Module 11: Ch. 4 Oligopoly

According to the kinked demand curve model Oligopolistic firms will earn profits in between

competitive and monopoly levels.

The extreme competition or Nash equilibrium feels oligopolies are at or close to the

competitive end of the scale.

The HHI is often used instead of concentration ratios to avoid the

distribution issue

(true/false) If the competitive price is $6 and the monopoly price is $10 then the Nash equilibrium is at $10.

false

(true/false) Most oligopolized industries have concentration ratios of 100.

false

(true/false) Network advantage is a legal barrier.

false

(true/false) Oligopolies will always make economic profit

false

(true/false) The more similar goods in oligopoly are the more different their prices will be.

false

(true/false) the body of law that deals with competition prolems is called anti-monopoly law

false

(true/false)Covert collusion has probably never taken place among American oligopolists.

false

(true/false)Most oligopolies in the United States take the form of a cartel.

false

(true/false) The TV networks could not be considered oligopolies

false, it is considered an oligopoly

(true/false) large economies of scale is an artificial barrier to entry

false, it is the only natural barrier to entry

Cover Collusion occurs when _____

firms in the same industry COVERTLY fix prices and/or divide up the market among themselves

Open Collusion occurs when ___

firms in the same industry OPENLY fix prices and/or divide up the market among themselves

Price-Fixing occurs when ___

firms in the same industry conspire among themselves to charge an agreed upon price, rather than let the price be set by supply and demand

a Cartel is a combination of _____

firms that acts as if it were a single firm

Why have concentration ratios become less meaningful?

foreign imports have increased

_____ is a decision tool that helps take into account the anticipated reactions of competitors.

game theory

A very oligopolistic industry would have a relatively ___ concentration ratio and a relatively ___ HHI.

high; high

compared to the perfect competitor, the colluding oligopolist charges a _____ price, a _____ ATC and operates to the ______ of the minimum point of the ATC curve

higher; higher; left

Artificial barriers lead to _____P and _____Q

higher; lower

Two Key shortcomings do not include _____ and

imports; tell us nothing about the rest of the competitive structure of the rest of the industry

The oligopolist can only lose money

in the short run.

If an industry is defined narrowly,

it will appear less competitive, its concentration ratio will be higher.

If an industry is defined very broadly,

it will appear more competitive, its concentration ratio will be lower.

what will a firm think about before changing its price?

it will try to gauge what its competitors would do; their reactions

what are some artificial barriers to entry?

legal barriers (patients, copyrights, government licenses) Control of a vital input, network advantage...

a larger HHI indicates

less competition

Whats the HHI of every Monopoly?

100^2 or 100*100 = 10,000

The government has been concerned generally if the HHI above

1800 or rises by over 200.

What is the HHI of 2 firms who both have 50% market shares?

2500 + 2500 = 5000

The tobacco, healthcare wholesale, and beverage industries all have a concentration ratio of over ___

80

Which of the following would be an example of joint profit maximization?

A price fixing agreement.

Which one of these firms would be an oligopolist? A) a family farm B) general motors C) mcdonalds in manhattan D) only doctor in an isolated rural community

B) general motors

In an Oligopoly, is the product identical or differentiated?

Both. some items are identical, some are differentiated

Each of the following companies was found guilty of price-fixing except: A) Archer Daniels Midland. B) Roche Holding A.G. C) the Ford Motor Company. D) BASF A.G.

C) the Ford Motor Company.

What are some examples of Oligopolist firms

Dell, IBM, Disney, McDonalds....

The Prefix "Oli" means

Few

The less concentrated an industry the lower its _____

HHI

what is the only natural barriers to entry?

Large economies of scale

The oligopolist maximizes profit where

MC = MR.

According to the joint profit maximization model

Oligopolistic firms together will earn monopoly or near monopoly profits.

According to the Nash equilibrium:

Oligopolistic firms will only earn competitive profits.

What is slightly less extreme than a cartel?

Open Collusion

Which of the following is NOT part of oligopoly?

Probable negative long run economic profits.

Farm machinery and equipment has a concentration ratio of 54% and an HHI of 2133.8.

The concentration ratio signals a fairly competitive oligopoly and the HHI indicates one with a relatively high level of concentration.

With a kinked demand curve an oligopoly faces stable prices mainly because of:

a break in the MR curve multiple MC curves lead to the same Q*.

What is a Duopoly?

an industry with two firms

the government outlawed the kind of cooperative behavior between trustees known as the

antitrust law

barriers to entry in an oligopoly can be categorized as _____ or _____

artificial or natural

When an oligopolist operates with a kinked demand curve, she will operate at an output

at the kink.

An example of an oligopolistic industry would be:

cars

Obama Justice Department considers an industry with an HHI under 2500 to be _____

competitive

Oligopolies exist because of

measurable barriers to entry.

open collusion gives each operation a regional ____

monopoly

Nash Equilibrium is where

no firm can improve its position assuming other firms do not change their current behavior

A concentration ratio of 100 would imply that the industry has ______

no more than four firms

a cartel is most notably in the ____ market

oil (OPEC)

a cartel is an extreme case of an ______

oligopoly

The market structure in which the behavior of any given firm depends on the behavior of the other firms in the industry is

oligopoly.

what is Price Leadership?

one of the largest sellers in the market takes the lead by setting a price for its product and other firms quickly match the new price

An Oligopoly is a government controlled by ______

only a few rulers - they are interdependent

HHI over 1800 indicates what?

potential competition problems

The kinked demand curve exists when a firm's believes that:

price cuts will be matched but not price increases.

What are Administered Prices?

prices set by large corporations for relatively long periods of time without responding to the normal market forces, mainly, changes in demand.

the oligopolist can make 3 pricing decisions:

raise price, lower price, or not change price

The typical concentration ratio is the percentage of ___ earned by the ___ largest firms in the industry.

sales; four

An oligopoly market with a kinked demand curves is most likely to:

stable prices

Oligopolies tend to have

stable prices and lots of nonprice competition.

the cartel will control the entire industry ____

supply

Measures of the degree of oligopolization include

the Herfindahl-Hirschman Index and the Concentration Ratio.

What is the kinked demand curve?

the demand curve for the cutthroat oligopolist, which is based on the assumption that competitors will match a price cut, but will not match a price increase

Cutthroat competition is most closely associated with

the kinked demand curve.

Oligopolies are small in number but large in size and output, producing

the majority of goods.

What is Game Theory?

the study of how people behave in strategic situations

What is the Herfindahl-Hirschman Index? (HHI)

the sum of the squares of the market shares of each firm in the industry

Along a kinked demand curve

the upper portion is more elastic, while the lower portion is more inelastic.

Where is the American Industry placed on the spectrum of competition?

there is no answer, there is no one place the american industry is located

a concentration ratio is the

total percentage share of industry sales of the 4 leading firms in the industry

Total Profit =

total revenue - total cost OR (price - ATC) * Output

(true/false )economists disagree on how much range of competition there is within an oligopoly

true

(true/false) A firm with a kinked demand curve is highly competitive.

true

(true/false) Oligopolist firms as so big one firm can influence price

true

(true/false) The 3 models of oligopoly are kinked demand, joint profit maximization and extreme competition.

true

(true/false) The automobile industry is an oligopoly.

true

(true/false) The cartel and the extreme competition are on opposite ends of the competitive spectrum.

true

(true/false) an oligopoly is an industry with a few sellers

true

(true/false) an open collusion division is similar to the mafia

true

(true/false) in an oligopoly information can be excellent or not

true

(true/false) just like the monopolist, the oligopolist firms have a higher price and lower output than the perfect competitor

true

(true/false) the prime rates set by big banks is a form of price leadership

true

a great protection would be to turn over production and pricing decisions to a ____

trust or trustee

The natural barrier of large economies of scale is _____ in effect on P and Q.

unpredictable

when is collusion most likely to succeed?

when there are few firms in the industry and when there are high barriers to entry

does the oligopolist make a profit unlike the perfect and monopolistic competitor?

yes, because it does not produce at the minimum point of the ATC curve: It is not as efficient