ECON 309 SPRING 2022 RESEARCH PROJECT STEP 2
DUE MARCH 4, 11:59 PM Victoria, B.C. Time
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Marking scheme – Make sure you answer all the questions before handing this in!
Question
Max Mark
Q1
A
1
Q2
A
75
B
4
Q3
A
75
B
4
Q4
A
5
Regular: (2.a + 3.a)/2
75
Challenge: 1+2.b+3.b+4
15
Communication
10
Total
100
PROJECTS WILL BE MARKED AS SUBMITTED.
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Table of Contents
Hints and Pointers 2
Question 1: Name your theory of harm (2 marks) 3
Question 2: Show the harm in using supply/demand diagram. 4
2.a The diagrams (out of 75) 4
2.b Explain what’s going on in the diagrams (4 marks) 5
Question 3: Defend the firm using supply/demand diagrams 6
2.a The diagrams (out of 75) 6
2.b Explain what’s going on in the diagrams (4 marks) 7
Question 4: All together now (5 marks) 8
Hints and Pointers
This step is not difficult, but it can be confusing, as most of you are probably not yet used to thinking in terms of competition policy. To help you out, and hopefully reduce your frustration, I’ll spell out what I’m looking for as clearly as I can.
You’re studying a firm or group of firms ‘behaving badly’.
If they’re ‘behaving badly’ from a competition policy perspective, that means that they are reducing society’s total well-being, as measured via total surplus.
That means that by behaving badly they’re reducing producer surplus (not their own, probably, but that of their competitors/possible entrants), consumer surplus, or both…
…compared to what surplus would have been if they were not ‘behaving badly’.
With very, very few exceptions, you should be able to draw this ‘harm’ on the same type of supply/demand diagram we’ve been using in class – and in particular, the same type of diagram you worked with in Assignment 2.
Knowing you’ll be using that type of diagram for your analysis is convenient, because it lets you know what your ‘harm’ can affect: quantities, prices, increasing/lowering Demand (willingness to pay), or increasing/lowering Supply (marginal cost).
Suppose you’re looking at a cartel. Very loosely, this is a group of firms jointly acting like a monopolist. The main way they ‘behave badly’ is to restrict output (or raise prices). This harms society by creating the usual deadweight loss triangle, when compared with what would happen if the firms were not colluding with each other. That would be your ‘theory of harm’.
Another example: Suppose that a producer switched to a production technology that is cheaper to them, but which causes a lot of pollution. Although the cost to the producer has fallen, the cost to society has gone up. The producer will probably produce more than it did under the old technology, since its costs are now lower, but society may be worse off, due to the added pollution.
Question 1: Name your theory of harm (2 marks)
For reference purposes, please name or briefly describe the main theory of harm (e.g. monopoly, cartel, abuse of dominance) you are using to examine your situation. If you are using more than one, feel free to write them all down. These are meant to be almost free marks.
Theory or theories of harm:
Monopoly- Monopoly is one of the most common theories of economics. Monopoly theory argues on the basis where there is only one seller in the market. The seller has a huge influence and controls all the prices in the market. The demand curve of a monopoly seller has a downward trend because the seller operates on low prices as compared to other sellers in the market. Therefore, the major operating principles is that they must lower the prices to operate and outdo other firms in the market.
Question 2: Show the harm in using supply/demand diagram.
2.a The diagrams (out of 75)
1. This assignment is all about establishing the potential harm and benefit from the situation you are studying. Question 1 asks about harm.
Draw two diagrams in which you clearly illustrate the potential harm to society from the situation you are studying. You need one ‘before’ diagram, showing what total surplus was like before the firm started behaving badly (or what it would be if the firm stopped behaving badly), and one ‘after’ diagram, showing the reduction in surplus due to the firm’s behaviour.
For example, if you are looking at a monopoly in a market that, without the monopoly, would probably be perfectly competitive, you could draw two diagrams: one showing price, quantity and surplus in a perfectly competitive market, and one showing price, quantity, surplus and the deadweight loss under monopoly.
This diagram is intended to be very similar to the ones you worked with in Assignment 2. You do NOT need to have a specific formula for your demand curve, etc. – but if it makes things easier for you, feel free to use one, as long as it applies to your situation. (e.g. In Assignment 2 our firms mostly had zero marginal costs of production, but that will almost certainly not be the case in your topic – most students will probably want to use a standard upward-sloping supply curve, or a ‘hockey-stick’ shaped one if capacity constraints are an important part of your story.)
These diagrams do NOT have to be perfectly to scale (even if you have numbers, which is not necessarily the case). General sketches such as those used in the lecture notes are fine.
Please make sure your diagrams are in GIF, JPG, TIFF, PNG or PDF format. You may put them directly in this word document or upload them as separate files (e.g. as a separate image taken from your phone).
[Insert diagrams here]
2.b Explain what’s going on in the diagrams (4 marks)
Explain the reason for the harm using a combination of background information and economic reasoning & theory. Cite any sources used in APA format.
[After
In the first diagram there is more effect to the society because of the changes in the supply policies. The had started the alliance and started having challenges as a firm. Every mono-logy organization mainly plays with the prices of commodities in the market. The major aim is to kill its competitors by having the lowest price of some o their major substitutes in the market. As such, it becomes challenging for the other firms to adapt to the situation. The major trick of monopolistic market is to know when to shift their prices. The process of creating alliances kills the small upcoming business. These issues have multiplied the existing business challenges in the society. More especially, the small business never gets good access to sufficient customers. Therefore, most of them end up getting losses and finally shutting down.
Before
The second diagram has represented the state of the biotech firms before getting involved in alliances. Harm on a monopoly farm can be negative or positive. However, on the first diagram it is a positive situation for the company. The company had potential benefit when it was at its normal state before engaging in the alliances. For instance, the population changes have a significant impact on the demand of the products. The population of the region around the company was well because they could purchase the products from the company without struggle. Before the alliances were done, the company had a good price and market for the products. Therefore, the company had so much benefit to the society.]
Cite any sources used in APA format:
Question 3: Defend the firm using supply/demand diagrams
2.a The diagrams (out of 75)
This assignment is all about establishing the potential harm and benefit from the situation you are studying. Question 3 asks about benefits.
a. (Regular) Draw two supply & demand diagrams in which you clearly illustrate the potential benefit to society from the situation you are studying. There needs to be at least one.
For example, suppose you are looking at a merger to monopoly of a type of shop that had previously been so competitive that there were rival shops on every corner. (For example, a McDonald’s and a Burger King.) Now you would need only one shop – maybe slightly expanded – where before there had been two, which could lower fixed and marginal costs. That would represent an efficiency gain to society, and could help counteract the deadweight loss of monopoly. Your diagrams could show quantity, output & surplus before and after the merger.
Hint: What you’re showing in this diagram is what you would expect the firm to counter with if the Competition Bureau accused them of punishably bad behaviour. For example, “Yes, we’re merging to monopoly, and that would normally create a deadweight loss, BUT there’s so much synergy between our companies that our costs will fall by almost half. This would make our merger a net benefit to society, even if we acted like a monopolist.”
Since you’re working with a supply/demand diagram, your options for showing a benefit are limited: higher quantities, lower costs, shifted up demand (willingness to pay) curve or shifted down supply (marginal cost) curve.
These diagrams do NOT have to be perfectly to scale (even if you have numbers, which is not necessarily the case). General sketches such as those used in the lecture notes are fine.
Please make sure your diagrams are in GIF, JPG, TIFF, PNG or PDF format. You may put them directly in this word document or upload them as separate files (e.g. as a separate image taken from your phone).
[Insert diagram here]
Benefits
The society will gain more income, for example, through the income that will be earned from the excess demand in market. Through the shift, the society increases the production and revenue.
2.b Explain what’s going on in the diagrams (4 marks)
Explain the reason for the benefit above using a combination of background information and economic reasoning & theory. Cite any sources used in APA format.
[After
The first diagram explains the benefits of the situation described in the society through the shift in demand and supply for the company. For instance, in Canada if the biotech firms merger, they will increase the demand for the services in the market. As such, the prices are likely to increase. The manufacturers of the products will be forced to supply more to the market. In this state there is a likelihood of forming monopolistic competition market which has more benefits which are not shared to all the sellers in the marker. For instance, the key monopolistic market earns all the profit and sells to the customers because of the large economies of scale as well as the potential of buying the young upcoming investor. Also, the MX space is small as compared to the second one.
Before
In the second diagram shown above, the curve has perfectly moved to the right implying that the market is gaining more potential. Thus, the firm is earing more revenue from the sale of the products and the revenue earned. Despite that the curve has moved to the right, the benefit is for the company. Thus, the customers have no choice other than going for the best quality of the products. New competitors are always joining the market, and the perfect role the competitors can do in the market is to overthrow the monopolistic competitor. The MX width was large as compared to the first one. Hence a higher gap. The social and private benefit was huge. Therefore, a monopolistic market will be formed which will act as barrier to other new firms in the market increasing the prices of products and services in the market.]
Cite any sources used in APA format:
Question 4: All together now (5 marks)
By now you should have a shape or shapes (triangles, rectangles, etc.) representing the loss to total surplus from the firm’s actions, and a shape or shapes representing the benefit to total surplus from the firm’s actions. Whether or not the firm should be allowed to continue behaving in this way depends on which of the shapes is bigger: the one representing loss, or the one representing benefit.
Based on your diagrams, and your research, which do you think is greater: the loss to society (total surplus) from the firm’s actions, or the possible benefit to society from the firm’s actions? Explain your reasoning.
Note: For full marks, it’s not enough to speak in generalities, e.g. “I think the harm is bigger, because I’m looking at a monopoly and monopolies always create a deadweight loss.” Instead, for full marks I expect you to make use of the insight from your diagrams. For example, “The harm is a triangle with base = (merged firm output – competitive output), and height equal to the price charged minus the marginal cost at the merged firm output, and the benefit is the parallelogram with a height equal to the difference between the ‘before’ and ‘after’ marginal cost curves, and…” etc., followed by something like, “In order for the area of the loss triangle to be greater than the area of the benefit parallelogram, the merged firm output would have to be less than half of the pre-merger duopoly output. A lot of near substitutes exist for the good produced by the firm, such as [examples]. This means that there’s likely to be a high price elasticity of demand – in fact, according to this CBC news report [citation], last time the industry had to raise prices they immediately lost a third of their customers. This, combined with the incentive to increase output after the fall in costs from the merger, means that the profit-maximizing monopoly output is almost certainly greater than half of current output, and therefore the benefits from the merger are probably greater than the costs.”
[ Based on the analysis provided and curves of the two situations in the market. the curve for the loss to the society is huge as compared to the benefit. For instance, the parallelogram on the loss section is bigger than that triangle on the benefit section as listed on the last question. Monopolistic firms will never have a significant benefit to the society excluding the low prices which do not merge with the quality of the goods produced. As a result, those firms will essentially gain more ridiculously from the sales of their commodities. The only essential element or factor is how to entice the customers to producing their goods in the market. The curve moved to right for the benefit of the company.]
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