior? Section 2 A Monopolistic Market 203 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 204 Don’t Fall for an Old Scam O ne day you receive a letter in the mail. The letter is from an investment advisor who says that he can predict what will be good investments in the near future. The Setup At this point, like most people would be, you are skeptical. Having anticipated your skepticism, the investment advisor goes on to say in his letter that he is going to make a prediction about next week’s price of gold. He predicts that it will rise. It costs you nothing to wait to see...
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