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Ec142 Week 6 Homework

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EC142/Principles of Microeconomics
Week 6 Homework
Chapter 8:
#2. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which berries, if any, do you feel give rise to monopoly that is socially justifiable.
Some of the major berries to entry into certain industries would be economies of scale, legal barriers such as patents and licensees, ownership of essential resources and cost or pricing.
Economies of scale could foster a monopoly because it deals with very large industries that have the ability to sustain substantial losses in order to reach their long term gains. Smaller companies that wish to enter the business just can’t afford the lost in capital or gains and need to make a profit now. These larger industries could go years’ operating in the red and effectively squeeze out their smaller completion that could not do the same.
Some legal barriers that could cause a monopoly could be patents on inventions that are need to make the product. They could also be restriction on product, tax laws and government regulations. One government regulation that ensures the U.S. Postal Service will always be a monopoly is the law that was established that states the U.S. Postal service is the only company that can legally deliver first class mail. This law alone is a barrier for any new company that would like to start a post office business.
Ownership of essential resources and cost could foster either a monopoly or oligopoly. By being the only company that has a certain item, resource, tool, machine that can produce a product you can effectively dictate how much of that product is the market and how much it will cost. If that resource (like gold) is rare, then only a few companies will have the resources and funding to sustain the losses it takes to start a new business (such as gold processing).
#8. U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceiling. Explain why these companies, for profit reasons, oppose laws allowing reimportation of their drugs back into the United States.
U.S. pharmaceutical companies oppose laws allowing reimportation of their drugs back into the U.S for one simple reason, profit. If the company is forced to sell its product at a low price in a country that imposes a price ceiling on its product, a company could by the product at the lower price, reimport it into the U.S. and sell it for less than the pharmaceutical company and still make a profit off it. The consumer can buy the exact same prescription drugs for less ensuring the pharmaceutical company losses money. The result would be a huge profit loss for the company. #9. How was De Beers able to control the world price of diamonds over the past several decades even though it produced only 45 percent of the diamonds? What factors ended its monopoly? What is its new profit strategy?
The reason that De Beers was able to control the world price on diamonds over the past several decades was due to their purchasing power. Even though De Beers has only been producing about 45 percent of the diamonds for the last twenty or so years, at one time they owned 90 percent of the world’s market on diamonds. To keep control of the market, De Beers would engage in different tactics. If the country that found a new diamond mine and was trying to sell them without going through De Beers, De Beers would either try to convince them to sue the single supplier method to maximize profits. If that didn’t work they would use their vast stock pile of diamonds to flood the market and drive prices into the ground making it unprofitable to sell them. Third, when a country like Russia found diamonds and started to export them, De Beers would buy all the diamonds produced so they were the only conduit for diamonds on the market. They would just stock pile diamonds making the world go through them and they set the price. This strategy help them until the 20th century when other countries and diamond companies started to stock pile their own diamonds and started to influence the market themselves. Now De Beers has moved away from trying to own the market for rough diamonds and moved over to retail stores. De Beers posted a 75 percent increase in profits in 2011 and it just opened up another store. #10. Under what law and on what basis did the federal district court find Microsoft guilty of violating the Sherman Act? What was the initial district court’s remedy? How did Microsoft fare with its appeal to the court of appeals? What was the final negotiated remedy?
In the reading, it never really stated what the federal district court found Microsoft guilt of; it does however allude to what it was guilty of what it was charged with. The U.S. Justice Department and 19 individual states to include the District of Columbia filed antitrust charges against Microsoft under the Sherman Antitrust Act. They claim that Microsoft violated Section 2 of the act and that their actions violated Section 1 of the Sherman Act which prohibits actions that restrain trade or commerce. The initial judge order that Microsoft be broken into two companies, one that sold the Windows operating system and the other initially selling Microsoft applications (such as word, Hotmail, MSN etc.) Microsoft appealed the district court’s decision to a U.S. court of appeals and won. The appeals court ruled that while Microsoft illegally maintained its monopoly, it tossed out the district courts decision to break up Microsoft. The break up was replaced with the following behavioral remedies that prevents Microsoft from retaliating against any firm that is developing, selling, or using software that competes with Microsoft Windows or Internet Explorer or is shipping a personal computer that include both Windows and a non-Microsoft operating system; requires Microsoft to establish uniform royalty and licensing terms for computer manufactures wanting to include Windows on their PC’s; required that manufactures be allowed to remove Microsoft icons and replace them with other icons on the Windows desktop and calls for Microsoft to provide technical information to other companies so those firms can develop programs that work as well with Windows as Microsoft’s own products. This in turn caused Microsoft to pay billions in fines and payouts.

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