Deck 17: Competition Policy

Question 1

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

Answer 1

True

Question 2

Some companies merge, not to reduce competition but to lower costs through more efficient production.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

No deadweight losses will result if regulators allow a natural monopolist to price at average total cost.

Question 5

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 6

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

Question 7

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

Question 8

Price cap regulations are intended to let monopolists keep some of the profits they generate if they lower their costs.

Question 9

The main agency in Australia that enforces competition protection is the Australasian Competition and Consumer Commission (ACCC).

Question 10

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

Question 11

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

Question 12

All competition laws help competition.

Question 13

Transparent pricing may help a cartel to sustain high prices.

Question 14

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

Question 15

The proper level of government intervention is ambiguous when dealing with a monopoly.

Question 16

Economists generally agree that predatory pricing should be a concern for competition policymakers.

Question 17

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

Question 18

Resale price maintenance prevents retailers from competing on price.

Question 19

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

Question 20

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 21

Regulated natural monopolies typically have rising average costs.

Question 22

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 23

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

Question 24

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 25

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

Question 26

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

Question 27

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

Question 28

The Competition and Consumer Act makes it illegal for companies to make a contract or arrangement that would substantially lessen competition

Question 29

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 30

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

Question 31

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 32

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

Question 33

If Sony was to require all stores carrying their cameras to sell at the recommended retail price Sony sets, rather than allow the stores to set their own prices, then Sony would be practicing predatory pricing.

Question 34

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

Question 35

The practice of tying is used to encourage the enforcement of collusive agreements.

Question 36

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 37

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

Question 38

Private ownership of a monopoly cannot benefit society.

Question 39

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

Question 40

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

Question 41

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 42

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 43

The practice of tying is used to:

A) enhance the enforcement 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 44

When attempting to limit the market power of a natural monopoly, governments tend to:

A) use regulations to limit prices
B) turn these monopolies into public enterprises
C) split natural monopolies into smaller companies
D) by all of the above measures

Question 45

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 46

Tying is becoming increasingly important in the market for:

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

Question 47

Suppose that one forestry company can operate at a lower average cost than several smaller firms. The forestry company is a natural monopoly in this local region. If the government was to regulate log prices to equal marginal cost, then this would:

A) result in a less than optimal total surplus for the log market
B) maximise the forestry company's producer surplus
C) cause the forestry company to operate at a loss
D) do all of the above

Question 48

When regulating a monopoly, one of the problems with setting price equal to average cost is that:

A) all of the below are correct
B) total social welfare is not optimised
C) there is no incentive for the monopolist to lower its costs
D) consumer surplus is not maximised

Question 49

A local bank sells two services, cheque accounts and ATM card services. Mr Donethat is willing to pay $8 a month for the bank to service his cheque account and $2 a month for unlimited use of his ATM card. Ms Beenthere is willing to pay only $5 for a cheque account but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
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) $2
B) $19
C) $15
D) $9

Question 50

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 51

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 52

One problem with government regulation of monopolies is that:

A) a benevolent government is likely to be interested in generating profits for political gain
B) the government typically has little incentive to reduce costs
C) regulated industries typically have rising average costs
D) a government regulated outcome will increase the profitability of the monopoly

Question 53

A local bank sells two services, cheque accounts and ATM card services. Mr Donethat is willing to pay $8 a month for the bank to service his cheque account and $2 a month for unlimited use of his ATM card. Ms Beenthere is willing to pay only $5 for a cheque account but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
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) $8
B) $5
C) $9
D) $24

Question 54

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

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

Question 55

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 56

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 57

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 58

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 59

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 60

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 61

The business practice of tying is also referred to as:

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

Question 62

A local bank sells two services, cheque accounts and ATM card services. Mr Donethat is willing to pay $8 a month for the bank to service his cheque account and $2 a month for unlimited use of his ATM card. Ms Beenthere is willing to pay only $5 for a cheque account but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
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) $5
B) $10
C) $9
D) $13

Question 63

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 64

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 65

A local bank sells two services, cheque accounts and ATM card services. Mr Donethat is willing to pay $8 a month for the bank to service his cheque account and $2 a month for unlimited use of his ATM card. Ms Beenthere is willing to pay only $5 for a cheque account but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
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 66

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 67

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 68

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 69

Although predatory pricing is a common claim in trade practices suits, some economists are skeptical about this argument because they believe that:

A) all of the below are true
B) the evidence is littered with statistical uncertainties
C) the evidence is nearly impossible to collect
D) predatory pricing is not a profitable business strategy

Question 70

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 71

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 72

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 73

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 74

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 75

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 76

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 77

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 78

To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to:

A) cooperate rather than compete with each other
B) compete rather than cooperate with each other
C) collude with each other
D) form various levels of cartel

Question 79

A local bank sells two services, cheque accounts and ATM card services. Mr Donethat is willing to pay $8 a month for the bank to service his cheque account and $2 a month for unlimited use of his ATM card. Ms Beenthere is willing to pay only $5 for a cheque account but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
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) $14
B) $8
C) $10
D) $1

Question 80

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 have legitimate purposes
D) all of the above