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CLEP Microeconomic Notes 1

The more competition a firm faces the more efficient

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The more competition a firm faces the more efficient the firm becomes Imperfect Competition 127) Monopoly – prices are higher than Marginal Revenue (MR) 128) Monopoly – one firm who makes up an entire industry – no substitutes
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a) Barriers make it virtually impossible for new firms to compete b) Monopolist are price makers and will charge whatever the market will bear 129) Criteria for Illegal Monopoly (a.i.1) Inelastic demand – increase in price does not decrease demand (a.i.2) Not Cross-Elastic – no valid substitutes for the product (Ex. gas) (a.i.3) Market Share is greater than 70% (a.i.4) Illegal use of the monopoly power 130) Legal Monopolies – aka Natural Monopoly - Utility Companies a.i) Entry into the market has such a high cost that tow competing firms could not make money (a.i.1) t is illegal to compete against a legal monopoly a.ii) Most common type is one who holds a patent or permit, preventing other firms from competing a.iii) Less common is a monopoly that has law designed to protect it from competition (a.iii.1) Example: U.S. Post Office b) Meet the first three criteria for an illegal monopoly c) If they raise prices unreasonably or without cause – they would be subject to antitrust laws 131) Sherman Antitrust Act of 1890 – makes actions that restrain trade illegal a) Price-fixing b) Production quotas – per se violation – agreement to restrict supply to increase price c) And agreements between competitors that cartels use to influence demand 132) Clayton Antitrust Act of 1914- created to address the “rule of reason” and “ actual adverse impact” loopholes in the Sherman Act of 1890 a) Clayton Act - Most famous for prohibiting mergers and acquisitions that create monopoly or reduce competition 133) Rule of Reason – antitrust doctrine, which originated from a U.S. Supreme Court ruling (1911) allows restraint of trade if: (a.i.1) There is a legitimate business purpose (a.i.2) Trade is economically efficient a.ii) When economically efficient and related to valid business purposes, the “rule of reason” allows unintentional and reasonable restraints of trade 134) Interlocking Dictatorship – when a person serves as the director of two or more competing companies a) Prohibited by the Clayton Act of 1914 135) Vertical Agreements with antitrust concerns are: (a.i.1) Tie-in Agreement – customers have to buy a product (they don’t want) to get another product (a.i.2) Price Discrimination – different people are charged different prices for the same product (a.i.3) Exclusive Distributor – only one distributor can sell a product (a.i.4) Exclusive Dealing – a distributor can only sell one manufacturers product a.ii) Vertical agreements are agreements with the buyers and sellers. 136) Horizontal Agreements – an agreement between two businesses that are in competition a) A per se violation of the Sherman Act
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b) Reduces competition 137) Per Se violation – an action that is considerer anti-competitive and intrinsically illegal a) Examples of per se violations: (a.i.1) Price Fixing
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