Deck 4: Monopoly and Antitrust

Question 1

Write down the different costs associated with putting on an NFL game. Classify these costs as either fixed costs or variable costs. Assume that a single playing season constitutes the short run.

Answer 1

Salaries (fixed), travel (fixed given the schedule), marketing (variable) and venue expenses (mostly fixed, but somewhat variable depending on attendance and
post-season appearances).

Question 2

Differentiate between second and third degree price discrimination.

Answer 2

Second degree price discrimination occurs when the monopolist charges different prices (per unit) when the consumer buys different quantities of the good (i.e., season ticket prices per game are lower than single game ticket prices for the same seats). On the
other hand, third degree price discrimination occurs when the monopolist charges different prices for the same good in different segments of the market (i.e. single game tickets cost less in the student section of an NCAA football game than they do for a
non-student seat).

Question 3

Some economists argue that cooperation between franchises should not be considered in violation of antitrust laws. What argument do they use?

Answer 3

Some economists regard leagues as multiplant firms. According to this view, sports franchises are members of a single entity rather than competing firms. Their cooperation should not be considered any less normal than a single firm's individual departments getting together. Major League Soccer, in particular, is organized as a single-entity league where each team is considered an individual branch of the main company. In Fraser v. MLS (2002), the U.S. Court of Appeals upheld the league's organizational structure as legal.

Question 4

The earliest antitrust law enacted in the United States was

A) The Sherman Act.
B) The Clayton Act.
C) The Curt Flood Act.
D) The Rozelle rule.
E) None of the above.

Question 5

In game theory, a dominant strategy is one in which:

A) A player's strategy leads to a bad outcome.
B) A player's strategy is determined by the strategy of the other player.
C) A player's strategy is mixed.
D) A player's strategy is independent of the choice made by his/her opponent.

Question 6

Explain with a graph how a ticket price ceiling placed on a monopoly sports franchise (that does not sell out its games) may actually lower ticket prices and raise attendance. Assume that marginal costs are fixed.

Question 7

What is the loss to fans from the monopoly power that sports franchises exert? Be precise in your reasoning.

Question 8

Baseball has not been convicted of violating the Sherman Antitrust Act because

A) baseball is the national pastime.
B) baseball was the first sport to institute the Reserve Clause.
C) the Sherman Antitrust Act does not apply to sports.
D) baseball has been exempt from the Antitrust laws.

Question 9

When Mark Lemke said that Greg Maddux "played to a hitter's strength-just when he doesn't expect it" he meant that Maddux

A) forces the hitter into a prisoner's dilemma.
B) is subject to the winner's curse.
C) is following a dominant strategy.
D) is following a mixed strategy.

Question 10

Given that a minor league baseball monopolist faces a market demand function of Q_d =12 - P
(a) Write down this monopolist's demand and MR equations.
(b) If the monopolist faces a constant marginal cost of $3 per unit, how many units will she produce?

Question 11

How did the rise of privately owned cable TV networks affect the revenue structure of European soccer teams?

Question 12

The NCAA arose in response to

A) increasing violence in college football.
B) point-shaving scandals in college basketball.
C) the desire to act like a monopolist.
D) the desire to act like a monopsonist.

Question 13

The true cost of monopoly power to society is attributable to

A) the higher price that consumers must pay.
B) the reduction in output by the monopolist.
C) the excess profits enjoyed by the monopolist.
D) the failure of other firms to enter the industry.

Question 14

A perfectly-competitive firm would charge a price of:

A) $20
B) $10.
C) $100
D) 0

Question 15

In most professional sports leagues, over the course a single season, the largest proportion of team cost is

A) shared by other teams in the league.
B) fixed.
C) variable.
D) zero.

Question 16

The antitrust exemption that Major League Baseball enjoys

A) is shared by all major professional sports.
B) is not shared in any way by other professional sports.
C) is shared to a limited extent by the other professional sports.
D) is limited to baseball's dealings regarding television and broadcast rights.

Question 17

The NCAA has often been called an "incidental cartel."
(a) What is an "incidental cartel?"
(b) How has the NCAA exercised its cartel power? Give two distinct examples.

Question 18

Differentiate between first and second degree price discrimination.

Question 19

The monopoly power that the NCAA held over TV networks fell apart due to

A) the prisoner's dilemma.
B) the winner's curse.
C) the outlawing of the reserve clause.
D) the entry of new schools into the NCAA.

Question 20

In game theory, a prisoner's dilemma is interesting because:

A) Individually, each player's best strategy leads to the worst results for the players as a whole.
B) A player's strategy is determined by the strategy of the other player.
C) A player's strategy is a single, unique Nash equilibrium.
D) A player's strategy is independent of the choice made by his/her opponent. That is, each player has a dominant strategy.

Question 21

A monopoly firm would charge a price of:

A) $90.
B) $170.
C) $680.
D) $20

Question 22

Price discrimination:

A) Reduces deadweight loss.
B) Creates mutually-beneficial exchanges that would not happen under a single-price scheme.
C) Increases consumer surplus.
D) Both "a" and "b".

Question 23

Monopsony means:

A) One seller of an output.
B) One buyer of an input.
C) One ideal capital/labor ratio.
D) The same thing as externality.

Question 24

The NCAA operates as a(n):

A) Natural monopoly.
B) For-profit cartel.
C) Incidental cartel.
D) Perfect-competitor in collegiate athletics.

Question 25

Which popular American sport enjoys an "antitrust exemption"?

A) Football.
B) Basketball.
C) Baseball
D) Hockey.

Question 26

Natural monopolies are distinguished by:

A) Zero fixed costs.
B) Increasing average total costs (ATC) over the entire range of output.
C) Decreasing average total costs (ATC) over the entire range of output.
D) The existence of only one firm in the industry.

Question 27

If a seller is able to charge each consumer exactly their maximum (marginal) willingness-to-pay, they are practicing:

A) First-degree price discrimination.
B) Second-degree price-discrimination.
C) Third-degree price discrimination.
D) Hyperbolic price discrimination.