Chapter 17 
                     
                    MARKETS WITH MARKET POWER 
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                    Microeconomics in Context (Goodwin, et al.), 4  Edition 
                     
                    Chapter Summary 
                     
                    Now that you understand the model of a perfectly competitive market, this chapter 
                    complicates the picture by adding the element of market power. You will be introduced 
                    to the traditional models of monopoly, monopolistic competition, and oligopoly. You will 
                    learn about how firms maximize profits in these more complicated theoretical situations, 
                    and also about some of the ways in which firms may negotiate with one another–either 
                    explicitly or implicitly–to attain their preferred outcomes.  
                     
                    Objectives 
                     
                    After reading and reviewing this chapter, you should be able to: 
                            1.  Define a monopoly and describe how a monopolist maximizes profits. 
                            2.  Understand why a monopoly may or may not be efficient. 
                            3.  Define monopolistic competition and describe how profits are maximized in 
                                these markets. 
                            4.  Define oligopoly and discuss firm behavior under conditions of oligopoly. 
                     
                    Key Terms 
                     
                    pure monopoly                                           monopolistic competition 
                    oligopoly                                               barriers to entry 
                    natural monopoly                                        exclusionary practices 
                    predatory pricing                                       dumping 
                    local monopoly                                          regulated monopoly 
                    price maker                                             price discrimination 
                    nonprice competition                                    industrial concentration ratio 
                    duopoly                                                 payoff matrix 
                    price war                                               collusion 
                    tacit collusion                                         price fixing 
                    price leadership                                         
                     
                                                     
                    Chapter 17 – Markets with Market Power                                                         1 
                     
                  Active Review Questions 
                   
                  Fill in the Blank 
                   
                     1.  A monopoly that emerges because of economies of scale is called a 
                         ________________monopoly. 
                      
                     2.  Joe’s Superstore prevents competitors from entering the market by temporarily 
                         pricing its goods below cost, thus driving new entrants out of business.  This 
                         practice is known as ________________ pricing. 
                   
                     3.  Selling goods to another country at a price below the cost of production is known 
                         as ________________. 
                   
                     4.  The marginal revenue curve for a monopolist is (flat/downward-sloping/upward- 
                         sloping) ________________. 
                   
                     5.  Market power in the form of a monopoly creates benefits for the (buyer/seller) 
                         ________________ at the expense of the (buyer/seller) ________________. 
                      
                     Questions #6, #7, and #8 refer to the graph below. In this graph, QE refers to the 
                     quantity of a good that would be provided under conditions of perfect competition, 
                     and QM refers to the quantity of the same good that is provided under conditions of 
                     monopoly. 
                                                               
                     6.  Area A shows the magnitude of  ________________. 
                      
                     7.  Area D shows the magnitude of  ________________. 
                   
                     8.  Area B represents a transfer from  ________________ to  ________________. 
                   
                     9.  A firm that charges different prices to different buyers depending on their ability 
                         and willingness to pay is referred to as a  ________________ seller. 
                   
                   
                   
                  Chapter 17 – Markets with Market Power                                            2 
                   
                  True/False 
                   
                     10. In a hypothetical case of perfect price discrimination, producer surplus is 
                         completely eliminated. 
                   
                     11. In a hypothetical case of perfect price discrimination, deadweight loss is 
                         completely eliminated. 
                   
                     12. “Monopolistic competition” includes some characteristics of perfect competition 
                         and some characteristics of monopoly. 
                   
                     13. In a situation of monopolistic competition, no close substitutes are available. 
                   
                     14. Monopolistically competitive firms have higher unit costs than would occur in a 
                         perfectly competitive market. 
                   
                  Short Answer 
                   
                     15. Describe one way in which monopolistically competitive firms work to protect 
                         their “miniature monopoly.” 
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                     16. List three conditions of the idealized market structure of monopoly. 
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                     17. Explain how network externalities can lead to monopolization. 
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                     18. Briefly describe the pros and cons of allowing drug companies to enjoy 
                         substantial market power (e.g. through the use of patents). 
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                  Chapter 17 – Markets with Market Power                                            3 
                   
                     19. Briefly explain how monopolistic competition differs from perfect competition. 
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                     20. Describe the main characteristics of oligopoly. 
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                     21. Explain in what ways markets for food are not as competitive as they could be. 
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                  Problems 
                   
                     1.  Suppose that a monopolistic firm produces hair dryers. The chart below shows the 
                         quantities of hair dryers that can be sold at various prices. 
                   
                       Quantity of            Price of            Total              Marginal 
                       Hairdryers           Hairdryers          Revenue              Revenue 
                              
                            1                   $100                                       
                            2                    $90                                       
                            3                    $80                                       
                            4                    $70                                       
                            5                    $60                                              
                            6                    $50                                       
                             
                         a.  Fill in the total and marginal revenue columns in the chart shown above. 
                             
                         b.  If marginal cost is equal to marginal revenue at MC=MR=$20, what is the 
                            profit maximizing level of production (assuming that the firm should produce 
                            at all)? 
                   
                             
                             
                             
                             
                  Chapter 17 – Markets with Market Power                                             4