1) State and evaluate the arguments made for concentration of market power in a
ID: 1161395 • Letter: 1
Question
1) State and evaluate the arguments made for concentration of market power in a Monopoly. 2) Why is there an emphasis on non-price competition in oligopoly markets rather than on lowering prices to gain market share? 3) Economists say that excess capacity in monopolistically competitive markets is “the cost to society of variety”. What is the cost that economists are talking about, and why is this cost the result of having a variety of goods and services? 1) State and evaluate the arguments made for concentration of market power in a Monopoly. 2) Why is there an emphasis on non-price competition in oligopoly markets rather than on lowering prices to gain market share? 3) Economists say that excess capacity in monopolistically competitive markets is “the cost to society of variety”. What is the cost that economists are talking about, and why is this cost the result of having a variety of goods and services? 2) Why is there an emphasis on non-price competition in oligopoly markets rather than on lowering prices to gain market share? 3) Economists say that excess capacity in monopolistically competitive markets is “the cost to society of variety”. What is the cost that economists are talking about, and why is this cost the result of having a variety of goods and services?Explanation / Answer
1. The monopoly firms enjoys market power because there is only producer for the commodity which allows the monopolist to charge any price he wants. Normally the monopolist charge a price above the marginal cost to maximize the profit of the firm. The monopoly firm faces downward sloping demand curve and it shows the negative relationship between the price and quantity demanded, that is if the monopolist want to increase the quantity of output sold he must decrease the price of the product.
2. The main feature of the oligopolistic market is that there is interdependence between the firms in the market, that is the action of one firm affects the other firms. So if one firm reduce the price for their product the other firms will be forced to do the same, other wise their sales will decline. When the firms reduce their prices that is also a reduction in their profits. So if the firms cooperate toghether and forms a cartel that will be a best decision for the firms. So lowering prices will decline the profits of teh oligopolistic firms.
3. The monopolistic firms produce on the declining portion of the average total cost curve rather than the minimum point. At the minimum the cost will be very low but the monopolistic firm stay on the declining portion of the ATC. So the firms can increase the production of the goods further, this means the they have excess capacity. The price at the declining part of the ATC will be much higher than the minimum point so at a higher price the firms should be a decrease in the quantity demanded so this is a cost to the society.
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