ECO4104 Exam2

What is the term for examining consumers travel patterns?

a a) Flow analysis b) Travel analysis c) Purchase location analysis d) Consumer distance analysis e) None of the above

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

b a) Blockaded b) Perfectly contestable c) Accommodated d) Deterred e) Predatory

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

b a) Kaizen b) Keiretsu c) Kanban d) Karõshi e) Mochibun kaisha

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?

c a) Backward Integration b) Forward integration c) Nonintegration d) Contractually unbound e) Contractually bound

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

c a) Collusive pricing b) Predatory pricing c) Patents d) Formation of a cartel e) Price fixing

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

c a) Limit pricing b) Price leading c) Predatory pricing d) Quality pricing e) Capacity expansion

The Revenue Destruction Effect in oligopolies occurs when:

c a) Firms individually reduce prices to gain more customers b) Firms intentionally reduce output quantity to raise price c) Firms independently maximize their own profits d) Firms agree to all sell at the same price e) Firms all agree to specific output quantities

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

c a) Perfectly competitive b) Monopolistically competitive c) Oligopoly d) Monopoly e) Diversified

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

e a) 40% b) 50% c) 60% d) 70% e) 80%

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?

a a) Agency efficiency b) Technical efficiency c) Lean compliant d) Economizing e) Six sigma compliant

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?

a a) Backward Integration b) Forward integration c) Nonintegration d) Contractually unbound e) Contractually bound

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?

a a) Deterred Entry b) Judo Entry c) Stealth Entry d) Accommodated Entry e) Blockaded Entry

Which of the following in the late 19th century was predicted by the asset-specificity hypothesis?

a a) Forward integration was most likely to occur for products that require specialized investments in human capital b) 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 c) Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities d) For industries with small manufacturers, marketing relied on specialized assets e) For industries with small manufacturers, distribution relied on specialized assets

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

a a) Governance arrangements b) Manager contracts c) Required quality of finished product d) Cost of upstream vertical supplies e) None of the above

Which of the following is a characteristic of an implicit contract?

a a) It is an understanding between parties in a business relationship b) It is generally enforceable in court c) The threat of losing future business makes implicit contracts not viable d) They are typically used in firms that have little relationship with one another e) It is an alternative agreement method to the Keiretsu understandings between members

Which of the following methods is believed to be used by Brazilian cement makers to prevent entry into the market?

a a) Limit pricing b) Price leading c) Predatory pricing d) Quality pricing e) Capacity expansion

Which of the following terms refers to the practice whereby an incumbent firm discourages entry by charging a low price before entry occurs?

a a) Limit pricing b) Price leading c) Predatory pricing d) Quality pricing e) Capacity expansion

What was the cause of Walmart's exit from the German market?

a a) Loss of a predatory pricing lawsuit b) High tariffs on imported goods c) Total revenue that failed to cover sunk costs d) German regulations against foreign owned firms e) None of the above

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

a a) Postentry competition b) Postentry actions c) Postentry procedures d) Postentry diversification e) Postentry strategic decisions

Which of the following generally accompanies firms that survive as market entrants?

a a) Precipitous growth b) Lower marginal costs than incumbents c) Higher average revenue than incumbents d) Small size allowing fast decision making e) None of the above

When are sunk costs a most effective entry barrier?

a a) When the incumbent has incurred them and the entrant has not b) When incumbents have long-standing relationships with suppliers and customers c) When channels are few and hard to replicate d) When a firm has a reputation for toughness or competes in multiple markets e) When marginal costs are low and flooding the market causes large price reductions

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

a a) Horizontal differentiation b) Vertical differentiation c) Idiosyncratic differentiation d) Spatial differentiation e) Non-price differentiation

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

a a) Perfect competition b) Monopolistic competition c) Oligopoly d) Monopoly e) Diversified

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?

b a) Backward Integration b) Forward integration c) Nonintegration d) Contractually unbound e) Contractually bound

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?

b a) Both would be sold by the insurance company's in-house sales force b) Whole life would be sold by the insurance company's in-house sales force; term by an independent agent c) Whole life would be sold by an independent agent; term by the insurance company's in-house sales force d) Both would be sold by an independent agent e) An insurance company would try to "buy" the business (whole and term life insurance) of its independent agents

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)?

b a) Contestable limit pricing b) Strategic limit pricing c) Predatory pricing d) Quality pricing e) Capacity expansion

Which of the following in the late 19th century was predicted by the firm-size hypothesis?

b a) Forward integration was most likely to occur for products that require specialized investments in human capital b) 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 c) Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities d) For industries with small manufacturers, marketing relied on specialized assets e) For industries with small manufacturers, distribution relied on specialized assets

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

b a) Matrix Management Outcome (MMO) b) The Property Rights Theory (PRT) c) Complete Contract Theory (CCT) d) Total Production Model (TPM) e) Resource Allocation Theory (RAT)

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

b a) Packaging b) Combining c) Bundling d) Mixing e) Assembling

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

b a) Predatory pricing b) War of attrition c) Dumping d) Capacity Expansion e) Puppy Dog Ploy

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

b a) Shut-down b) Exit c) Sale d) Removal e) Withdrawal

The process by which governance develops is known as:

b a) Vertical decision making (VDM) b) Path Dependence c) Internal design d) Management evolution e) Institutional learning

Which of the following conditions may make predatory pricing by incumbents rational?

b a) When entry costs are very high b) When entrants are uncertain about market conditions c) When existing firms have significant coast advantages d) When entrants are required to obtain extensive licensing and regulatory approvals e) When exiting firms have increasing marginal revenue

When is reputation a most effective entry barrier?

b a) When the incumbent has incurred them and the entrant has not b) When incumbents have long-standing relationships with suppliers and customers c) When channels are few and hard to replicate d) When a firm has a reputation for toughness or competes in multiple markets e) When marginal costs are low and flooding the market causes large price reductions

What kind of competition is generally described as quantity competition?

b a) Bertrand competition b) Cournot competition c) Perfect competition d) Chamberlin competition e) Monopolistic competition

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

b a) Herfindahl index b) Market share c) Market structure d) SSNIP e) Numbers-equivalent of firms

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

b a) Horizontal differentiation b) Vertical differentiation c) Idiosyncratic differentiation d) Spatial differentiation e) Non-price differentiation

The causal connection between firms is known as the:

b a) Market structure formula b) Structure, Conduct, Performance paradigm c) Competition index d) Herfindahl Iindex e) Concentration, Profit connection

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

b a) Monopolist b) Monopsonist c) Oligopolist d) Oligopsonist e) Cartelist

Which U.S. agency is responsible for preventing anticompetitive conduct?

b a) Securities and Exchange Commission b) Department of Justice c) Office of Fair Trading d) Competition Commission e) Competition Authority

Which of the following best describes tapered integration?

c a) A manufacturer produces some of all input quantity itself b) A manufacturer purchases all input quantity from independent firms c) A manufacturer produces some of an input quantity itself and purchases the remaining portion from independent firms d) A manufacturer produces some of all input quantity from its competitors e) None of the above

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

c a) Governance arrangements split decision rights and controls between two related firms b) Governance arrangements are optimal c) Past circumstances could exclude certain possible governance arrangements in the future d) The firm will split into two entities to reduce the governance issues created e) The governance will form effectively

Which of the following conclusions can we make about vertical integration with regards to product market share and scope?

c a) 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. b) A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope c) 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 d) The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist e) 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 are the two types of barriers to entry?

c a) Legal and strategic b) Price and Size c) Structural and strategic d) Size and Legal e) Price and Structure

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

c a) Market leader b) Entrant c) Incumbent d) Market follower e) Monopolist

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

c a) Packaging b) Combining c) Bundling d) Mixing e) Assembling

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?

c a) Predatory pricing b) Cost plus pricing c) Dumping d) Marginal cost pricing e) Price leading

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

c a) Reduction in prices b) No measurable change in prices c) Increases in prices d) More firms entering the market e) More innovation

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?

c a) The cost difference increases with greater asset specificity b) Scale-based advantages of outside suppliers are likely to be stronger with greater asset specificity c) The cost difference declines with greater asset specificity d) Scope-based advantages of outside suppliers are likely to be stronger with greater asset specificity e) The costs are negative for all levels of asset specificity

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

c. a) Consumer packaged goods b) Electronics c) Physician service d) Automotive e) Apparel

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?

d a) Asset specificity b) Non-contract rights of ownership c) Control rights agreement d) Residual rights of control e) Coordination

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?

d a) Cloud paradox b) Credit paradox c) Entry paradox d) Chain-store paradox e) Pricing paradox

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

d a) Cost of upstream vertical supplies b) Manager contracts c) Required quality of finished product d) Governance e) None of the above

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?

d a) Deterred Entry b) Judo Entry c) Stealth Entry d) Accommodated Entry e) Blockaded Entry

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

d a) Inefficient asset specificity b) Lack of coordinated scope economies c) Incomplete contracting d) Double marginalization e) None of the above

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

d 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. d) Allows the firm to produce most efficiently in all circumstances e) Helps the firm protect itself against holdup by independent input suppliers

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

d a) Jujitsu economics b) Karate economics c) Boxing economics d) Judo economics e) David and Goliath economics

Which of the following is a method a monopolist firm might use to prevent entry into a market?

d a) Limit pricing b) Predatory pricing c) Capacity expansion d) All of the above e) None of the above

Which of the following best describes an incumbent firm?

d a) One that just recently entered a market b) One that just exited a market c) One that faces no competition in its market d) One that is already operating in a particular market e) None of the above

Which of the following is not an exit barrier for firms in an industry?

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

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?

d a) The cost difference is positive for both low and high levels of specificity b) The cost difference is negative for both low and high levels of specificity c) The cost difference is negative for low and positive for high levels of specificity d) The cost difference is positive for low and negative for high levels of specificity e) As asset specificity increases, the transaction costs of the market exchange decrease

What term describes existing firms in a monopolistically competitive market?

d a) Anchors b) Primaries c) Base d) Incumbents e) Pioneers

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

d a) Brand investment b) Cost of brand establishment c) Cost of advertising d) Endogenous sunk cost e) Market establishment cost

Which of the following is the definition of "competitors?

d a) Firms that manufacture similar products b) Firms located in geographic proximity to each other c) Firms that sell products to the same group of buyers d) Firms whose strategic choices directly affect one another e) Firms that purchase factors from the same suppliers

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

d a) Inaccuracy when dealing with more than 4 firms b) Inability to measure concentration if market shares are split evenly c) Inability to measure concentration across borders d) Invariance with changes in the size of the largest firms e) High variability when firm sizes are small

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

d 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 d) Customers are indifferent between X and Y 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

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

e a) Copyrights b) Exclusive franchise agreements c) Patents d) None of the above e) All of the above

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

e a) Deterred Entry b) Judo Entry c) Stealth Entry d) Accommodated Entry e) Blockaded Entry

Which of the following conclusions can we make about vertical integration with regard to scale and scope economies?

e a) 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. b) A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope c) A firm with a larger share of the product market will benefit more from vertical integration than a firm with a smaller share of the product market d) The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist e) 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

Which of the following is a method a monopolist firm would not use to prevent entry into a market?

e a) Limit pricing b) Predatory pricing c) Capacity expansion d) Strict patent enforcement e) Utilizing excess capacity for generic branded products

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

e a) Partnership b) Tapered integration c) Close-knit semi-formal relationship d) Mutual agreement e) Joint venture

Which of the following is an exit barrier for firms in an industry?

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

Which of the following is a potential risk of a brand umbrella?

e a) The brand umbrella reduces the incumbents sunk cost of introducing a new product b) The umbrella brand may help the incumbent navigate the vertical chain c) The brand umbrella allows an incumbent offset uncertainty about the quality of a new product d) A brand umbrella may make suppliers and distributors more willing to enter relationship specific investments in or sell credit to incumbents e) If a new product under the umbrella fails, consumers may become disenchanted with the entire brand

Which of the following is not a condition under which an incumbent firm can successfully deter entry by holding excess capacity?

e 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 e) The excess capacity investment must be recoverable prior to entry

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

e 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 e) All of the above

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

e a) They both have high costs b) They both are new trends in health care c) They are easy to integrate d) They do not require a significant investment to integrate e) They both require asset specificity and coordination

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

e a) Search preferences b) Horizontal preferences c) Consumer preferences d) Spatial preferences e) Idiosyncratic preferences

What is a catchment area?

e a) The area of a firm's customers as defined by traditional county lines b) The area a firm's customers shops due to idiosyncratic reasons c) The area a firm operates in which it has no competition d) The area where a firms customer will go to shop in the event the firm were to raise prices e) The contiguous area from which a firm draws most of its customers

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, which of the following statements is true?

e a) The more concentrated the industry, the smaller the PCMs in equilibrium b) The industry concentration only raises the PCMs in equilibrium c) The industry concentration has no bearing on PCM size in equilibrium d) The less concentrated the industry, the larger the PCMs in equilibrium e) The less concentrated the industry, the smaller the PCMs in equilibrium

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

e. a) Accounting practices b) Regulation c) Product differentiation d) Nature of sales transactions e) All of the above

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

a a) Clinical Research b) Drug Development c) Marketing d) Sales e) Manufacturing

Which of the following firms maintains a monopoly or cartel by controlling essential inputs thus creating a barrier to entry?

a a) DeBeers in diamonds OR International Tin Council, Ocean Spray b) Nike in shoes c) Pepsi in beverages d) Subway in sandwich fast food e) Levis in denim jeans

What kind of competition is generally described as price competition?

a a) Bertrand competition b) Cournot competition c) Perfect competition d) Chamberlin competition e) Monopolistic competition

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

a a) Cross-price elasticity b) Price comparison c) Relatedness factor d) Standard Industrial Classification e) SSNIP

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

b a) Agency efficiency b) Technical efficiency c) Lean compliant d) Economizing e) Six sigma compliant

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

b a) Forward Integration b) Tapered integration c) Backward Integration d) Balanced integration e) Combined integration

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

c a) Market competition criterion b) DOJ competition criterion c) SSNIP criterion d) SIC criterion e) DOJ market criterion

When is predatory pricing a most effective entry barrier?

d a) When the incumbent has incurred them and the entrant has not b) When incumbents have long-standing relationships with suppliers and customers c) When channels are few and hard to replicate d) When a firm has a reputation for toughness or competes in multiple markets e) When marginal costs are low and flooding the market causes large price reductions