Chapter 16, Problem 1FT

Subpart (a):

To determine

Why anti-trust laws are not helpful in markets of network goods and are highly contestable.

Explanation of Solution

The market is a structure where there are buyers who buy and sellers who sell and there is an exchange of goods and services between them. The price is determined by the interaction of demand and supply in the market. Consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. Thus, when the willing price is higher than the actual price, there will be consumer surplus and there will be no consumer surplus when the willing price is lower than the actual price. Producer surplus, on the other hand, is the difference between the lowest price the producer is willing to accept and the actual price that the producer receives by selling his product. Thus, when the price is higher, the producer surplus will also be high and vice versa.

The network goods provide greater value to their consumers when the number of the consumers using the commodity increases. Thus, the value to the consumers increases as the people using it increases and vice versa. Thus, when the anti-trust laws are forced to bring competition among them, it would create disturbances in the network of the consumers of the commodity which adversely affects the consumers by reducing the value to them.

Economics Concept Introduction

Concept introduction:

Consumer surplus: It is the difference between the highest price the consumer is willing to pay and the actual price that the consumer pays.

Producer surplus: It is the difference between the lowest price the producer is willing to accept and the actual price received by the producer.

Anti-trust laws: Anti-trust laws are the laws that were introduced by the U.S. government to protect consumers from predatory business practices by ensuring that there fair competition exists in the market.

Subpart (b):

To determine

Why anti-trust laws are not helpful in markets of network goods and are highly contestable.

Explanation of Solution

When the market is highly contestable, the firms in the market would act as if they are facing very stiff competition in the market. Thus, even though there is only the potential competition in the market, there will be no difference between the firms in it and in the competitive market. Thus, there is no need of the anti-trust laws in the market.

Economics Concept Introduction

Concept introduction:

Consumer surplus: It is the difference between the highest price the consumer is willing to pay and the actual price that the consumer pays.

Producer surplus: It is the difference between the lowest price the producer is willing to accept and the actual price received by the producer.

Anti-trust laws: Anti-trust laws are the laws that were introduced by the U.S. government to protect consumers from predatory business practices by ensuring that there fair competition exists in the market.