Discuss the effect of antitrust policy in the: a. monopolistic competition model

Question

Discuss the effect of antitrust policy in the:

a. monopolistic competition model.

a) Each firm in this model can have a large share of the market and make positive profit, so antitrust policy would lead to lower prices.

b) In this model, firms get together and allocate market share. Antitrust policy would prevent that, holding prices down and increasing quantity supplied.

c) Average total costs for firms in this model are always falling, so antitrust policy to break it up would result in higher product prices.

d) Each firm in this model has only a small share of the market and makes no profit, so antitrust policy would have little effect.

b. cartel model of oligopoly.

a) In this model, potential collusion, not market structure, determines equilibrium, so antitrust policy would have little effect unless it influenced barriers to entry and exit.

b) Average total costs are always falling, so antitrust policy to break it up would result in higher product prices.

c) In this model, firms get together and allocate market share. Antitrust policy would prevent that, holding prices down and increasing quantity supplied.

d) Combined, a cartel in this model has only a small share of the market and makes no profit, so antitrust policy would have little effect.

c. contestable market model of oligopoly.

a) The market in this model is viewed as a contest among firms vying for the greatest market share by lowering prices. Antitrust policy would only result in higher product prices.

b) The firms have only a small share of the market and make no profit, so antitrust policy would have little effect.

c) In this model, firms contest the mergers between other firms, negating the need for antitrust policy. Firms self-monitor in this market model.

d) In this model, potential competition, not market structure, determines equilibrium, so antitrust policy would have little effect unless it influenced barriers to entry and exit.

Explanation / Answer

a.

c.

c.

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