Economics monopolies

• What is price leadership?

  The setting of prices by a dominant firm followed by others
• What is a price agreement?

  An agreement between firms regarding pricing of goods or services
• What is a price war?

  Rival firms continuously lower prices to undercut each other
• Why is price leadership considered a form of covert collusion?

  Because it avoids overt agreements, which are usually illegal
• How do price agreements benefit firms and suppliers?

  They stabilize prices for a specified period of time
• What is the primary goal of a price war?

  To increase market share or force rivals out of business
• What might happen to consumers if a price war forces firms out of the market?

  Monopoly power of surviving firms increases, harming consumers
• What was retail price maintenance?

  Manufacturers set prices at which retailers sold their goods
• Why was retail price maintenance considered a restrictive practice?

  It prevented price competition and allowed manufacturers to make excessive profits
• What are recommended retail prices (RRPs)?

  Prices suggested by manufacturers for retailers to follow
• What are the potential outcomes of a price war?

  • Increased market share for some firms
  • Forced exit of rival firms from the market
  • Short-term benefits for consumers from lower prices
  • Long-term harm to consumers if monopoly power increases
• What are the effects of retail price maintenance on the market?

  • Lack of price competition
  • Excessive profits for manufacturers
  • Potential harm to consumers due to higher prices
• How do recommended retail prices (RRPs) affect the book market?

  • Stabilize prices across retailers
  • Benefit small bookshops by reducing competition
  • Large bookstores may still discount below RRPs
  • Online retailers like Amazon disrupt the market
• What is the definition of oligopoly?

  Imperfect competition among the few
• What is a price ring?

  A group of firms that agree to fix prices
• What is a high concentration ratio often used to define?

  Oligopoly
• Why do oligopolists sometimes collude?

  To reduce uncertainty and increase monopoly profit
• For how long are price agreements usually good?

  6 months
• What does the theory of the kinked demand curve illustrate?

  Effects of uncertainty and interdependence in oligopoly
• What is price discrimination?

  Charging different prices based on willingness to pay
• What is the main form of price discrimination based on?

  Differences in willingness to pay
• What is one form of price discrimination that involves bulk buying?

  Lower prices for larger quantities
• What are the characteristics of collusive oligopoly?

  • High prices
  • Productive and allocative inefficiency
  • Lack of choice
  • Few benefits of competition
• What are the benefits of economies of scale in oligopoly?

  • Dynamic efficiency
  • Ability to pass on cost cuts as low prices
• What are the weaknesses of the kinked demand curve theory?

  • Does not explain how the initial price is determined
  • Assumes that firms will always react in the same way to price changes
  • Ignores non-price competition
• What are the effects of oligopolies on output and prices?

  • Restrict output
  • Raise prices and profit
  • Firms may satisfice
• What are the disadvantages of collusive oligopoly?

  • Combines disadvantages of monopoly
  • High prices
  • Productive and allocative inefficiency
  • Lack of choice
• What are the main points about price discrimination?

  • Charging different prices based on willingness to pay
  • Not based on differences in production costs
  • Bulk buying is one form
• Why might the kinked demand curve theory be considered limited in explaining oligopoly behavior?

  It assumes firms react uniformly to price changes
• If a firm in an oligopoly market wants to increase its monopoly profit, what strategy might it use?

  Collude with other firms
• What does an oligopolist expect rivals to do when increasing price from P1 to P2?

  Keep their own prices stable
• What are the potential consequences of collusive oligopoly for consumers?

  Higher prices and less choice
• Why does the oligopolist expect demand to be relatively elastic when increasing price from P1 to P2?

  Rivals keep prices stable, gaining market share
• If a firm practices price discrimination, what is it likely to consider when setting prices?

  Customers' willingness to pay
• What happens to demand when price increases from P1 to P2 in an oligopoly?

  Demand falls more than proportionately
• Why does the oligopolist expect demand to be less elastic when cutting price from P1 to P3?

  Rivals follow suit with matching price cuts
• What are the potential drawbacks of oligopolies for market efficiency?

  Restricted output and higher prices
• What happens to demand when price decreases from P1 to P3 in an oligopoly?

  Demand increases less than proportionately
• If a firm in an oligopoly market wants to reduce uncertainty, what might it do?

  Collude with other firms
• How does the theory of the kinked demand curve explain firm behavior in oligopoly?

  It shows firms react to price changes based on interdependence