Question

1. What are the benefits and costs to society of advertising by automobile companies? By beer companies?

2. In monopolistic competition, the differentiation of firms’ products leads to negatively sloping demand curves, and this in turn leads to a long-run equilibrium characterized by excess capacity and costs that are above the minimum attainable. Do you believe the government should take action to standardize products so as to make demand curves for monopolistic competitors more elastic, and thereby eliminate the wastefulness of excess capacity? Why or why not?

3. Antitrust legislation is intended to ensure that American firms are competitive. Explain how antitrust laws can actually be used in some cases to reduce competition

Answer 1

1. What are the benefits and costs to society of advertising by automobile companies? By beer companies?

Generally firms in oligopoly competition spend much money on advertisements. In a market there is intense competition may also be seen. Eg. Car and Beer market.

Automobile companies:

Benefits: a. Customer is made aware of latest features. b. Intense rivalry often leads to price wars and thus benefits the customers. c. It generates jobs in media and advertising sector. d. Innovation is encouraged as companies often compete on same features and hence customers get updated technology.

Costs: a. It makes customers buy cars that they cannot afford.b. Luxury has environmental costs but advertisments make a person non sensible to these issues. c.it increases costs of products as companies recover them from customers.

Beer companies:

Benefits: a. Intense rivalry often leads to price wars and thus benefits the customers. c. It generates jobs in beverages sector. d. Innovation is encouraged as companies often compete on same features and hence customers get updated flavors.

Costs: a. It makes customers to feel extra cool and hence negative externalities of consumption are generated. b. Law and order is threatened. c. Beer production needs a lot of water and hence water usage may go to industry rather than agri or drinking.

2. In monopolistic competition, the differentiation of firms’ products leads to negatively sloping demand curves, and this in turn leads to a long-run equilibrium characterized by excess capacity and costs that are above the minimum attainable. Do you believe the government should take action to standardize products so as to make demand curves for monopolistic competitors more elastic, and thereby eliminate the wastefulness of excess capacity? Why or why not?

A market is a monoplistic market where every firm claims that there product is differentiated and is unique. There is niche that every organization wants to create. Eg. Premium cars, small and family cars, economic cars, high mileage cars etc.

Monopolistic markets have following charactristics: a. Differentiated product.b. Firms are price makers.c. entry for new firms is not having any barriers.Hence ease of entry/exit.

If govt. makes products standardized then following benefits and costs will occur:

1. Benefits: a. standard product b. No price differences c. No price/form discrimination. d. Uniformity in consumption

Costs: 1. No incentive for innovation. b. Market allocation of resources is better than govt. control. c. No effective and efficient production. d. Under/over allocation of resources.

Hence, govt. should not take steps to differentiate products.

3. Antitrust legislation is intended to ensure that American firms are competitive. Explain how antitrust laws can actually be used in some cases to reduce competition

In USA there are laws like Sherman Antitrust act of 1890. This act stops companies to become a monopoly.

A link is given below for a student to study how De Beers monopoly was curtailed by USA govt. Recently Microsoft was asked to gve choice customers to choose internet launcher and also to give choices of software rather than bundling products.

https://www.kitco.com/ind/Zimnisky/2013-06-06-A-Diamond-Market-No-Longer-Controlled-By-De-Beers.html

Also check:

https://www.investopedia.com/insights/history-of-us-monopolies/