1. “The North Carolina Board of Dental Examiners was established under North Car
ID: 1115403 • Letter: 1
Question
1. “The North Carolina Board of Dental Examiners was established under North Carolina law and charged with administering a licensing system for dentists. A majority of the members of the board are themselves practicing dentists. North Carolina statutes delegate authority to the dental board to regulate the practice of dentistry, but did not expressly provide that teeth whitening was within the scope of the practice of dentistry. Following complaints by dentists that non-dentists were performing teeth-whitening services for low prices, the dental board conducted an investigation. The board subsequently issued cease and desist letters to dozens of teeth-whitening outfits, as well as to some owners of shopping malls where teeth-whiteners operated. The effect on the teeth-whitening market in North Carolina was dramatic.”
Many would argue that it is obvious that dentists should serve on the board of the system that licenses dentists, since they have the expertise to certify quality. Given the information in this chapter, aside from ensuring quality, why else might dentists find it in their interest to control the licensing system?
Select one:
a. Current dentists would be more aware, but new dentists less aware, of how little the average dental patient knows about the services he or she really needs. Requiring a license for new dentists helps patients to overcome the information problem, which has been made worse over the past decade or so with the increase in information over the internet.
b. The licensing requirement increases the availability of dental substitutes (like the teeth whiteners), and current dentists want to ensure a variety of substitutes since it increases their individual marginal revenue.
c. The existing dentists would use their market power to reduce the demand for their own services, thereby increasing the demand and workload for new dentists. Since the new dentists would be required to have a license, it would increase the demand for their services more than the demand for dentists who received their licenses many years ago.
d. Existing or current dentists can use the licensing system as a barrier to entry to new dentists, thereby restricting labor supply and ensuring earnings that are higher than would occur under a more competitive, open labor market.
2. Why do you think there were complaints and an investigation that teeth were being whitened “for low prices?”
Select one:
a. The board of dental examiners wanted to determine whether the low cost of the whitening was due to low quality or incompetent work being performed by the unlicensed non-dentists. The board would be equally likely to investigate a licensed dentist who was performing services at a cheaper cost than his or her competitors.
b. The current licensed dentists are able to enjoy some market power because of the licensing system. The availability of unlicensed teeth whiteners increases dental substitutes and reduces the market power of current licensed dentists, thus pushing the dentists' prices (and profit) down.
c. The licensed dentists were fearful of the growing market power and high prices of the unlicensed non-dentists. The board conducted its investigation in hopes of increasing competition in the market for dental services.
d. The licensing board wants to ensure a fair return for all dental services, and presumed that unlicensed teeth whiteners were likely setting their prices below cost. Doing so would ultimately lead to losses and exit from the industry, and the licensing board exists to protect all those who provide dental services, licensed or not.
3. Political scientists usually conclude that voters dislike negative campaign ads, but we can use game theory to offer an explanation for why they continue to be used. While negative ads are (nauseatingly) commonplace in electoral competition, they are far less frequent in business competition; i.e., it is rare to see company A directly attacking the quality or character of competing company B to the extent that political candidate X attacks political candidate Y. (We might see a company talk about the insufficiencies of “the leading brand,” but the negativity is very tame compared to what happens during campaign season.) How might game theory also offer an explanation for this behavior?
Select one:
a. Political campaigns only offer voters one decision every few years (or even less frequently if a candidate loses or chooses not to run again); thus, there is a much smaller chance that voters will punish a successful candidate who used negative ads in a one-shot campaign. However, purchase decisions are made every day and repeatedly, so consumers have much more opportunity to punish negative companies in this type of repeated game.
b. Political campaigns are sequential games, but business decisions are simultaneous games. Politicians deduce backwards from the conclusion of an election that the harm (in the form of lost votes) from using negative ads earlier in the campaign is less than the harm from not using them, so there is a first-mover advantage. Businesses, though, are unable to deduce backwards from their quarterly earnings report given that the decisions are simultaneous, and so are unable to conclude that negative commercials would be beneficial.
c. This is an example of a prisoners' dilemma where political campaigns actually are achieving the optimal outcome by using negative ads, but businesses behave in a less-than-optimal way by not using them. Using the example of successful negative campaign ads, businesses could likewise be successful using negative ads in the aggregate (i.e., all companies would benefit if all went negative) but a single company would not be successful if it was the only one that went negative.
d. Political candidates find it much harder to form cartels since cheating (e.g., running negative ads against others) is relatively easy and successful in terms of gaining votes. The payoffs to cheating are also large since it means gaining office for many years. Businesses, however, usually are much less likely to form cartels since it is illegal to cheat and run negative commercials against other companies. Running a negative commercial is not a dominant strategy for a business like it is for a politician.
Explanation / Answer
1). D is the answer to this question. Existing or current dentists can use the licensing system as a barrier to entry to new dentists, thereby restricting labor supply and ensuring earnings that are higher than would occur under a more competitive, open labor market.
This is sort of an oligopoly where a group of people in a particular sector/market want to dominate the market by keeping its competitor's away or making it difficult for them to enter the market.
2). B is the answer to the questions. The current licensed dentists are able to enjoy some market power because of the licensing system. The availability of unlicensed teeth whiteners increases dental substitutes and reduces the market power of current licensed dentists, thus pushing the dentists' prices (and profit) down.
This is again the case of domination that the group of dentist would want to maintain in the market so that they do not lose their revenue or profit share.
3). The answer is B. Political campaigns are sequential games, but business decisions are simultaneous games. Politicians deduce backwards from the conclusion of an election that the harm (in the form of lost votes) from using negative ads earlier in the campaign is less than the harm from not using them, so there is a first-mover advantage. Businesses, though, are unable to deduce backwards from their quarterly earnings report given that the decisions are simultaneous, and so are unable to conclude that negative commercials would be beneficial.
It is true because the candidates know the decision, either a Yes or a NO. While it is hard for a firm to predict the actual market conditions and he does not have complete information about the market. Besides, there might be many competitors in the market so the effect of negative campaign might not be much in his case, while it might actually work in the case of Presidential Elections.
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