ECO4104 Exam 2

Based on Bresnahan and Reiss' study of the relationship between concentration and prices, how many firms did they determine generally need to be in a market for price competition to be as intense as it would likely get?

3

What is the typical "capacity use" ratio as reported by plant managers to the U.S. Census of Manufacturers annually?

80%

A conclusion we can make about vertical integration with regards to product market share and scope

A firm with multiple product lines will benefit more from being vertically integrated in the production of components for those products in which it can achieve significant market scale

What best describes tapered integration?

A manufacturer produces some of an input quantity itself and purchases the remaining portion from independent firms

Which of the following firms maintains a monopoly or cartel by controlling essential inputs thus creating a barrier to entry? a) DeBeers in diamonds b) Nike in shoes c) Pepsi in beverages d) Subway in sandwich fast food e) Levis in denim jeans

A) DeBeers in diamonds

What type of entry exists if structural entry barriers are low, and either (1) entry-deterring strategies will be ineffective or (2) the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out?

Accommodated Entry

What term describes when a firm has minimized the extent to which the exchange of goods and services in the vertical chain has been organized to minimize coordination, agency and transaction costs?

Agency efficiency

What is NOT a benefit of tapered integration?

Allows the firm to produce most efficiently in all circumstances

Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain. What term best describes the organization of the transaction where Firm 2 owns the assets of Firm 1?

Backward integration

What kind of competition is generally described as price competition?

Bertrand Competition

What type of entry exists if structural barriers are so high the incumbent need do nothing to deter entry?

Blockade Entry

What term describes when a firm sells a combination of goods and services together, but not individually?

Bundling

Of the following industries listed, which one is generally thought of as having the highest search costs? a) Consumer packaged goods b) Electronics c) Physician service d) Automotive e) Apparel

C) Physician Service

What term best describes the paradox which says despite the conclusion that predatory pricing to deter entry appears irrational, many firms are commonly perceived as slashing prices to deter entry?

Chain-store paradox

For what critical aspect of drug development has research (Azoulay & Henderson) shown that major drug houses have chosen tapered integration?

Clinical Research

How CANT incumbents legally erect entry barriers around novel and non-obvious products or production processes?

Collusive pricing, Predatory pricing, Formation of a Cartel, and Price Fixing

What term describes when a firm sells a combination of goods and services at a price below what the individual items would cost?

Combining

What kind of competition is generally described as quantity competition?

Cournot Competition

What empirical method generally is used to measure the degree to which products substitute for each other?

Cross-Price elasticity

What is NOT a characteristic of substitute products of X and Y?

Customers are indifferent between X and Y

What US agency is responsible for preventing anticompetitive conduct?

Department of Justice

What type of entry exists if (1) the incumbent can keep the entrant out by employing an entry-deterring strategy and (2) employing the entry-deterring strategy boosts the incumbent's profits?

Deterred Entry

What causes finished goods prices not to maximize the joint profits of a manufacturer and its supplier?

Double marginalization

What term is defined as a firm selling goods at a price below their normal price (and generally below cost) usually as an export in international trade?

Dumping

What term does Sutton use to describe the costs of establishing a credible brand?

Endogenous sunk cost

What is NOT an example of an exit barrier for firms in an industry?

Excess Capacity

What is the term defined as the withdrawal of a product from a market?

Exit

The Revenue Destruction Effect in oligopolies occurs when:

Firms independently maximize their own profits

What is the definition of "competitors"?

Firms whose strategic choices directly affect one another

What is the term for examining consumers travel patterns?

Flow analysis

Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain. What term best describes the organization of the transaction where Firm 1 owns the assets of Firm 2?

Forward integration

In the late 19th century was predicted by the asset-specificity hypothesis

Forward integration was most likely to occur for products that require specialized investments in human capital

What would reduce co-ordination and hold-up problems?

Governance

The reduction of co-oridination and hold-up problems depends on:

Governance Arrangements

What term describes the differentiation of a product when only some consumers prefer it to competing products (holding price equal)?

Horizontal Differentiation

What group/type of preferences describes when tastes differ markedly from one person to the next and result in horizontal differentiation?

Idiosyncratic Preferences

A conclusion we can make about vertical integration with regard to scale and scope economies

If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and there is a large market outside the firm for the input, then the firm should buy the input from outside market specialists

What is a potential risk of a brand umbrella?

If a new product under the umbrella fails, consumers may become disenchanted with the entire brand

A conclusion we can make about vertical integration with regard to product market share and scope

If asset specificity is significant enough, vertical integration will be more profitable than arm's-length market purchases, even when production of the input is characterized by strong scale economies or when the firm's product market scale is small.

Recent studies have shown that increases in market concentration lead to what?

Increases in prices

In the late 19th century was predicted by the firm-size hypothesis

Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution

What type of firm is one that is already operation in a particular market?

Incumbent

What describes existing firms in a monopolistically competitive market?

Incumbents

The Herfindahl index solves which problem with the N-Firm ratio?

Invariance with changes in the size of the largest firms

Whats is a characteristic of an implicit contract?

It is an understanding between parties in a business relationship

What type of strategic alliance involves two or more firms creating and together owning a new independent organization?

Joint venture

What term describes the situation where a smaller firm and potential entrant can use the incumbent's size to its own advantage?

Judo economics

What Japanese term describes a labyrinth of firms with long-term semi-formal relationships up and down the vertical chain?

Keiretsu

What method is believed to be used by Brazilian cement makers to prevent entry into the market?

Limit pricing

What refers to the practice whereby an incumbent firm discourages entry by charging a low price before entry occurs?

Limit pricing

What is a method a monopolist firm might use to prevent entry into a market?

Limit pricing, predatory pricing, and capacity expansion

What is defined by the number and size distribution of the firms in a market?

Market Structure

In what type of market structure doe sellers set identical prices and are prices generally driven down to marginal costs?

Monopolistic Competition

What term describes a firm that faces little or no competition in one of its input markets?

Monopsonist

Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain. What term best describes the organization of the transaction where the two firms are independent, each with control over its own assets?

Nonintegration

In what type of market do the actions of individual firms materially affect the overall market?

Oligopoly

What best describes an incumbent firm?

One that is already operating in a particular market

What happens when the process by which governance develops exhibits path dependence?

Past circumstances could exclude certain possible governance arrangements in the future

How can incumbents legally erect entry barriers around novel and non-obvious products or production processes?

Patents, Copyrights, and Exclusive Franchise Agreements

The process by which governance develops is known as:

Path Dependence

What term describes a market where a monopolist cannot raise price above long run average cost?

Perfectly contestable

What term represents the conduct and performance of firms in the market after entry has occurred?

Postentry competition

What accompanies firms that survive as market entrants?

Precipitous growth

What situation occurs when a large incumbent sets a low price to drive smaller rivals from the market?

Predatory pricing

What concept describes the situation where the owner of an asset grants another party the right to use that asset, but the owner retains all controlling rights that are not explicitly stipulated in the contract?

Residual rights of control

What criterion developed by the DOJ is used to identify all potential competitors within the market?

SSNIP criterion

What situation occurs if an incumbent firm with increasing marginal costs or limited capacity sets a price just below the entrants' marginal costs even though the incumbent may be unable to meet all market demand (or possibly may have to sacrifice its profits to do so)?

Strategic limit pricing

What are the two types of barriers to entry?

Structural and strategic

The casual connection between firms is known as the:

Structure, conduct, performance paradigm

What describes when a manufacturer produces some of an input quantity itself and purchases the remaining portion from independent firms?

Tapered integration

What best describes when a firm is using the least-cost production process?

Technical Efficiency

What term describes when a firm is using the least-cost production process?

Technical efficiency

What is a catchment area?

The contiguous area from which a firm draws most of its customers

What is NOT a condition under which an incumbent firm can successfully deter entry by holding excess capacity

The excess capacity investment must be recoverable prior to entry

The average PCM (percentage contribution margin) in a Cournot equilibrium is given by the formula PCM=H/η, where H is the Herfindahl index and η is the price elasticity of market demand. Given this equation, what is true?

The less concentrated the industry, the smaller the PCMs in equilibrium

Concept of who gets to control resources, make decisions and allocate profits is known as:

The property rights theory (PRT)

Why are the current health care systems on the rise being built around the integration of clinical information technology and disease management systems

They both require asset specificity and coordination

What is a method a monopolist firm would not use to prevent entry into a market?

Utilizing excess capacity for generic branded products

What term describes the differentiation of a product when it is unambiguously better or worse than competing products?

Vertical Differentiation

What term describes a situation where two or more parties expend resources battling each other?

War of Attrition

When is predatory pricing a most effective entry barrier?

When a firm has a reputation for toughness or competes in multiple markets

What condition may make predatory pricing by incumbents rational?

When entrants are uncertain about market conditions

When is reputation a most effective entry barrier?

When incumbents have long-standing relationships with suppliers and customers

When are sunk costs a most effective entry barrier?

When the incumbent has incurred them and the entrant has not

According to the GHM Theory, the choice between an in-house sales force versus independent agents should turn on the relative importance of investments in developing persistent clients by the agent versus list-building activities by the insurance firm. What would GHM thus predict about the sales of whole life versus term life insurance?

Whole life would be sold by the insurance company's in-house sales force; term by an independent agent

What are benefits of tapered integration?

a) It expands the firm's input and/or output channels without requiring substantial capital outlays b) Allows the firm to use information about the cost and profitability of its internal channels to help negotiate contracts with independent channels c) Lets the firm motivate its internal channels by threatening to expand outsourcing and, at the same time, motivate its external channels by threatening to produce more in-house. e) Helps the firm protect itself against holdup by independent input suppliers

What is an exit barrier for firms in an industry?

a) Sunk costs b) Labor agreements or commitments to purchase raw materials c) Obligations to input suppliers d) Government restrictions

Examples of exit barriers for firms in an industry:

a) Sunk costs b) Labor agreements or commitments to purchase raw materials c) Obligations to input suppliers e) Government restrictions

What are conditions under which an incumbent firm can successfully deter entry by holding excess capacity?

a) The investment in excess capacity must be sunk prior to entry b) The incumbent should have a sustainable cost advantage c) Market demand growth should be slow d) The potential entrant should not itself be attempting to establish a reputation for toughness

What features of transactions make those transactions excellent candidates for alliances?

a) The transaction involves impediments to comprehensive contracting b) The transaction is complex, not routine. c) The transaction involves the creation of relationship-specific assets by both parties in the relationship, and each party to the transaction could hold up the other d) It is excessively costly for one party to develop all the necessary expertise to carry out all the activities itself

What are characteristics of substitute products of X and Y?

a) They have the same or similar product performance characteristics b) They have the same or similar occasions for use c) They are sold in the same geographic market e) A price increase of X while keeping the Y's price constant leads to a drop in purchases of X and an increase in purchases of Y

The cost difference is positive for low and negative for high levels of specificity

is true with regard to the difference in exchange costs between an item produced internally firm and an item purchased from an outside supplier through an arm's length market transaction as the level of asset specificity increases

The cost difference declines with greater asset specificity

is true with regard to the difference in production costs between an item produced in a vertically integrated firm and an item exchanged through an arm's length market transaction as the level of asset specificity increases