back start next

[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [ 54 ] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] [73] [74] [75]


sells in cities as a monopolist are often considerably higher than in other towns where it faces even a single rival. If apparendy only one competitor is enough to cause a big reduction in a monopolists piice, muldple firm oligopoly must reasonably lie far from the monopoly equilibrium.

Second, illegal price-fixing conspiracies in oligopolistic markets frequently achieve enormous increases in prices and profits, an impossible outcome if oligopolisdc structure alone were sufficient to achieve monopoly prices. Moreover, prices and profits in oligopolies engaged in price-fixing conspiracies often fall dramatically when even a single firm breaks with the conspiracy. Again, this result shouldnt occur if oligopolists could wrest monopoly profits with sheer oligopolistic market structure alone.

Third, such price-fixing conspiracies often collapse entirely of their own weight. Since apparently its hard for oligopolists to effectively collude for monopoly profits even with a specific agreement, the chances of gaining monopoly price without explicit collusion must presumably be a good deal less.

Finally, many careful studies of such regulated oligopolies as railroads and (formerly) airlines have concluded that regulation has dramatically raised prices in these industries. This likewise suggests that the oligopoly structure alone cannot achieve the monopoly price without government assistance via regulation.

The evidence presented here is neither systematic nor conclusive. Nonetheless, it is suggestive: At the very least the presence of oligopoly does not necessarily mean a strongly non-competitive outcome. Whether it often means a competitive one is wide open for serious debate.


Many products - potatoes, makes of furniture, beef, clothing, and hundreds of others - are sold either entirely without a brand name or with a practically unrecognizable one. Such products are generally simple. When we look at more complex products, brand names become much more important. Brand names arise when product information is cosdy.

Consider what would happen in a world without brand names. Suppose that starting tomorrow could legally put the name Ford on any car he might manufacture. After a period of time, counterfeiters would enter the market selling cheaply made Ford look-alikes. For example, the fakes might rapidly wear out, rust, waste gas, break-down, or develop safety hazards due to poor design, materials, or work-

manship. Since consumers have no way of readily distinguishing real Fords from the counterfeits, many bogus cars will be sold at high profits made possible by cost cutting. Eventually, as disappointing experience with the counterfeits mounts, consumers will adjust their expectations downward when they see the Ford logo on a car

As such, the demand for real Fords will decrease; after all, people ivill not be willing to pay as much for a car of dubious quality. Further, the real Ford will fmd it hard to recover the cost of maintaining its normal quality level since consumers cant distinguish the genuine article from the fakes. Consequendy, even though consumers are willing to pay for the usual Ford standard of quality, the company could capture no reward for producing it As a result, the quality of genuine Fords would sink to the low level of the counterfeits.

In the real world Ford contiols the property right to the use of its name, and forbids the unlicensed use of it. Thus, the Ford brand name reduces consumer search costs. Buyers need not investigate quality as much because they know Ford products have a certain reputation - not necessarily the highest - to mzuntain. Moreover, since saving these search costs is valuable to consumers, they reward the company by paying a higher price for its products.

Of course, it would be legally possible for Ford to mimic the behavior of the counterfeiters in the above example. Specificzdiy, the company could sharply reduce its production cost by radicaUy cutting the quality, thereby enjoying enhanced profit while its old reputation lasts. Ford does not implement this strategy, however, because its increased profit in the present would come at the expense of decreased future profit once consumers caught onto the ruse. Since the latter is presumably greater than the former. Ford and other brand name producers maintain their J reputations by preserving quality.

Finally, since brand name reputation is a creat-. ed good useful for the production of a consumer good, specifically, consumer information, it is often referred to as brand name capital. Sellers of potatoes 1 posses no brand name capital because the information appropriate for pouto buying can be had at a glance. Conversely, if a product has brand name capital, it usually surpasses minimal standards at the very least. Products with a great deal of brand name capital are; often the best in their field. Of course, many - sumers are willing to trade qualit)- in order to have i more of something else, specifically money with which i to buy other goods.


The function of advertising is to convey informadon. Ads inform consumers of products prices, characteristics and available sellers. Conversely, when WJ advertising is banned by the government, prices often soar. For example, at the urging of dispensing opticians, some states banned the advertising of prescription glasses until recendy. Prices in such states averaged twenty-five to thirty percent higher than states which didnt restrict advertising. Similarly, when the ban was finally lifted in states which had it, prices fell dramatically. Evidentially, these advertising impediments made it hard for sellers to reach the low lying regions along their average total cost curves. Nonetheless, few magazine ads and almost no television spots provide any direct informadon. Can such image advertising achieve anything more than consumer befuddlement? Philip Nelson is one economist who vigorously argues that it does. Price is not much stressed according to Nelson because its so easy for consumers to acquire this information without advertising. Instead, advertisers concentrate on providing informadon regarding quality, and the character of the good determines how advertising conveys this uiformation.

Some types of goods, which Nelson calls search goods, have characteristics that can be readily checked out before purchase. Examples cited by Nelson are articles of clothing and steam generators. Advertising of search goods direcdy informs potential consumers of the products characteristics. Such advertising is almost inevitably truthful because it costs consumers

litde to verify the claims made. In other words, a manufacturer who attempts to trick consumers by making false claims for a search good will be unable to sell a single item through the trick. Consumers will see at once that the claim is false, and so will refuse to buy the good. Naturally, if the manufacturer has brand name capital, its value will be reduced once the ruse is discovered. Thus, Nelson .savs it would be "foolhardy" for manufacturers to make false claims for search goods.

In another category are what Nelson calls experience goods. One must consume, i.e., experience these goods in order to know what theyre really like. For example, soft drinks and beer are two clear-cut experience goods; after all, a listing of ingredients in a television ad would, provide consumers with litde worthwhile information about the products. What consumers want to know is what such goods taste like, and to know that, one must buy and direcdy experience the good. Products sold with image advertising almost inevitably fall into the category of experience goods. Although image advertising might trick a consumer once into buying an inferior and disappointing product, advertising generally does not pay unless the consumer repeatedly buys the advertised good. As such, it rarely pays to heavily advertise inferior products; repeat purchases are simply too small to cover the advertising expense. This means that manufacturers will promote only relatively high quality products with advertising. It is thus an empirical implication of Nelsons theory that high quality goods carry reladvely heavy advertising budgets, ceteris paribus.

1. Mann, Rol)crl S. and Baird. Oiarles W., Elemcnu of Microeconomics (Si. Paul: Wcsl Publisliing, 1981) pp. 27.=i-276

2. Ibid.

3. Demetz, Harold, "Why Regulate Utilities.Jourpal of Law & Economics, pp. 5»60 (1968)

4. Berk, Rol)en, The Anliirust Paradox (New York: Basic Books. 1978) pp. 181-185

5. Benham, Lee, "The Effect of Adi-ertising on the Price of Eyeglasses, Journal of Law and Economics, pp. 337-52

6. Nelson. PhiUp, "Advertising as Information.Journal of Politiral Economics, pp. 729- (1974)


A. Which of the following pairs are incorrectly matched? (a) monopolisdc competition and many firms (b) cartels and profits (c) monopolisdc compedtion and short-run profits (d) joint profit maximizing cartels and "cheating" (e) none of these.

B. Oligopolisdc markets are least characterized by which of the following? (a) interdependence (b) P > MC (c) entry barriers (d) many firms (e) potendal collusion.

C. Which ofthe following is not associated with a cartel? (a) the existence of quotas for each firm (b) high industry profits (c) the possibility of secret price cuts (d) the incurring of costs to police the agreement (e) price equal to marginal cost.

D. The kinked oligopoly demand curve model explains which of the following phenomena? (a) the current price (b) the stability of market shares between firms (c) the stability of oligopoly price (d) total industry output (e) both (b) and (c).

E. Monopolisdc compeddon is characterized by: (a) homogeneous products (b) differendated products (c) blocked entry (d) posidve profits in the long run (e) perfecdy elastic demand curves.

F. Which of the following statements is incorrect? (a) monopolistic competitors demand curves become

less elastic as entry occurs (b) in a long run monopolistic compedtive equUibrium, profits are zero (c) a downward sloping demand curve for an individual firms product indicates the presence of monopoly power

(d) in a joint profit maximizing cartel, the marginal cost of producing the last unit is the same for all artelists (e) a "kink" in an individual firms demand implies a discontinuity in its marginal revenue curve.

G. Which of the following statements regarding monopoUsdc competition is correct? (a) equilibrium occurs in the region of economies of scale (b) profits are destroyed by entry in the long run (c) the product has some unique features in the minds of consumers (d) entry is open (e) all of the above.

H. In equilibrium under monopolistic compedtion: (a) MR is greater dian AR (b)MR=MC (c) output is efficient (d) short run profits are impossible

(e) MR and P are one and the same thing.

I. Which of the following is always identical among the cartelists in the joint profit maximizing model? (a) average total cost (b) output (c) profit per unit (d) marginal cost (e) each firms share of the total profit achieved by the cartel.

J. A ftmction of advertising is to: (a) coiivq-information (b) deceive consumers (e) forestall competition (d) destroy brand names (e) make products more homogeneous.

[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [ 54 ] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] [73] [74] [75]