SS242 Chapters 13 & 14
INTERINDUSTRY COMPETITION
The competition for sales between the products of one industry & the products of another industry.
IMPORT COMPETITION
The competition that domestic firms encounter from the products & services of foreign producers.
KINKED-DEMAND CURVE
-A demand curve that has a flatter slope above the current price than below the current price. -Applies to a noncollusive oligopoly firm if its rivals will match any price decrease but ignore any price increase.
HERFINDAHL INDEX
-A measure of the concentration & competitiveness of an industry. -Calculated as the sum of the squared percentage market shares of the individual firms in the industry.
MUTUAL INTERDEPENDENCE
-A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales & profits of another firm (or other firms). -Any firm that makes such a change can expect its rivals to react to the change.
DIFFERENTIATED OLIGOPOLY
An oligopoly in which firms product a differentiated product.
GAME THEORY
-The study of how people behave in strategic situation in which individuals must take into account not only their own possible actions but also the possible reactions of others. -Originally developed to analyze the best ways to play games like poker and chess.
CARTEL
A formal agreement among firms (or countries) in an industry to set the price of a product & establish the outputs of the individual firms (or countries) or to divide the market for the product geographically.
OLIGOPOLY
A market structure in which: -A few firms sell either a standardized or differentiated product -Entry is difficult -The firm has limited control over product price because of mutual interdependence (except when there is collusion among firms) -There is typically nonprice competition
MONOPOLISTIC COMPETITION
A market structure in which: -Many firms sell a differentiated product -Entry is relatively easy -Each firm has some control over product price -There is considerable nonprice competition
COLLUSION
A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition.
PRODUCT DIFFERENTIATION
A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).
If an oligopolist's demand curve is kinked at the going price: A. The loss in revenue from reducing output by one unit exceeds the gain in revenue from expanding output by one unit B. The gain in revenue from expanding output by one unit exceeds the loss in revenue from reducing output by one unit C. total revenue will remain constant if price is changed in either direction D. profits will rise if price is increased but fall if price is decreased
A. The loss in revenue from reducing output by one unit exceeds the gain in revenue from expanding output by one unit
5. The kinked-demand curve of an oligopolist is based on the assumption that: A. competitors will follow a price cut but ignore a price increase. B. competitors will match both price cuts and price increases. C. competitors will ignore a price cut but follow a price increase. D. there is no product differentiation.
A. competitors will follow a price cut but ignore a price increase.
Compared to a competitive firm, a monopolistically competitive firm: A. faces a less elastic demand curve B. is less likely to advertise its product C. faces a more elastic demand curve D. can earn positive profits in the long run
A. faces a less elastic demand curve
In an oligopolistic industry: A. firms behave strategically B. output is produced at minimum average total cost C. firms make price and output decisions without regard to the responses of their rivals D. high profits will attract many new entrants to the industry
A. firms behave strategically
4. Game theory: A. is the analysis of how people (or firms) behave in strategic situations. B. is best suited for analyzing purely competitive markets. C. reveals that mergers between rival firms are self-defeating. D. reveals that price-fixing among firms reduces profits
A. is the analysis of how people (or firms) behave in strategic situations.
2. In a duopoly, if one firm increases its price, then the other firm can: A. keep its price constant and thus increase its market share. B. keep its price constant and thus decrease its market share. C. increase its price and thus increase its market share. D. decrease its price and thus decrease its market share.
A. keep its price constant and thus increase its market share.
Which is a typical tactic that has been used by the price leader in the price leadership model of oligopoly? A. limit pricing B. frequent price changes C. starting a price war with competitors D. giving no announcement of a price change
A. limit pricing
Market shares in oligopoly are typically determined on the basis of A. product development and advertising B. covert collusion and cartels C. tacit understandings D. joint profit maximization
A. product development and advertising
The Herfindahl index is: A. the sum of the squared percentage market shares of all firms in the industry. B. the sum of the market shares for the top 10 firms in the industry. C. a measure of product differentiation in the market. D. a measure of how easy it is for new firms to enter the market.
A. the sum of the squared percentage market shares of all firms in the industry.
A monopolistically competitive firm is producing at an output level in the short run where average total cost is $3.50, price is $3.00, marginal revenue is $1.50, and marginal cost is $1.50. This firm is operating A. with an economic loss in the short run B. with an economic profit in the short run C. at the break-even level of output in the short run D. at an inefficient level of output in the short run
A. with an economic loss in the short run
Increased competition from foreign firms in oligopolistic industries has stimulated more competitive pricing in those industries.
TRUE
PRICE LEADERSHIP
An informal method that firms in an oligopoly may employ to set the price of their product: -One firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes.
HOMOGENOUS OLIGOPOLY
An oligopoly in which firms product a standardized product.
Those contending that advertising contributes to monopoly power argue that the advertising by established firms creates barriers to the entry of new firms into an industry.
TRUE
Which would be most characteristic of oligopoly? A. easy entry into the industry B. a few large producers C. product standardization D. no control over price
B. a few large producers
To be successful, collusion requires that oligopolists be able to A. keep prices and profits as low as possible B. block or restrict the entry of new producers C. reduce legal obstacles that protect market power D. keep the domestic economy from experiencing high inflation
B. block or restrict the entry of new producers
One major problem with concentration ratios is that they fail to take into account A. the national market for products B. competition from imported products C. excess capacity in production D. mutual interdependence
B. competition from imported products
If firms enter a monopolistically competitive industry, we would expect the typical firm's demand curve to A. increase and the firm's price to increase B. decrease and the firm's price to decrease C. remain the same, but the firm's price to increase D. remain the same and the firm's price to remain the same
B. decrease and the firm's price to decrease
Were a monopolistically competitive industry in long-run equilibrium, a firm in that industry might be able to increase its economic profits by A. increasing the price of its product B. increasing the amounts it spends to advertise its product C. decreasing the price of its product D. decreasing the output of its product
B. increasing the amounts it spends to advertise its product
In a monopolistically competitive market, the firm's marginal revenue schedule: A. is the same as the demand schedule. B. lies below the demand schedule. C. lies above the demand schedule. D. is not dependent on the demand schedule.
B. lies below the demand schedule.
Suppose only three airlines service a particular route. One of the airlines typically signals its price intentions through a daily posting on its internet site, which the other two quickly match. This best describes: A. cost-plus pricing B. price leadership C. a cartel D. game theory
B. price leadership
Industry A is composed of four large firms that hold market shares of 40, 30, 20, and 10. The Herfindahl index for this industry is A. 100 B. 1,000 C. 3,000 D. 4,500
C. 3,000
Which value (in percentage form) of the four-firm concentration ratio is most likely to indicate a monopolistically competitive market? A. 100% B. 60% C. 30% D. 2%
C. 30%
Productive efficiency is not achieved in monopolistic competition because production occurs where A. MR is greater than MC B. MR is less than MC C. ATC is greater than minimum ATC D. ATC is less than MR and greater than MC
C. ATC is greater than minimum ATC
An industry whose Herfindahl index is 5300, producing a standardized product, is most likely an example of: A. pure competition B. monopolistic competition C. Oligopoly D. pure monopoly
C. Oligopoly
6. If oligopolistic firms facing similar cost and demand conditions successfully collude, price and output results in this industry will be most accurately predicted by which of the following models? A. The kinked demand curve model of oligopoly B. The price-leadership model of oligopoly C. The pure monopoly model D. The monopolistic competition model
C. The pure monopoly model
3. The term oligopoly indicates: A. a one-firm industry. B. many producers of a differentiated product. C. a few firms producing either a differentiated or a homogeneous product. D. an industry whose four-firm concentration ratio is low.
C. a few firms producing either a differentiated or a homogeneous product.
Which would be most characteristic of monopolistic competition? A. collusion among firms B. firms selling a homogeneous product C. a relatively large number of firms D. difficult entry into and exit from the industry
C. a relatively large number of firms
8. In the short run, a profit-maximizing monopolistically competitive firm sets it price: A. equal to marginal revenue. B. equal to marginal cost. C. above marginal cost. D. below marginal cost.
C. above marginal cost.
In the short-run, a profit-maximizing monopolistically competitive firm sets it price: A. equal to marginal revenue. B. equal to marginal cost. C. above marginal cost. D. below marginal cost.
C. above marginal cost.
7. Nonprice competition refers to: A. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts. B. price increases by a firm that are ignored by the firm's rivals. C. advertising, product promotion, and changes in the real or perceived characteristics of a product. reductions in production costs that are not reflected in price reductions
C. advertising, product promotion, and changes in the real or perceived characteristics of a product.
Nonprice competition refers to: A. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts. B. price increases by a firm that is ignored by its rivals. C. advertising, product promotion, and changes in the real or perceived characteristics of a product. D. reductions in production costs that are not reflected in price reductions.
C. advertising, product promotion, and changes in the real or perceived characteristics of a product.
Mutual interdependence means that A. each firm produces a product similar but not identical to the products produced by its rivals B. each firm produces a product identical to the products produced by its rivals C. each firm must consider the reactions of its rivals when it determines its price policy D. each firm faces a perfectly elastic demand for its product
C. each firm must consider the reactions of its rivals when it determines its price policy
Product differentiation is an important characteristic in a monopolistically competitive market because: A. it results in zero profits in the short run. B. it promotes productive efficiency in the long run. C. it provides firms with some market power. D. it implies market share is zero in the long run.
C. it provides firms with some market power.
Suppose several firms in a purely competitive industry begin to experiment slightly with their product designs. This product differentiation allows them to modestly increase their prices and increase their short-run profits. The industry now more closely resembles: A. pure monopoly B. Oligopoly C. monopolistic competition D. competitive monopoly
C. monopolistic competition
One reason why monopolistic competition is economically inefficient is that the average cost of producing the product is greater than the minimum average cost at which the product could be produced.
TRUE
If an individual oligopolist's demand curve is kinked, it is necessarily A. perfectly elastic at the going price B. less elastic above the going price than below it C. more elastic above the going price than below it D. of unitary elasticity at the going price
C. more elastic above the going price than below it
Excess capacity occurs in a monopolistically competitive industry because firms A. advertise and promote their product B. charge a price that is less than marginal cost C. produce at an output level short of the least-cost output D. have a perfectly elastic demand for the products that they produce
C. produce at an output level short of the least-cost output
The concern that monopolistically competitive firms express about product attributes, services to customers, or brand names are aspects of A. allocative efficiency in the industry B. collusion in the industry C. product differentiation D. concentration ratios
C. product differentiation
NONPRICE COMPETITION
Competition based on distinguishing one's product by means of product differentiation & then advertising the distinguished product to consumers.
One shortcoming of kinked-demand analysis is that it does not explain how the going oligopoly price was established in the first place.
TRUE
A particular industry consists of three firms whose market shares are 50%, 30%, and 20%. The Herfindahl index for the industry is: A. 33.3 B. 100 C. 2400 D. 3800
D. 3800
What is the situation called whenever firms in an industry reach an agreement to fix prices, divide up the market, or otherwise restrict competition? A. interindustry competition B. incentive to cheat C. price leadership D. Collusion
D. Collusion
1. Which of the following statements is true? A. Nash equilibriums exist only in games with dominant strategies. B. Dominant strategies do not exist in repeated games. C. Collusive agreements will always break down in repeated games. D. Games with a known ending date undermine reciprocity strategies.
D. Games with a known ending date undermine reciprocity strategies.
A monopolistically competitive firm in the short run is producing where price is $3.00 and marginal cost is $1.50. To maximize profits: A. The firm should continue to produce this quantity. B. The firm should increase output and decrease price. C. The firm should decrease output and increase price. D. It is unclear what the firm should do without knowing marginal revenue.
D. It is unclear what the firm should do without knowing marginal revenue.
In the short run, a typical monopolistically competitive firm will earn A. only a normal profit B. only an economic profit C. only an economic or normal profit D. an economic or normal profit or suffer an economic loss
D. an economic or normal profit or suffer an economic loss
If profits are negative in a monopolistically competitive market, then: A. the industry will stop production. B. new firms will enter the market until economic profits are zero. C. firms will exit the market until economic profit returns to the optimal positive level. D. firms will exit the market until economic profit returns to zero.
D. firms will exit the market until economic profit returns to zero.
The demand curve a monopolistically competitive firm faces is A. perfectly elastic B. perfectly inelastic C. highly but not perfectly inelastic D. highly but not perfectly elastic
D. highly but not perfectly elastic
The firm's reputation for servicing or exchanging its product is a form of product differentiation under monopolistic competition.
TRUE
10. A monopolistically competitive firm in the short run is producing where price is $3.00 and marginal cost is $1.50. To maximize profits: A. the firm should continue to produce this quantity. B. the firm should increase output and decrease price. C. the firm should decrease output and increase price. D. it is unclear what the firm should do without knowing marginal revenue.
D. it is unclear what the firm should do without knowing marginal revenue.
Many economists think that relative to pure competition, oligopoly is A. allocatively efficient but not productively efficient B. productively efficient but not allocatively efficient C. both allocatively and productively efficient D. neither allocatively nor productively efficient
D. neither allocatively nor productively efficient
When oligopolists collude, the results are generally A. greater output and higher price B. greater output and lower price C. smaller output and lower price D. smaller output and higher price
D. smaller output and higher price
Given a representative firm in a typical monopolistically competitive industry, in the long run A. the firm will produce that output at which marginal cost and price are equal B. the elasticity of demand for the firm's product will be less than it was in the short run C. the number of competitors the firm faces will be greater than it was in the short run D. the economic profits being earned by the firm will tend to equal zero
D. the economic profits being earned by the firm will tend to equal zero
In a monopolistically competitive market: A. there is a relatively small number of sellers. B. all products are identical. C. it is typically difficult to enter the market. D. there are a relatively large number of sellers.
D. there are a relatively large number of sellers.
9. In the long run, new firms will enter a monopolistically competitive industry: A. provided economies of scale are being realized. B. even though losses are incurred in the short run. C. until minimum average total cost is achieved. D. until economic profits are zero
D. until economic profits are zero
In the long run, new firms will enter a monopolistically competitive industry: A. provided economies of scale are being realized. B. even though losses are incurred in the short run. C. until minimum average total cost is achieved. D. until economic profits are zero.
D. until economic profits are zero.
The products produced by the firms in an oligopolistic industry may be either homogeneous or differentiated.
TRUE
Concentration ratios include adjustments for inter-industry competition in measuring concentration in an industry.
FALSE
Entry is relatively easy in pure competition, but there are significant barriers to entry in monopolistic competition.
FALSE
Game theory analysis of oligopolist behavior suggests that oligopolists will not find any benefit in collusion.
FALSE
Limit pricing is the leadership tactic of limiting price increases to a certain percentage of the basic price of a product.
FALSE
Monopolistic competitors have no control over the price of their products.
FALSE
Oligopolies are allocatively and productively efficient when compared with the standard set in pure competition.
FALSE
Oligopolistic industries contain a few large firms that act independently of one another.
FALSE
Representative firms in a monopolistically competitive market earn economic profits in the long run.
FALSE
Secret price concessions and other forms of cheating will strengthen collusion.
FALSE
Successful product improvement by one firm has little or no effect on other firms under monopolistic competition.
FALSE
The Herfindahl index is the sum of the market shares of all firms in the industry.
FALSE
The demand curve of the monopolistic competitor is likely to be less elastic than the demand curve of the pure monopolist
FALSE
The long-run equilibrium position in monopolistic competition would be where price is equal to marginal cost.
FALSE
The more product variety offered to consumers by a monopolistically competitive industry, the less excess capacity there will be in that industry.
FALSE
The practice of price leadership is almost always based on a formal written or oral agreement.
FALSE
The smaller the number of firms in an industry and the greater the extent of product differentiation, the greater will be the elasticity of the individual seller's demand curve.
FALSE
EXCESS CAPACITY
Plant resources that are underused when imperfectly competitive firms product less output than that associated with achieving minimum average total cost.
STRATEGIC BEHAVIOR
Self-interested economic actions that take into account the expected reactions of others.
A cartel is usually a written agreement among firms that sets the price of the product and determines each firm's share of the market.
TRUE
Collusion occurs when firms in an industry reach an overt or covert agreement to fix prices, divide or share the market, and in some way restrict competition among the firms.
TRUE
In the short run, firms that are monopolistically competitive may earn economic profits or incur losses.
TRUE
FOUR-FIRM CONCENTRATION RATIO
The percentage of total industry sales accounted for by the top four firms in an industry. =(output of four largest firms) / (total output in the industry)