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