Deck 18: Competition Policy

Question 1

Economists agree that all competition laws lead to an increase in consumer welfare.

Answer 1

False

Question 2

Transparent pricing may help a cartel to sustain high prices.

Answer 2

True

Question 3

Economists generally agree that transparent pricing increases incentives for cartel members to cheat.

Answer 3

False

Question 4

Under common law, courts will typically enforce contracts between competitors that reduce competition and increase prices.

Question 5

Resale price maintenance prevents retailers from competing on price.

Question 6

The optimal way to increase welfare in a natural monopoly is to increase competition.

Question 7

If regulators set price equal to marginal cost, then a natural monopolist will earn exactly zero profit.

Question 8

There are some logical economic arguments in favour of resale price maintenance.

Question 9

Predatory pricing occurs when a firm sells its product at a price below the cost to drive out a competing firm.This reduces long run competition so the firm can then charge much higher prices.

Question 10

When regulating a natural monopoly, the government should make the firm charge its marginal cost of production.

Question 11

The Australian law that controls mergers and prevents monopolists from abusing their market power is the Competition and Consumer Act 2010.

Question 12

Mergers always decrease welfare as there is a reduction in competition.

Question 13

Tying can be thought of as a form of price discrimination.

Question 14

If purchasers value two products differently, tying may allow a seller to increase profit by charging a combined price closer to the purchasers' total willingness to pay.

Question 15

Intervention by government into oligopoly markets can improve outcomes.

Question 16

Price-cap regulation is used in Australia as an incentive for regulated firms to lower costs.

Question 17

Government policies to reduce the monopoly problem can create larger costs via political failure than the actual market failure costs.

Question 18

A common solution to the monopoly problem is for government agencies to regulate prices.

Question 19

Some business practices that appear to reduce competition may have legitimate business purposes.

Question 20

Corporatisation is the process of providing incentives to make them behave more like private owners.

Question 21

Regulated natural monopolies typically have rising average costs.

Question 22

Competition laws may increase the cost of operating by restricting synergistic mergers.

Question 23

As the number of sellers in an oligopoly grows, an oligopolistic market looks more and more like a competitive market.

Question 24

In 1998 the US Government charged Microsoft with the anti-competitive practice of tying.This was motivated by Microsoft bundling its internet browser into the Windows operating system.

Question 25

Average cost pricing always guarantees that the monopolist earns zero economic profits but does not ensure a socially optimal market solution.

Question 26

A government can impose a tax on a regulated monopolist to address the problems associated with marginal-cost pricing.

Question 27

As the number of sellers in an oligopoly grows, an oligopolistic market looks less and less like a competitive market.

Question 28

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly has no incentive to exit the industry.

Question 29

Privatisation of a government-owned asset could reduce future earnings to the country.

Question 30

Re-sale price maintenance is a profit-maximising strategy used by wholesalers to restrict competition amongst retailers.

Question 31

Public bureaucrats who operate monopolies typically have lower incentives to lower costs.

Question 32

If a manufacturer does not exercise retail price maintenance, a free-rider problem may become evident among retailers and ultimately lead to lower profits for the manufacturer.

Question 33

The argument that consumers will not be willing to pay any more for two items sold as one than they would for the two items sold separately is used to justify the legality of predatory pricing.

Question 34

To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to cooperate rather than compete with each other.

Question 35

It is easy for policymakers to determine whether some firms' decisions are anti-competitive or have a legitimate economic purpose.

Question 36

Economists argue that there are no practical problems with marginal-cost pricing as a regulatory system.

Question 37

The argument that consumers will not be willing to pay any more for two items sold as one than they would for the two items sold separately is used to justify the legality of resale price maintenance.

Question 38

Private ownership of a monopoly cannot benefit society.

Question 39

Tying sales allow a firm to raise profit through perfect price discrimination.

Question 40

Although predatory pricing leads to short-run losses for the firm, it can be profitable in the long run.

Question 41

According to the information provided, if the bank is unable to use tying, what is the profit-maximising price to charge for a cheque account?

A)$5
B)$10
C)$14
D)$15

Question 42

Suppose Apple Computers has entered into an enforceable resale price maintenance agreement with Computer Super Stores Inc.(CSS Inc.) and Wal-Mart.Which of the following will always be true?

A)the wholesale price of Apple computers will be different for CSS Inc.to that for Wal-Mart
B)Wal-Mart and CSS Inc.will always sell Apple Computers for exactly the same price
C)Wal-Mart will benefit from customers who go to CSS Inc.for information about different computers
D)CSS Inc.will sell Apple computers at a lower price than Wal-Mart

Question 43

Government-run monopolies may lead to undesirable outcomes in the form of:

A)special interest groups that attempt to block cost reductions
B)customer and taxpayer losses when the monopoly operates inefficiently
C)the political system as the only avenue of recourse for customers
D)all of the above

Question 44

Choose the correct statement.Policymakers in Government can respond to the problem of monopoly by:
(i) turning private monopolies into public enterprises
(ii) lowering input costs for the monopoly
(iii) regulating the behaviour of monopolies

A)(i) only
B)(iii) only
C)(ii) and (iii) only
D)(i) and (iii) only

Question 45

The practice of tying is used to:

A)enhance the enforcement of the Trade Practices Act
B)package products to sell at a combined price closer to a buyer's total willingness to pay
C)encourage the enforcement of collusive agreements
D)control the retail price of a collection of related products

Question 46

The main rationale for making tying illegal is that:

A)it allows firms to form collusive arrangements
B)it increases the availability of movies to the public
C)collusive agreements are not conducive to cooperative outcomes
D)it allows firms to expand their market power

Question 47

In 1997, new additions were made to the Competition and Consumer Act to regulate telecommunications.What issues detrimental to competition are likely to arise in copper (fixed line) telecommunication networks?

A)Telstra, as a profit-maximising private instead of a public company, is likely to offer poor service
B)telecommunications are a very complex business, and the lack of available expertise limits competition
C)the advent of wireless technologies (mobile phones and wireless internet) threatens Telstra's profits, forcing it to raise prices
D)the fixed line network has very high fixed-costs, leading to a natural monopoly that Telstra can exploit

Question 48

According to the information provided, if the bank is unable to use tying, what is the profit-maximising price to charge for unlimited use of an ATM card?

A)$5
B)$10
C)$14
D)$15

Question 49

Governments often regulate natural monopolies in order to increase welfare.Which of the following regulations would lead to no deadweight losses in the long run?

A)making the firm charge marginal cost
B)making the firm set price equal to average total cost
C)allowing the firm to set price equal to marginal revenue
D)none of the above

Question 50

Resale price maintenance may not be anti-competitive if:

A)market power is exerted through wholesale price rather than retail price
B)retail markets are inherently non-competitive
C)retail cartel agreements cannot increase retail profits
D)suppliers are never able to exercise noncompetitive market power

Question 51

Reduced competition through merging of companies:

A)may raise social welfare if the benefit from the synergies exceeds the social cost of increased market power
B)may raise social welfare if the cost from the synergies exceeds the benefit of increased market power
C)will always benefit society as a whole
D)will never benefit society as a whole

Question 52

An important benefit of private ownership of a monopoly is that a private monopoly has more incentive to:

A)bargain for much lower wages for its workers
B)charge a price that is consistent with that of a benevolent social planner
C)lower its costs so that it can earn more profit
D)price its good according to the intersection of marginal cost and average revenue

Question 53

The information obtained from a retail outlet can be considered a:

A)private good
B)cooperative good
C)collective good
D)public good

Question 54

Which of the following measures may eliminate some of the inefficiency that results from monopoly pricing?

A)the government can regulate the monopoly
B)the monopolist can price discriminate
C)the monopoly can be publicly owned
D)all of the above

Question 55

Tying is becoming increasingly important in the market for:

A)crude oil
B)long-distance phone calls
C)wheat
D)computer software

Question 56

The key issue in determining the efficiency of public versus private ownership of a monopoly is:

A)the inability of private monopolies to get rid of managers who are doing a bad job
B)how ownership of the firm affects the cost of production
C)the tendency for efficient management of publicly owned enterprises
D)the propensity of private monopolies to generate excessive profits

Question 57

One problem with regulating a monopolist on the basis of cost is that:

A)a monopolist is still able to generate excessive economic profits
B)regulators are unable to effectively control prices and/or production
C)a monopolist's costs, by definition, are higher than costs of perfectly competitive firms
D)it does not provide an incentive for the monopolist to reduce its cost

Question 58

Suppose Peach Computers has entered into a resale price maintenance agreement with Computer Super Stores Inc.(CSS Inc.) but not with CompuMart.In this case:

A)CompuMart will benefit from customers who go to CSS Inc.for information about different computers.
B)CSS Inc.will sell Peach computers at a lower price than CompuMart.
C)the wholesale price of Peach computers will be different for CSS Inc.than it is for CompuMart
D)Peach computers will never increase profits by having a resale price maintenance agreement with all retail outlets that sell its products.

Question 59

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly:

A)has no incentive to exit the industry
B)will experience a price below average total cost
C)may rely on a government subsidy to remain in business
D)both B and C are true

Question 60

Suppose the government regulates a natural monopoly by making the firm charge marginal cost.In order for the firm to make zero economic profits the government must pay a subsidy to the firm.What amount should this subsidy be?

A)a subsidy of (Average Total Cost - marginal cost) per unit
B)a subsidy of (Average Variable Cost - marginal cost) per unit
C)a subsidy of (quantity*price) per unit
D)a subsidy of (quantity*marginal cost) per unit

Question 61

The practice of requiring someone to buy two or more items together, rather than separately, is called:

A)product fixing
B)tying
C)free riding
D)resale maintenance

Question 62

The argument that consumers will not be willing to pay any more for two items sold as one than they would for the two items sold separately is used to justify the legality of which of the following?

A)resale price maintenance
B)tying
C)cost-plus pricing
D)free riding

Question 63

According to the information provided, how much additional profit does the bank make when it switches to use of a tying strategy to price cheque account and ATM services?

A)-$4
B)$2
C)$4
D)$6

Question 64

In the Microsoft antitrust lawsuit, Microsoft's lawyers argued that selling an internet browser and operating system together is no different to:

A)selling a car with a radio
B)selling a camera with a flash
C)selling a car with an air conditioner
D)all of the above

Question 65

If a manufacturer does not exercise retail price maintenance, a free-rider problem may become evident among retailers and ultimately lead to:

A)transparent pricing
B)tying
C)lower profits for the manufacturer
D)higher profits for the manufacturer

Question 66

The degree of market failure caused by monopoly:

A)is never a cause of concern
B)is always greater than the political failure associated with reducing monopoly problems
C)may often be less than the political failure associated with reducing monopoly problems
D)is always capable of being fixed by using marginal-cost pricing

Question 67

Suppose Jason is willing to pay $5 for a tennis ball and $10 for a tennis racquet, while Joe is willing to pay $12 for a tennis ball but only $8 for a tennis racquet.In addition, the retailer knows exactly what Jason and Joe are willing to pay.Which strategy should the retailer use to maximise profits?

A)resale price maintenance
B)tying sales
C)competitive pricing
D)monopoly pricing

Question 68

The business practice of tying is also referred to as:

A)resale price maintenance
B)predatory pricing
C)bundling
D)cost-plus pricing

Question 69

If regulators impose marginal-cost pricing on a natural monopolist, the government may have to:

A)nationalise the monopolist
B)require transparent pricing
C)subsidise the monopolist
D)tax the final product

Question 70

Predatory pricing occurs when a firm:

A)reduces its prices in order to make itself more competitive
B)reduces its prices temporarily to impose losses on any competition so as to force them out of the market
C)exercises its monopoly power by raising its price
D)sets the price on wildlife products made from predators like crocodiles or sharks

Question 71

Which of the following is necessarily a problem with competition laws?

A)they promote competition
B)they limit monopoly power
C)they may target a business whose practices appear to be anti-competitive but in fact has legitimate purposes
D)all of the above

Question 72

Regulated price caps in a natural monopoly are designed to:

A)provide an incentive for firms to lower costs
B)eliminate deadweight losses associated with natural monopolies
C)ensure that firms earn zero profits
D)mimic the competitive market outcome

Question 73

Suppose an airline sells its tickets at an artificially low price in order to force an efficient competitor out of the market and thus reduce long run competition.This firm has adopted:

A)predatory pricing
B)aggressive marketing
C)resale price maintenance
D)transparent pricing

Question 74

Some shops may provide a lot of information to a customer at a high cost to the store.If the customer then buys the product cheaper from a different store that does not provide this information, a free-rider problem emerges.A possible solution to this problem is:

A)resale price maintenance
B)cost-plus pricing
C)tying
D)marginal-cost pricing

Question 75

A central issue in the Microsoft antitrust lawsuit involved Microsoft's integrating its internet browser into its Windows operating system, to be sold as one unit.This practice is known as:

A)price fixing
B)resale maintenance
C)tying
D)collusion

Question 76

According to the information provided, if the bank is able to use tying to price cheque account and ATM services, what is the profit-maximising price to charge for the 'tied' good?

A)$20
B)$22
C)$24
D)$25

Question 77

If Canon were to require every store that carried its cameras to charge customers 20 per cent more than the store's cost for each camera, Canon would be practising:

A)tying
B)cost-plus pricing
C)resale price maintenance
D)aggressive marketing

Question 78

The intent of competition laws is to raise social welfare by limiting market power of some firms.To determine whether there has been a gain in social welfare, it is necessary to measure and compare the:

A)benefits from synergies with the social benefits of reduced competition
B)benefits from synergies with the social costs of reduced competition
C)costs from synergies with the social costs of reduced competition
D)costs from synergies with the social benefits of reduced competition

Question 79

Which of the following is false of limiting a firm's behaviour through competition laws?

A)competition laws focus on granting competitive firms the option to form a cartel
B)policymakers have the easy task of determining whether some firms' decisions have legitimate purposes
C)policymakers should not always limit a firm's pricing power
D)the proper scope of competition laws is often poorly defined and vague

Question 80

The practice of a producer requiring that retailers charge a price for its products that is set by the producer is called:

A)tying
B)unfair trade
C)resale price maintenance
D)cost-plus pricing