CLEP Microeconomic Notes 1

When several competitors agree to raise the price of

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- when several competitors agree to raise the price of a product – results in a higher price than the market can bear (a.i.2) Price Discrimination - when a firm charges two parties different prices for the exact same product or service 138) Potential Entrant Effect - when the potential of a new competitor drives businesses to efficiency and lower prices for the consumer a.i) Conglomerate Mergers can be challenged on the basis of “Potential Entrant Effect” if: (a.i.1) The threat of potential entrant influenced the industry (a.i.2) Company could have entered the market without the merger taking place (a.i.3) The number of potential entrants is small a.ii) The problem with mergers and acquisitions is it can eliminate the potential entrant effect 139) Group Boycotts – per se violations of the Sherman Act of 1890 – occurs when a group of companies pressure a manufacturer to terminate its relationship with one company a) Definitions a.i) Group Boycott – because of pressure from many retailers, a manufacturer decides to not longer sell to an individual retailer a.ii) Refusal to deal – a manufacturer decides to no longer sell to a retailer 140) Market Division –is when competitors in the same industry divide up a large territory into segments, a) Restricts customers access to a free market a.i) by dividing the territories they create monopolies a.ii) a per se violation of the Sherman Act of 1890, a.iii) Also known as Horizontal Territorial Limitations 141) Monopolistic Competition is the most prominent type of market structure in the United States a) Monopolistic competition is inefficient due to excess capacity a.i) Ex: a restaurant that is only busy at lunch a.ii) Produces less output than perfect competition and the output it produces is at a higher price b) In the long Run a monopolistic competitor will make normal profits (economic profits are zero in the long run) similar to a perfect competitor b.i)With one difference: (b.i.1) Monopolistic Competition: Price (P) = Average Total Cost (ATC) NOT at Minimum (b.i.2) Perfect competition: Price (P) = Average Total Cost (ATC) at the Minimum b.ii) Since monopolistic competition is inefficient (b.ii.1) Price (P) is greater than Marginal Cost (MC) (b.ii.2) Goods and services are priced at a higher level than the cost to produce 142) Game Theory – a mathematical analysis of the strategic moves and counter-moves that occur in an oligopoly market 143) Cartel – multiple firms acting together as one firm a) Example of Cartel - OPEC – group of 11 major oil producing countries who attempt to control oil prices by limiting production a.i) Eliminates competitive pricing a.ii) Increases the firms price/profits
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(a.ii.1) Cartels were made illegal in the U.S by the Sherman Act of 1890 a.iii) Cartels are not stable since there are incentives within a cartel to “cheat” 144) Imperfect Competition is inefficient – (a.i.1) they can survive unlike Perfect Competition, efficiency is a requirement for long-term survival (a.i.2) produce output level where the Price (P) is greater than Marginal Cost (MC) (a.i.2.a)
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