Deck 18: Competition Policy

Question 1

Transparent pricing may help a cartel to sustain high prices.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

Resale price maintenance prevents retailers from competing on price.

Question 10

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

Question 11

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

Question 12

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

Question 13

Intervention by government into oligopoly markets can improve outcomes.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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

Question 22

Private ownership of a monopoly cannot benefit society.

Question 23

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 24

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

Question 25

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 26

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 27

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

Question 28

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 29

Regulated natural monopolies typically have rising average costs.

Question 30

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 31

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

Question 32

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 33

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 34

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 35

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

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

Question 36

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 37

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

Question 38

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 39

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

Question 40

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 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

Tying is becoming increasingly important in the market for:

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

Question 51

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

Question 52

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 53

The business practice of tying is also referred to as:

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

Question 54

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 55

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 56

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 57

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 58

Economists usually prefer private ownership to public ownership of natural monopolies because private owners have an incentive to:

A) maximise cost as long as they reap part of the benefit in the form of lower profit
B) minimise cost as long as they reap part of the benefit in the form of lower profit
C) maximise cost as long as they reap part of the benefit in the form of higher profit
D) minimise cost as long as they reap part of the benefit in the form of higher profit

Question 59

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 60

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 61

In many countries, the government chooses to 'internalise' the monopoly by owning monopoly providers of goods and services. (In some cases these firms are 'nationalised' and the government actually buys or confiscates firms that operate in monopoly markets.) What would be the advantages and disadvantages of such an approach to ensuring that the 'best interest of society' is promoted in these markets? Carefully explain your answer.

Question 62

Explain the practice of resale price maintenance and discuss why it is controversial.

Question 63

If market failure from monopoly behaviour is deemed small compared to the inevitable imperfections of policies, policymakers may choose to:

A) do nothing at all
B) regulate the prices that the monopoly charges
C) use competition laws to try to make the industry more competitive
D) turn the monopolist into a government-run enterprise

Question 64

Consider two potential book buyers, Tom and Jane, who are considering whether to purchase two books, book A and book B. Assume that the maximum Tom is willing to pay for book A is $40, while he is willing to pay $25 for book B. Jane is willing to pay $25 for book A and $40 for book B.
(a) If each book is sold at $40, how much revenue will the seller receive?
(b) If each book is sold for $25, how much revenue will the seller receive?
(c) If the seller ties or bundles the two books together, what price should she charge? What will the sellers profit be?
(d) Why does tying or bundling increase revenue?

Question 65

Why is doing nothing sometimes considered an appropriate strategy to deal with monopoly?

Question 66

The business practice of tying:

A) is also referred to as bundling
B) is also referred to as full-line forcing
C) can increase business revenue
D) all of the above are true

Question 67

What is the rationale for transparent pricing and why is it unlikely to improve competition?

Question 68

The agency responsible for competition regulation in Australia is the:

A) Australian Competition and Consumer Commission
B) Federal Trade Commission
C) Australian Competition Agency
D) Federal Treasury

Question 69

Economists argue that transparent pricing will:

A) make it more difficult for a cartel to sustain high prices
B) lead to vigorous competition among firms
C) make it easier for firms to collude
D) make it easier for producers to cheat on any cartel agreement

Question 70

What is tying sales and why are economists skeptical that it leads to lower competition?

Question 71

A legitimate business reason for companies to merge is not to reduce competition but to:

A) increase costs through less efficient joint product
B) increase costs through more efficient joint product
C) reduce costs through less efficient joint product
D) reduce costs through more efficient joint product

Question 72

Why do economists usually prefer private ownership to public ownership of natural monopolies?

Question 73

Government policies that aim to improve the efficiency of oligopolistic and monopoly markets are called:

A) competition policy
B) welfare policy
C) state government policy
D) equal opportunity policy

Question 74

Explain the practice of tying and discuss why it is controversial.

Question 75

What is resale price maintenance, predatory pricing and tying?

Question 76

If regulators want to allow monopolists to keep some of the benefits from lower costs in the form of higher profit:

A) marginal-cost pricing is required
B) a departure from marginal-cost pricing is required
C) public ownership of monopolies is required
D) application of the Trade Practices Act is required

Question 77

One problem with requiring firms to list their prices in advance is:

A) it will lead to an increase in competition
B) it can make it easier for firms to collude
C) it reduces the amount of searching customers need to do, limiting the effectiveness of competition
D) firms do not necessarily know their prices in advance

Question 78

Why might economists prefer private ownership of monopolies over public ownership of monopolies?