ECO 4104 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 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

Which of the following features of transactions make those transactions excellent candidates for alliances?

All of the above

What kind of competition is generally described as price competition?

Bertrand competition

What problem preventing complete contracts refers to the limits on the capacity of individuals to process information, deal with complexity and pursue rational aims?

Bounded rationality

When contracts are incomplete, what must be well defined and enforceable to allow for smooth transactions to occur?

Contract law

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

Oligopoly

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

Which of the following conclusions can we 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

Which of the following 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 is a reason other than concentration that price-cost margins may vary across industries?

All of the above

Which of the following is not a benefit of tapered integration?

Allows the firm to produce most efficiently in all circumstances

What is a market firm?

An independent outsourcing partner

Which of the following processes is most representative of a less integrated firm on the "buy" end of the make-or-buy continuum?

Arm's length market transactions

What problem preventing complete contracts refers to a lack of transparency/equal access to the details surrounding a contract?

Asymmetric information

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

Which of the following is not a method to protect intellectual property?

Charging higher prices to limit access to IP

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

Clinical Research

Long term contracts with suppliers can help a firm with which of the following?

Counteract raw material price fluctuations and eliminate income risk

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

Which of the following is not a characteristic of substitute products X and Y?

Customers are indifferent between X and Y

Which of the following has a downstream relationship with a Toyota Motor Corporation?

Dealerships

Which U.S. agency is responsible for preventing anti-competitive conduct?

Department of Justice

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

Double marginalization

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

Endogenous sunk cost

Which of the following is a method firms can use to counteract price fluctuations and eliminate income risk?

Enter into futures contracts to hedge the price of raw materials

The Revenue Destruction Effect in oligopolies occurs when:

Firms independently maximize their own profits

Which of the following is a true argument regarding the make-or-buy decision process?

Firms should buy, rather than make, in general, because market firms are subject to the discipline of the market and must be efficient and innovative to survive

Which of the following 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

Which of the following 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

Which of the following would reduce co-ordination and hold-up problems?

Governance

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

Governance arrangements

What term describes the differentiation of a product when only come consumers prefer it to competing products (holding prices 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

Which of the following conclusions can we 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

Strong contract law aids the most in which of the following?

Incomplete contracts

Recent studies have shown that increases in market concentration lead to which of the following?

Increases in price

Which of the following 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 term 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

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

Keiretsu

What primary agency cost problem plagues the partnership between Sony's hardware and software from 1998-2008 with regards to digital music?

Manager/worker slacking

What is an independent outsourcing partner often called?

Market Firm

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

Market structure

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

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

Past circumstances could exclude certain possible governance arrangements in the future

The process by which governance develops is known as:

Path Dependence

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

Perfect competition

Which of the following processes is most representative of a vertically integrated firm on the "make" end of the make-or-buy continuum?

Perform activity internally

Of the following industries listed, which one is generally thought of as having the highest search costs?

Physician service

The biotechnology industry is seeing a broad pattern of disintegration due to the fact that big pharma companies are less and less doing which of the following core functions?

Product innovation

Which of the following is not a result of the holdup problem?

Reduction in the transaction costs of arm's length market exchanges

What concept describes the situation where the owner of an asset grants another party the right to use that asset, but 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

Which of the following types of fit (used to aide in coordination along all dimensions of production) explains a situation where the steps of a particular process must occur in a particular order?

Sequence fit

The casual connection between firms is known as the:

Structure, Conduct, Performance paradigm

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

Tapered integration

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

Technical efficency

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

Technical efficiency

The concept of who gets control resources, make decisions and allocate profits is known as:

The Property Rights Theory (PRT)

What do the vertical boundaries of a firm refer to?

The activities the firm itself performs versus purchases from independent firms

What is a catchment area?

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

Which of the following is not a characteristic of a complete contract?

The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds

Which of the following 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?

The cost difference declines with greater asset specificity

Which of the following 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 is positive for low and negative for high levels of specificity

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

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

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

Which of the following is a reason for a firm to Buy rather than make?

Upstream firms aggregate the demands of many buyers and provide economies of scale.

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

Vertical differentiation

Under what circumstance would it be logical to leave contracts vague and open-ended?

When performance may be ambiguous or difficult to measure.