Question

Media Analysis Question In today's economy, many sectors telecoms, cable TV, digital branches from social media to internet search, health insurance, pharmaceuticals, agro-business, and many more cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the "pure" competition depicted in textbooks. A few sectors can be defined as "price taking": firms are so small that they have no effect on market price. Agriculture is the clearest example, but government intervention in the sector is massive, and prices are not set primarily by market forces Barack Obama's council of economic advisers (CEA), led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications. In most industries according to the CEA, standard metrics show large and in some cases, dramatic - increases in market concentration. The top 10 banks share of the deposit market, for example, increaseed from about 20% to 50 % in just 30 years, from 1980 to 2010. Some of the increase in market power is the result of changes in technology and economic structure: consider network economies and the growth of locally provided service-sector industries. Some is because firms Microsoft and drug companies are good examples- have learned better how to erect and maintain entry barriers, often assisted by conservative political forces that justify lax anti-trust enforcement and the failure to limit market power on the grounds that markets are "naturally" competitive. And some of it reflects the naked abuse and leveraging of market power through the political process: Large banks, for example, lobbied the US Congress to amend or repeal legislation separating commercial banking from other areas of finance. The consequences are evident in the data, with inequality rising at every level, not only across individuals, but also across firms. The CEA report noted that the "90th percentile firm sees returns on investments in capital that are more than five times the median. This ratio was closer to two just a quarter of a century ago." Joseph Schumpeter, one of the great economists of the 20th century, argued that one shouldn't be worried by monopoly power monopolies would only be temporary. There would be fierce competition for the market and this would replace competition in the market and ensure that prices remained competitive. My own theoretical work long ago showed the flaws in Schumpeter's analysis, and now empirical results provide strong confirmation Today's markets are characterized by the persistence of high monopoly profits The implications of this are profound. Many of the assumptions about market economies are based on acceptance of the competitive model, with marginal returns commensurate with contributions. This view has led to hesitancy about official intervention: If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. But if markets are based on exploitation, the rationale for laissez- faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity social * Joseph Stiglitz, is a Nobel-prizewinning economist, professor at Columbia University, former senior chief economist of the World Bank and chair of the council of economic advisers under Bill Clinton Excerpted from: www.theguardian.combsiness 2016ma/13-new gra-monopoleioseph-stiglitz . Explain THREE characteristics of a monopoly? Illustrate the different types of profits carned by a monopoly firm in the short run. From the article above, explain why does a monopoly earn high profits in the long run?

Answer 1

a) 1. heterogenous or differentiated products.

2. one seller and more than one buyers.

3. sellers are price setters and buyers are price takers.

b) There are three kinds of profit-

1. supernormal profit

2. normal profit

3. subnormal profits