EC 111 Chapter 15
In the cartel model of oligopoly, - oligopolists act as independent firms and make their own pricing and output decisions - all firms follow a uniform pricing policy that serves their collective interest - total output is consistent with joint profit maximization - oligopolists act as if they were monopolists that have assigned output quotas
- all firms follow a uniform pricing policy that serves their collective interest - total output is consistent with joint profit maximization - oligopolists act as if they were monopolists that have assigned output quotas
A monopoly market has which of the following: - barriers to entry - only one firm - zero profit in the long-run - the most output restrictions of any market
- barriers to entry - only one firm - the most output restrictions of any market
In a contestable market model of oligopoly, prices are determined by 1. 2. 3.
1. Costs 2. Barriers to entry 3. Barrier to exit
In a monopolistically competitive market there are (2 things) 1. some or a lot of restrictions on output due to product differentiation 2. many or not many firms
1. Some restrictions on output due to product differentiation 2. Many firms
2 key features of an oligopoly are 1. # of firms 2. firm take what into account
1. there are a smaller number of firms 2. firms take other firms' action into account
There are 2 firms in an industry, and each of them has 50% of the market share. Calculate the Herfindahl index.
5000 50x50 = 2500 2500 x 2 = 5000
The act that declared SPECIFIC business practices that result from monopoly power to be illegal is the - Sherman Antitrust Act of 1890 - Federal Trade Commission Act - Merger Act of 1920 - Clayton Antitrust Act
Clayton Antitrust Act
In the ALCOA antitrust case in 1945, the Court ruled that the
Company has a monopolistic structure and therefore should be broken up
Which of the following is a model of oligopoly behavior? - Non-collusive model - Perfect model - Competitive model - Contestable market model
Contestable market model
Under oligopoly, there are MANY or FEW sellers in the industry
Few
An index of market concetration calculated by addding the squared value of the individual market shares of all the firms in the industry is called the - market ratio - Herfindahl index - concentratio ratio - Crukshank index
Herfindahl index
Which of the following indices gives the most weight to the largest firms in the industry? - Concentration index - Collusion index - Sales index - Herfindahl index
Herfindahl index
The judgement by structure criterion is difficult to implement in practice because
It is difficult to determine the relevant market and the industry necessary to identify the structural competitiveness of any industry
According to the kinked demand model, one explanation why prices of goods tend to be "sticky" is that firms tend to believe that they will
Lose a lot of customers if they raise prices and gain few if they lower prices
In the Microsoft antitrust case the government ruled that (Microsoft was what and did what)
Microsoft was a monopoly and was involved in anti-competitive practices
The industry classification that categorizes industries by type of economic activity and groups firms with like production processes is called the
NAICS North American Industry Classification System
Which market structures does not have predictable price and output decisions at which the firms will arrive rationally?
Oligopoly
The Herfindahl index is an index of market concentration calculated by adding the
Squared values of all the individual market shares of firms in the industry
In the Standard Oil antitrust case in 1911, the Court ruled that
The company was guilty of unfair business practices and therefore should be broken up
No single model of oligopoly behavior exists because
The interactions among oligopolists and market dynamics are too complicated and indeterminant
The Sherman Antitrust Act of 1890 was passed primarily because of
The practices of various trusts in the railroad, steel, tobacco, and oil industries
An attorney for a firm that is arguing that its market is competitive rather than monopolistic would be most likely to argue that the relevant market is shown by a
Three-digit North American Industry Classification System (NAICS) industry
True or False: A cartel is a combination of firms that acts as if it were a single firm
True
True or False: Oligopolists's pricing and output strategies can take many forms and are difficult to characterize with one model.
True
True or False: The threat of outside competition can limit oligopolies from acting as a cartel.
True
A cartel is
a group of firms that collude to maximize group profits
If oligopolistic firms decide to collude, they are likely to charge - a HIGHER or LOWER price than before
a higher price than before
If a cartel splits up, the individual firms are likely to charge - a higher price than before - a lower price than before - the same price as before
a lower price than before
Contestable Market Model
a model of oligopoly in which barriers to entry and barriers to exit, not the structure of the market, determine a firm's price and output decisions
What is a possible consequence of oligopoloistic rivalry?
a price war
In the contestable market model, what determines a firm's price and output decisions?
barriers to entry
In the absence of barriers to entry in a contestable market model, the price an oligopolist sets will - be equal to the competitive price - depend of the pricing decision of other firms - be equal to the monopolist's price - depend on the market structure
be equal to the competitive price
In the NAICS system, as the number of digits in the classification falls, the industry becomes more broad or specific?
broad
To prevent price wars and enhance profits, firms in a cartel may
collude
The lowest price that an oligopoly firm will generally charge is the - this value cannot be determined - monopoly price - competitive price
competitive price
If an industry has a Herfindahl index of 3,000, the contestable market model probably would predict that the industry would be more likely to have a
competitive price if there are no barrier to entry
The most important reason the judgement by performance criterion is difficult to implement in practice is that
each action of a firm must be analyzed separately and within a particular context
The marginal revenue in the kinked demand model is discontinuous because at higher than existing prices, perceived demand is - elastic/inelastic; at lower than existing price, the perceived demand is elastic/inelastic
elastic; at lower than existing price, the perceived demand is inelastic Firms believe they will lost a lot of customers if they raise prices (elastic) because competitors will not match price increases and gain few if they lower prices (inelastic) because competitors will match price decreases.
Oligopoly is characterized by
few sellers
The Sherman Antitrust Act is consistent with judgement by - labor practices - firm performance - market structure - firm structure
firm performance The Sherman Antitrust Act made some actions illegal, so is consistent with performance.
Predatory Pricing Likely to be successful only if
firms cannot enter an industry easily
A three-digit industry in the NAICS system is more broadly defined compared to a
four-digit industry five-digit industry
In the market for bank credit a large bank sometimes announces a change in interest rates. After the changes in interest rates are announced, other banks in the industry usually react by changing their rates in the same way. This is an example of
implicit collusion
The central characteristic of oligopolistic industries is
interdependent pricing decisions
The marginal revenue in the kinked demand model is discontinuous because if a firm increases ...
its prices, it does not expect other firms to go along; if a firm decreases its prices, it expects firms to match that action
The primary criterion governing U.S. antitrust policy until 1945 was
judgement by performance
Suppose an oligopolistic firm assumes that its rivals will ignore a price increases but match a price cut. In this case, the firm perceives its demand curve to be
kinked, being steeper below the going price than above
All firms follow a uniform pricing policy that serves their collective interest in a - market with a cartel - monopolistically competitive market - perfectly competitive market - contestable market
market with a cartel
According the kinked-demand curve model, one explanation why prices of goods tend to be "sticky" is that firms tend to believe that competitors will - not match any price changes of its competitors - match price increases, but do not match price decreases - match all price changes of its competitors - match price decreases, but do not match price increases
match price decreases, but do not match price increases They believe firms would not match price increases because competitors would gain business by not doing so. They would match price decreases because they risk losing business by not doing so.
Prices are sticky in oligopoly because firms
may informally collude
If a profit-maximizing oligopolist has a kinked demand curve, a downward shift in its marginal cost curve - may affect output or price - may not affect output or price
may not affect output or price
Refer to the table below. Using the four-firm concentration ratio, the upholstered furniture industry is best categorized as Industry # of sellers %ships by 4 comps Tires ------------- 15 -------------- 95 Furniture -------- 2000 ----------- 15
monopolistically competitive
A market structure that has a small number of firms that make strategic decisions is called
oligopoly
Oligopolies are limited in their ability to form a cartel by
outside competition
The concentration ratio is defined as the
percentage of total industry output produced by the top firms
The basis of judgement for the Standard Oil case was - performance - cost - structure - market concentration
performance
From society's perspective, a possible benefit of a cartel is that it could
provide incentives for the introduction of superior products by competitors
If the courts found a company in violation of antitrust laws based on a high market share, it is using judgement by
structure
Judgement by structure means that the competitiveness of a market is determined by the
structure of the firms in the market
Strategic Decision Making
taking explicit account of a rival's expected response to a decision that you are making
According to contestable market theory barriers t oentry are much more important than what in what?
than market structure in determining the degree of price competition in an industry
An antitrust policy is the government's policy toward
the competitive process
Compared to concentration rate, the Herfindahl index gives more weight to
the largest firms in the industry
The lawsuit against the Aluminum Company of America focused on
the number of firms in the market
A four-digit industry in the NAICS system is more narrowly defined compared to a: - six-digit industry - two-digit industry - three-digit industry - five-digit industry
two-digit industry three-digit industry
The NAICS categorizes industries by the - quantity of product sold - size of firm - type of production process - type of economic activity
types of production process type of economic activity
The U.S. Justice Department argued that Microsoft maintained its monopoly position because of
unfair business practices
A concentratio ratio is the
value of sales by the top firms in the industry stated as a percentage of total industry sales
ALCOA was found guilty of violating the antitrust statutes in 1945 because it - forced competing firms out of business - exploited its monopoly power to charge high prices - had engaged in unfair practices - was so successful that it dominated the market
was so successful that it domianted the market ALCOA did not engage in any unfair practices. It just used its knowledge of the market to expand its capacity before any competitors had a chance to enter the market.
The higher the concentration ratio, the closer the industry is to
an (1) oligopolistic or (2) monopolisitic type of market structure
The higher the concetration ratio, the closer the industry is to
an oligopolistic or monopolistic market structure
Between the cartel model and the contestable market models of market structure, the ________ model best fits the empirical measures of industry structure.
cartel