Econ Ch 11 – Flashcards
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Market power is the ability of a firm to
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control the price and quantity supplied.
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An industry's market structure refers to
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the number and size of the firms in the industry.
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In what market structure are entry barriers the highest?
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Monopoly
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There are many corn farmers, each of whom produces the same product. The corn market can best be classified as
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perfect competition.
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What market structure is characterized by the absence of market power?
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Perfect competition
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When firms are interdependent,
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the profit of one firm depends on how its rivals respond to its strategic decisions.
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What market structure is characterized by a few interdependent firms?
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Oligopoly
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The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is
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oligopoly.
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The number of firms in an oligopoly must be
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small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry.
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What does not characterize an oligopoly?
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No market power
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What does not characterize an oligopoly?
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Many firms
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What may characterize a monopoly?
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Substantial market power
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It is most difficult for new firms to enter
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an oligopolistic market.
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It is easiest for new firms to enter a
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perfectly competitive market.
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The soft drink market is dominated by Coke, Pepsi, and very few other firms. The market can be classified as
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oligopoly.
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What is not a determinant of market power?
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Age of the industry
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The degree of market power exercised by a firm is not related to
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the age of the industry.
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The correct ranking of degree of marker power from highest to lowest is
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monopoly, oligopoly, monopolistic competition, perfect competition.
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If an oligopoly market is contestable and new firms enter, the
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market power of the former oligopolists will be reduced.
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A contestable market is
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an imperfectly competitive situation that is subject to entry.
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To keep a market from being contested, firms might
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seek to obtain a monopoly franchise from the government.
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What is the critical determinant of market power?
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The extent of barriers to entry.
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The concentration ratio measures the
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proportion of total output produced by the four largest producers in a specific market.
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The goal of a company in an oligopoly industry is to
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increase market share and profits.
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Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output
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only for domestic production when the true market boundaries are international for some markets.
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A nationwide concentration ratio is likely to understate market power when
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the true markets are local and small.
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What industry is likely to have the highest concentration ratio?
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Video game systems.
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What industry has the highest concentration ratio?
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Soft drinks.
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What is an industry that has a high concentration ratio?
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Satellite radio.
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The concentration ratio for an oligopoly is
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over 60%.
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Market share can be computed by dividing
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the amount sold by a single firm by the total sold in the market.
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Market share is the percentage of total
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market output produced by a single firm.
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Suppose there are only three firms in a market. The largest firm has sales of $500 million, the second-largest has sales of $300 million, and the smallest has sales of $200 million. The market share of the largest firm is
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50%.
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Suppose the larger firm of a duopoly has sales of $900 million and the smaller firm has sales of $100 million. The market share of the larger firm is
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90%.
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Suppose the larger firm of a duopoly has sales of $400 million and the smaller firm has sales of $100 million. The market share of the larger firm is
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80%.
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When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in
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product differentiation.
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Product differentiation
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involves advertising unique product features.
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If a firm in an oligopoly expands its market share at prevailing prices, its competitors
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lose market share.
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If oligopolists start cutting prices to capture a larger market share, the result will be a
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movement down the market demand curve.
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If oligopolists start cutting prices to capture a larger market share, the result will be
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lower prices, increased output, and smaller profits.
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What is not a danger of experimenting with pricing for an oligopoly?
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Product differentiation.
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RC Cola lost market share in the 1980s due to
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its decision not to advertise.
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The kinked demand curve explains the observation that in oligopoly markets
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prices may not change even in the face of cost increases.
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The demand curve will be kinked if rival oligopolists
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match price reductions but not price increases.
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What is true about the kink in the demand curve?
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It is the result of different rival responses to price increases and reductions.
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The kinked demand curve explains
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the consequences of the interdependent behavior of oligopolists.
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If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked demand model
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it will lose market share to the firms that do not follow the price increase.
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If a firm is producing at the kink in its demand curve and it decides to decrease its price, according to the kinked demand model
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its market share will not be affected.
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A kinked demand curve indicates that rival oligopolists match all
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price reductions.
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What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?
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Cut their prices.
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If an oligopolist is going to change its price or output, its initial concern is
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the response of its competitors.
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If rival oligopolists completely ignore Mitchell's Tool Company's price changes, then Mitchell's Tool Company's
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demand curve will not have a kink.
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Game theory is
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the study of how decisions are made when interdependence exists between firms.
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The study of how decisions are made when strategic interaction between firms exists is known as
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game theory.
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A payoff matrix shows
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the profits or losses that result from strategic decisions of one firm and another firm.
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Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint
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profits.
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The goal of an oligopoly is to maximize
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market share to achieve long-run economic profit.
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If a market changes from oligopoly to perfect competition, then as a result
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output should increase in the long run.
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Oligopolists will maximize total profits for all of the firms in the market at the rate of output where
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MR = MC for the market.
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The potential for maximizing total industry profits is greater in oligopolies than in perfect competition because
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there are fewer firms and each is dependent on the actions of rivals.
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In an effort to maximize profits, oligopolists could not participate in
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self-destructive behavior.
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The pricing strategy in which there is an explicit agreement among producers regarding price is called
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price-fixing.
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Oligopolists have an incentive to coordinate price because with coordination
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each firm faces a relatively inelastic demand for its product.
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A cartel is
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a public agreement between firms or countries to restrict production and raise prices.
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Borden, Inc., which sold milk to Texas Tech University, public schools, and hospitals, paid $8 million in fines for
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price-fixing.
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General Electric and Westinghouse were convicted of
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price-fixing.
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Price leadership is a method by which oligopolies can
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increase prices without explicit price-fixing.
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Price leadership
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helps achieve monopoly profit for the market.
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Price leadership
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permits oligopolistic firms in a given market to coordinate market-wide price changes.
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The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called
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price leadership.
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Open and explicit agreements concerning pricing and output shares transform an oligopoly into a
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cartel.
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Sky-High Skywriters raises its price, and the other four firms in the industry raise their prices in response. Coordination in this industry is accomplished by
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retaliation.
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Temporary price reductions intended to drive out competition are referred to as
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predatory pricing.
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Sky-High Skywriters temporarily reduces its price when a new firm called The Sky's the Limit Skywriting enters the industry. Sky-High Skywriters is practicing
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predatory pricing.
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What does not function as a barrier to entry into an oligopoly market?
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Predatory pricing.
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For an oligopoly, a few firms cannot dominate in the long run unless
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barriers to entry exist.
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A firm cannot maintain above-normal profits over the long run
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unless barriers to entry exist.
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In the long run, an oligopolist is most likely to
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experience economic profits because of barriers to entry
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Distribution control can not be accomplished through what method?
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Predatory pricing.
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When U.S. government regulations that prevent goods from being imported are relaxed, this
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reduces the barriers to entry into U.S. markets.
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The most common form of nonprice competition is
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advertising.
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How might an oligopolist increase total revenue without changing price?
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Through nonprice competition.
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High training costs help firms maintain
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barriers to entry.
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If all of your friends use the same instant messaging service provider, you are likely to use it too. This behavior may create
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a network economy.
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The demand curve facing an oligopoly firm is kinked because
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it is most likely that rivals will match price cuts but not price increases.
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An imperfection in the market mechanism that prevents optimal outcomes is called
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market failure.
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Market power leads to market failure when it results in
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decreased market output.
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Collusion is undesirable and illegal because
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resources are misallocated and the level of output is restricted.
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When oligopoly firms collude to raise prices,
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each firm benefits, but society loses.
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Oligopolistic behavior includes
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tacit collusion.
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Often antitrust enforcers
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lack the resources to prosecute anticompetitive behavior.
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What is not an argument to have less antitrust enforcement?
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Oligopolies can lead to less output and higher prices.
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The Herfindahl-Hirshman Index is the sum of the
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squared market shares of the firms in the market.
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The Herfindahl-Hirshman Index is
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used to identify cases worthy of antitrust concern.
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Suppose there are 51 firms in a market. The largest firm has sales of $50 million and each of the other firms has sales of $1 million. The Herfindahl-Hirshman Index of this industry is
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2550.
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Suppose there are three firms in a market. The largest firm has sales of $50 million, and each of the other two firms has sales of $25 million. The Herfindahl-Hirschman Index of this industry is
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3750.
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An In the News article titled "Eliminating the Competition" indicates that, in order to protect their prices and profits, the major carriers operating at the Washington, DC, Dulles airport
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practiced predatory pricing.
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According to an In The News article titled "Major Airlines Match Southwest's Fare Cuts,"
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airlines often match their rivals' fares rather than risk losing price-sensitive passengers.
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According to "Coke and Pepsi May Call Off Pricing Battle," price discounting (price wars) can destroy oligopoly profits. When profit destruction occurs,
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rival oligopolists seek to end it as quickly as possible.
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According to "Oil Cartel Achieves Cuts in Output, Halting Price Slide," OPEC wants to behave like a monopoly, choosing a rate of industry output that maximizes total industry profit. The challenges for all cartels, OPEC in particular, do not include
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preventing some members from decreasing production
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In the article "AT&T Plan to Buy T-Mobile Means Higher Prices, Fewer Phones," the opportunity cost of the merger between AT&T and T-Mobile is
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reduced phone selection.
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AT&T will argue that the merger should be approved by antitrust officials because
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the merger will lead to efficiencies because a larger firm can enjoy economies of scale and can keep prices low.
