ECN 201H Exam 4

Potential competition

-Is there currently strong competition in the market segment? -Is the competition vulnerable in terms of price or quality?

Negative outcomes of market power include all of the following EXCEPT 1. lower prices 2. smaller quantity 3. larger profits 4. higher costs

1

The basis of product differentiation is to convince your customers that your product _______ so that customers will ______ for your firm's product. 1. will more completely satisfy their wants; pay a higher price 2. is the best version; be more price sensitive 3. is different from the output of other sellers; have a more elastic demand 4. is as good as any other version; pay an equal price

1

What are the main positive and negative impacts of mergers? 1. Lower costs and increased market power 2. Increased competition and higher costs 3. Decreased market power and higher prices 4. Lower prices and more companies

1

When a seller considers the threat of potential substitutes, what is a substitute product? 1. Anything that could be consumed in place of a given product to satisfy the need or want of the consumer for the given product. 2. A product or service that uses more labor and less capital or less labor and more capital to produce its product. 3. Anything a company could produce using the same inputs as needed to produce its current product. 4. A new company that enters the market by producing a product identical to other companies.

1

When it is difficult for customers to assess quality prior to consuming a product, they tend to rely on ______ as an indicator of quality. 1. brand reputation 2. persuasive advertising 3. informative advertising 4. new experiences

1

When setting prices for different groups of customers, a manager should charge higher prices for groups that 1. value the product more. 2. have a lower marginal benefit. 3. have a lower demand. 4. have a more elastic demand.

1

Which of the following is an example of a company practicing price discrimination? 1. Most passengers traveling on an airplane pay different prices for their tickets. 2. The average price of a haircut is $20 in Warwick and $30 in Providence. 3. A restaurant charges different prices for soft drinks based on their size. 4. Johann's bakery charges $2 for a cookie and Bella's bakery charges $3 for an identical cookie.

1

Name the most competitive competition to the least.

1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly

5 threats to profitability

1. existing competition 2. potential competition 3. competition from potential substitutes (related markets) 4. bargaining power of key suppliers 5. bargaining power of buyers

What are three ways for firms to use market power to gain even more power?

1. increase barriers to entry 2. limit competition 3. lobbying government

2 ways to deal with market power

1. laws to increase competition 2. laws to minimize harm from market power

4 ways to deal with hold-up problem

1. vertical integration (merge with supply chain) 2. long-term contracts 3. reputation 4. repeated interaction

A business owner spends on advertising with the intent that it will affect demand for the company's product in what two ways? By 1. decreasing the company's demand and making its demand more elastic. 2. increasing the company's demand and making its demand more inelastic. 3. decreasing the company's demand and making its demand more inelastic. 4. increasing the company's demand and making its demand more elastic.

2

A company will be subject to price competition if 1. there is successful product differentiation in the product market. 2. customers view its product as the same as or very similar to the products of rival companies. 3. other producers are selling in the product market. 4. barriers to entry reduce the number of firms participating in the product market.

2

Barriers to entry _______ existing businesses ______. 1. protect; from price wars 2. protect; from competition by new entrants 3. expose; to competitive pressures 4. expose; to limited pools of customers

2

For effective segmentation of market demand, the basis for putting each customer into a given price segment requires criteria that are _______ and ______. 1. verifiable; at each consumer's discretion 2. easy to check; hard to change 3. a demand-based price; a cost-based price 4. consistent across consumers; hard-to-change

2

How does price discrimination move a market that is not perfectly competitive to a more efficient output level? 1. Price discrimination gives businesses the incentive to move revenue to its highest possible level. 2. Price discrimination gives businesses the incentive to increase output to the level where their marginal cost equals the marginal benefit of their last customer. 3. Price discrimination causes businesses to raise its output to the level where the average cost is at its minimum. 4. Price discrimination causes businesses to charge the price where marginal cost equals marginal benefit to all customers.

2

If a company engages in perfect price discrimination, it is attempting to 1. charge each customer the lowest price they would be willing to pay. 2. charge each customer their reservation price. 3. try different prices until it finds the exact market equilibrium price. 4. attract more customers by charging lower prices to groups of new customers.

2

Imperfect competition stems from _____ and whether the product is ______. 1. market power; a good or a service 2. the number of sellers; differentiated 3. the costs of production; identical across firms 4. the product price; produced by all firms in the market

2

Price discrimination is when a company 1. buys a given input from several sellers and pays a different price to each seller. 2. charges different prices to different customers who are are buying the same product. 3. refuses to sell its product to certain customers based on some distinguishing factor such as race, gender, or religion. 4. produces different versions of its product.

2

The market power of a firm is its 1. ability to cause other firms in its market to drop out of the market. 2. ability to raise its price without losing many of its customers to competing businesses. 3. ranking based on units sold compared to other firms selling the same product. 4. market share based on the percentage of total market revenue.

2

Vertical integration occurs in a merger when the companies that merge 1. each produce different products whose productions are unrelated but are consumed together. 2. had a buyer-seller relationship prior to the merger, with each covering a different stage in a production chain. 3. produce different types of products, such as one producing a service and the other a tangible good. 4. are different sizes, with one being significantly larger than the other.

2

Which of the following is NOT a way to differentiate a product? 1. Provide different types of customer service for a product 2. Charge a lower price than other companies for a given product 3. Add features to a product 4. Change the quality of a product

2

Which of the following markets is closest to an example of a perfectly competitive market? 1. Fast-food hamburgers 2. Corn 3. Apple computers 4. Dining chairs

2

A city has 4 hospitals, and there are no other hospitals within 200 miles. Two of the hospitals are specialized -- one has a large cardiac unit and the other has a cancer treatment center. The local market for hospital services can most likely be described as 1. perfectly competitive. 2. a monopoly. 3. an oligopoly. 4. monopolistically competitive.

3

A product market has one seller and that seller has a high level of market power. There are no close substitutes for the product. What type of market is this? 1. Oligopoly 2. Perfect competition 3. Monopoly 4. Monopolistic competition

3

A seller's demand curve summarizes its _____, and its marginal revenue curve measures its ______. 1. market share; market power 2. customer power; costs of production 3. market power; incentive to increase production 4. incentive to increases production; costs of production

3

In deciding how many segments to divide the market into, a company should look for ways to identify clear segments that have ______ demand. 1. mirror image 2. overlapping 3. distinctly different 4. equal reservation

3

In which of the following situations would Allie's Donuts have the greatest market power? 1. The closest donut shop is 10 miles away, but there is a bakery with breakfast pastries 2 miles away. 2. There are 2 rival donut shops within 3 miles of Allie's but no other bakeries. 3. The closest donut shop or bakery is 25 miles away from Allie's. 4. There are 5 other donut shops and 3 bakeries that sell breakfast pastries within 3 miles of Allie's.

3

What 3 conditions must be present before a company can price discriminate? 1. The company has market power; the product is homogeneous; the demand is elastic 2. Product demand is highly elastic; the company can identify how much each customer is willing to pay; the company is seeking market power. 3. The company can identify how much each customer is willing to pay; the product cannot be resold; the company has market power. 4. The product cannot be resold; consumers have differing willingness to pay; there are many sellers

3

Which of the following is NOT an example of a relationship-specific investment that could result in a hold-up problem? 1. buying customized equipment to produce output to the specifications of a major customer. 2. training employees in the same computer system and programming used by customers to simplify transfer of data 3. organizing the layout of a factory for the most efficient flow of the production line. 4. locating a factory near a major supplier of inputs.

3

According to the Five Forces framework, how can producers of potential substitute goods impact a company's profits? The producers of potential substitute goods 1. may exit the market, signaling that the market demand is weak and profits are low. 2. indicate that the market demand is weak, leading to lower company profits. 3. indicate that the market supply is shrinking, leading to higher company profits. 4. may become actual competitors, causing market demand to be spread across a larger number of companies and thereby reducing the profits of the original companies.

4

According to the Five Forces framework, the greater the _______ in an industry, the ________ the average profits will be in the industry. 1. lower; lower 2. lower; more variable 3. more variable; greater 4. greater; lower

4

Bargaining power is a buyer's of seller's ability to 1. get a lower price as a seller or higher price as a buyer. 2. reduce market supply to raise price. 3. increase market demand. 4. negotiate a deal to its own benefit.

4

Early bird specials at many restaurants are an example of using ______ to create ______. 1. alternate versions; lower marginal costs 2. alternate versions; marginal benefit 3. difficult-to-change characteristics; a hurdle 4. timing; a hurdle

4

How does the threat of potential substitutes lessen the market power of a business? If the substitute becomes available, then the business may 1. charge higher prices because the addition of the new substitutes will raise the level of customer satisfaction. 2. reduce its costs by substituting one input for another input. 3. gain customers from the substitute market, adding to its profits. 4. lose customers to the substitute good's market unless it lowers price.

4

Output in a market with market power is 1. higher than output in a market with output market power. 2. more predictable than output in a market without market power due to product differentiation. 3. efficient because marginal cost is equal to marginal revenue. 4. inefficient because the marginal benefit to society of extra output exceeds the marginal cost.

4

Perfectly competitive markets are relatively rare in the real world because most 1. firms advertise and most markets have many buyers. 2. goods are not identical and most markets have many firms. 3. firms advertise and most markets have many firms. 4. goods are not identical and most markets have some dominant firms.

4

The threat of entry includes 1. creation of a new product market, the addition of new inputs, and the expansion of an existing business into new distribution channels. 2. addition of new distribution channels by existing businesses, the expansion of existing businesses into the market, and the creation of a new product market 3. expansion of existing businesses into the market, the creation of a new product market, and new entrants. 4. expansion of existing businesses into the market, the addition of new distribution channels by existing businesses, and new entrants.

4

What distinguishes persuasive advertising from informative advertising? Persuasive advertising 1. uses facts about the product to convey its excellence. 2. focuses on brand reputation by frequent reminders of awards won by brand. 3. relies on statistics summarizing customer reviews. 4. focuses on emotions and provides few facts about the product.

4

When a market is perfectly competitive, advertising typically is done _________ because ________. 1. by individual companies; it effectively differentiates each company's product 2. by individual companies;it helps the advertising company stand out from the others. 3. for the entire industry; with only one company, the market demand is the company demand. 4. for the entire industry; it affects market demand more effectively than some individual company demands

4

When price competition occurs 1. product differentiation rises and price rises. 2. price rises as competitive pressures increase. 3. profits rise and the number of sellers rises. 4. price is pushed down, reducing profits.

4

Why would a seller choose the hurdle method instead of group pricing to price discriminate? The seller 1. wishes to make it more difficult for customers to deal with the seller's company. 2. realizes that those who are willing to go over a hurdle to get a product are willing to pay more for it. 3. knows that hurdles increase customer interest in the product. 4. cannot find a verifiable, hard-to-change characteristic on which to base the group segmentation.

4

Agglomeration

Clumping together of industries for mutual advantage.

Perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

What is natural monopoly?

a market where it's most efficient to have one producer (water, gas, electricity)

Experience goods

can't evaluate before buying, use persuasive advertising

Competition from potential substitutes

cheaper alternatives, new innovations, bigger threat when substitution is easier

Quantity discounts

discounts offered to encourage customers to buy in larger amounts

Bundling

grouping two or more products together and pricing them as a unit

Product differentiation can _______ market power.

increase

Advertising goals: ________ demand and make demand more _________

increase; inelastic

More price sensitive people should be charged _______ (________)

less; elastic

What is monopolistic competition?

many companies selling similar but not identical products

What is perfect competition?

many firms (competitors); identical product

Bargaining power of key suppliers

may have bargaining power to increase input costs leading to decrease in profitability

Less competition leads to ______ market power.

more

Less price sensitive people should be charged _______ (________)

more; inelastic

Hold-up problem

once you have made a relationship-specific investment, the other side may try to renegotiate to get a better deal

What is a monopoly?

one firm dominates the market

Group pricing

price discrimination by charging different prices to different groups of people

Search goods

products that can be evaluated before purchase, use informative advertising to differentiate product

What is market power?

the ability to increase the price without losing too many customers

Bargaining power of buyers

the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other

What is an oligopoly?

there are a handful of dominant firms in the market. examples are social media and cell phones

What is profit maximization?

when firms with market power choose price and quantity to maximize profit

What is the discount effect?

when revenue decreases from selling all units at a lower price

What is the output effect?

when revenue increases from selling one more unit

Existing competition

- When product is relatively standardized and the competitors are relatively numerous and similar in size. -When cost of switching providers is relatively low. -In industries characterized by overcapacity and among firms still in the market because of a high fixed-asset position.