Chat with AIExam 16: Real-World Competition and Technology
Economists describe competition as a market structure, a specific type of institutional arrangement. In what other way can the term "competition" be used? Explain your answer.
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VerifiedCharacterizing competition simply as an institutional arrangement ignores many of the dynamic processes that occur in real-world business dealings. Specifically, real-world competition often involves a rivalry between firms and individuals. This competitive process is active in all market structures. Another way to describe real-world competition is as a fight between the forces of competition and the forces of monopoly.
Explain why X-inefficiencies are often associated with lazy monopolists. In your answer, make sure you define a lazy monopolist and X-inefficiency.
(38) VerifiedLazy monopolists are those producers that don't make the effort to minimize their costs. They simply try to ensure that enough profits are made to keep stockholders somewhat satisfied. The resulting inefficiency is what economists call X-inefficiency, which occurs when firms operate far less efficiently than they could technically. Although these producers have monopoly power, they don't make large monopoly profits. If there are no threats of competition from outside the industry, lazy monopolists will not be concerned with losing their jobs, and as a result X-inefficiency continues to be present. The less significant is the level of competition, the greater is the degree of laziness, and, therefore, the larger is the X-inefficiency.
Demonstrate graphically and explain verbally why there is an incentive for suppliers to get together to restrict supply. As part of your explanation discuss why consumers-even though they are hurt by this-typically don't fight it.
(39) VerifiedFirms have an incentive to get together to restrict output because this allows them to increase price and transform some consumer surplus to producer surplus. This is shown in the diagram as a movement from output level 0M to level 0L (with an associated increase in price from PM to PL). The amount of consumer surplus transferred to the producers is shown as the filled in rectangle. Consumers typically do not fight this type of restriction because the costs of organizing the effort to fight it often outweigh the benefits of doing so. 
Demonstrate graphically and explain verbally what is meant by the term X-inefficiency.
(33) Describe two market mechanisms that may serve to enhance efficiency and limit the lazy monopolist problem. Can efficiency be achieved by incentives other than profit?
(35) If one were to observe the short-run behavior of a typical American business enterprise, you might fail to see the profit-maximizing behavior assumed by economists. Suggest two reasons for this.
(45) Economists often describe competition as a market structure. Why do they also think of competition as a process?
(39) What is the monitoring problem as it applies to corporate management? What are some potential solutions for this problem?
(41) A sizeable proportion of corporate takeovers are financed with so-called junk bonds. Such bonds offer bondholders higher rates of return than most other bonds traded because there are no hard assets as collateral to reduce the risk for bondholders in case of a default. The sellers of the bonds hope to be able to meet their obligations to pay these high rates of return to bondholders through the expected increase in profits of the company(ies) just taken over. How do the monitoring problem and the existence of lazy monopolists contribute to the market for junk bonds?
(30) Having just graduated from college, you accept a position with a large corporation as an entry-level sales manager. After a few weeks on the job, you observe that many of your senior colleagues are not working very hard, but make a lot more money than you do. You remember learning about the "motivating discipline" of corporate takeovers within your Economics courses. Draft a memo to your colleagues explaining how corporate takeovers might impact their lives if they don't alter their behavior. Why might you hesitate to write such a letter?
(30) Explain how owners can try to deal with the monitoring problem by using incentive-compatible contracts. Is tying managerial compensation to annual profit a sure-fire solution to the monitoring problem? Why or why not?
(34) Distinguish two uses of the word competition, and relate that discussion to Peter Thiel's statement that competition is for losers.
(39) The threat of a corporate takeover will help prevent lazy monopolist behavior and lead managers to run more efficient, more profitable firms in order to prevent being taken over. Wouldn't a more efficient, more profitable firm be even more inviting for a corporate takeover? Explain why not.
(32) Consider the following advertisement: "We will pay you $13 to buy a light bulb that pays for itself." The coupon necessary to take advantage of this offer was available only at offices at the local electric company. Why do you think the electric company would make such an offer?
(43) Once a firm has a monopoly it often has to worry about other firms trying to get a piece of its action. Describe three things monopolists do to try to keep other firms from getting a share of their markets. Discuss how much a monopolist would spend on any of these tactics.
(42) Briefly describe the monitoring problem as it applies to the managers of corporations. Why is this problem so severe in large corporations?
(39) What are the implications of the monitoring problem for economic analysis?
(41) Define X-inefficiency and explain how the threat of takeovers helps to limit X-inefficiency.
(39) Define X-inefficiency and explain how the threat of takeovers helps to limit X-inefficiency.
(35) Often, if a monopoly exists, other firms try to figure out how to break it up - to get a share of the monopolist's profit. Describe two things firms do to try to enter a monopolized industry. Give an example of each.
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