Econ Exam 1
In a three firm market where the market share split is 50%, 30% & 20%, what is the Herfindahl index?
.38
What is the approximate observed median learning curve slope for typical firms?
0.8
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
Which of the following terms best describes a review system in which an employee's supervisor, coworkers and subordinates are all asked to provide information regarding that employee's performance over a period of time?
360-degree peer review system
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?
Accommodated Entry
Diversifying activity is most often measured by looking at which of the following?
Acquisition and merger activity
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 the limits on the capacity of individuals to process information, deal with complexity and pursue rational aims?
Bounded rationality
What term describes when a firm sells a combination of goods and services together, but not individually?
Bundling
What term best describes the payment which must be offered to a risk-averse individual to willingly accept a gamble?
Certainty equivalent
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?
Chain-store paradox
When contracts are incomplete, what must be well defined and enforceable to allow for smooth transactions to occur?
Contract law
What institution within a firm must fail on some level for managers to be motivated to acquire another firm for the purposes of increasing their own compensation, shielding themselves against risk, or gaining prominence by running a larger firm?
Corporate governance
What are agency costs?
Costs associated with slack effort and with the administrative controls to deter it
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 U.S. agency is responsible for preventing anticompetitive conduct?
Department of Justice
What are economies of density as referred to in the airline industry?
Economies of scale along a given route
Which of the following benefits of diversification explains the idea that mergers are more likely when there is an expectation of positive changes in market share?
Economies of scale and scope
What term best refers to a wage payment made to an agent that exceeds his opportunity cost of working and discourages the agent from shirking?
Efficency Wage
Which of the following is not a characteristic of performance based pay?
Employees will always prefer performance based pay thus aligning principal/agent objectives
What term does Sutton use to describe the costs of establishing a credible brand?
Endogenous sunk cost
Relative performance is best described as which of the following?
How a firm performs based on a comparison to another firm in its peer set within an industry
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 is a potential risk of a brand umbrella?
If a new product under the umbrella fails, consumers may become disenchanted with the entire brand
By satisfying which of the following conditions can shareholders prevent management driven acquisitions?
If shareholders could determine which acquisitions will lead to increased profits and which will not
Which of the following terms describes a contract based on information that cannot be observed by courts or arbitrators?
Implicit incentive contract
How does umbrella branding aid economies of scale and scope?
Increases effectiveness of advertising due to offering a broad product line under one name
What type of firm is one that is already operating in a particular market?
Incumbent
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 term describes the situation where a smaller firm and potential entrant can use the incumbent's size to its own advantage?
Judo economics
Which of the following methods is believed to be used by Brazilian cement makers to prevent entry into the market?
Limit pricing
Which of the following terms refers to the practice whereby an incumbent firm discourages entry by charging a low price before entry occurs?
Limit pricing
What term best refers to a wage payment made to an employee that is large enough for the employee to purchase the median amount of personal goods and services?
Living Wage
What kind of economies come from reductions in cost due to adoption of technology that has high fixed costs, but lower variable costs?
Long-run economies of scale
Which of the following terms best describes a review system in which an employee and a supervisor work together to construct a set of goals for that employee?
Management-by-objective system
What primary agency cost problem plagued the partnership between Sony's hardware and software from 1998-2008 with regards to digital music?
Manager/worker slacking
What force does Manne indicate constrains the actions of managers so that they stay focused on the goals of owners?
Market for corporate control
What is defined by the number and size distribution of the firms in a market?
Market structure
Consolidation of managers often occurs due to which of the following?
Mergers and acquisitions
Which of the following is a tool a firm can use to combat agency problems?
Monitoring, Performance-Based Incentives, Bureaucracy
Which of the following terms best describes the principle stating that when allocating effort among a variety of tasks, employees will tend to exert more effort toward those tasks that are rewarded?
Multitask principle
Which of the following best describes an incumbent firm?
One that is already operating in a particular market
How does a centralized organization solve coordination problems?
Organizational structure
How can incumbents legally erect entry barriers around novel and non-obvious products or production processes?
Patents
What term describes a market where a monopolist cannot raise price above long run average cost?
Perfectly contestable
Which of the following terms best describes a piece of information on which an incentive contract (explicit or implicit) can be based?
Performance Measure
Which of the following asset specificity forms describes why glass container production requires molds custom tailored to particular container shapes and glass making machines?
Physical asset specificity
Which of the following generally accompanies firms that survive as market entrants?
Precipitous growth
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 terms best describes the effect that results from supervisors giving all their subordinates average (or above average) grading to avoid making sharp distinctions between those subordinates when evaluating them?
Ratings Compression
What measure, that depends on how much of a firm's revenues are attributable to product market activities that have shared technological characteristics, production characteristics, or distribution channels, is used to determine how diversified a firm is at a given time?
Relatedness
What term best describes how a firm performs based on a comparison to another firm in its peer set within an industry?
Relative Performance
What criterion developed by the DOJ is used to identify all potential competitors within the market?
SSNIP criterion
What is a reason that companies might want to "buy" instead of "make" talent from the market when looking to acquire employees with a particular skill set?
Scale economies can result in fixed education costs while in house education methods may be more expensive
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
What are the two types of barriers to entry?
Structural and strategic
The causal connection between firms is known as the
Structure, Conduct, Performance paradigm
Which of the following is an exit barrier for firms in an industry?
Sunk costs, Labor agreements or commitments to purchase raw materials, Obligations to input suppliers, Government restrictions
What do the vertical boundaries of a firm refer to?
The activities the firm itself performs versus purchases from independent firms
Which of the following is a characteristic of economies of scale?
The average cost declines as output increases
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 not a condition under which an incumbent firm can successfully deter entry by holding excess capacity?
The excess capacity investment must be recoverable prior to entry
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?
The less concentrated the industry, the smaller the PCMs in equilibrium
Which of the following is generally a way that LBOs can help a firm realize its potential value?
The transaction requires debt repayment with future free cash flow leaving management no discretion over the investment of these funds
Which of the following terms best describes a review system in which a supervisor constructs a set of goals for an employee?
Traditional top down review system
Which of the following is not a method a firm could use to force vertical foreclosure?
Upstream competitor acquires downstream competitor and then the downstream competitor refuses to buy from other suppliers
Which of the following benefits of diversification explains the idea that combining unrelated businesses can allow firms to finance projects through cross-subsidization when they previously were unable to finance the same projects externally?
Use of internal capital markets
Which of the following practices does not contribute to the strategic fit of Southwest Airlines?
Use of multiple types of planes
What term describes the differentiation of a product when it is unambiguously better or worse than competing products?
Vertical differentiation
What term describes a situation where two or more parties expend resources battling each other?
War of attrition
Which of the following conditions may make predatory pricing by incumbents rational?
When entrants are uncertain about market conditions
When is reputation a most effective entry barrier?
When incumbents have long-standing relationships with suppliers and customers
Why might a large firm actually be at an advantage over a smaller firm with respect to labor?
Worker turnover is generally lower
Which of the following is a source of diseconomies of scale at a large firm?
a. Labor costs, Spreading specialized resources too thin, Conflicts of interest, Incentive processes
