ECO 202. Chapters 11, 15, 16 & 17.

Sticky prices
Prices that are resistant to change.
Monopolistic competition
A market structure with many producers selling products that are not identical but are close substitutes and with no barriers to entry.
Government intervention to alter market structure or prevent abuse of market power.
barriers to entry
Obstacles such as patents that make it difficult or impossible for would-be producers to enter a particular market.
A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market.
concentration ratio
The proportion of total industry output produced by the largest firms (usually the four largest).
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contestable market
An imperfectly competitive industry subject to potential entry if prices or profits increase.
game theory
The study of decision making in situations where strategic interaction (moves and countermoves) occurs between rivals
Herfindahl-Hirshman Index (HHI)
Measure of industry concentration that accounts for number of firms and size of each.
market failure
An imperfection in the market mechanism that prevents optimal outcomes
market share
The percentage of total market output produced by a single firm.
market structure
The number and relative size of firms in an industry.
One of the dominant firms in an oligopoly.
A market in which a few firms produce all or most of the market supply of a particular good or service.
payoff matrix
A table showing the risks and rewards of alternative decision options.
predatory pricing
Temporary price reductions designed to alter market shares or drive out competition.
Explicit agreements among producers regarding the price(s) at which a good is to be sold.
price leadership
An oligopolistic pricing pattern that allows one firm to establish the (market) price for all firms in the industry.
product differentiation
Features that make one product appear different from competing products in the same market.
1. In which of the following market structures does a firm produce a unique product for which there are no close substitutes?
2. In which of the following market structures are entry barriers the highest?
3. There are many wheat farmers, each of whom produces the same product. The wheat market can best be classified as:
Perfect competition
4. Which of the following market structures is characterized by many firms?
Monopolistic competition.
5. Which market structure is characterized by a few interdependent firms?
6. The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is:
7. The number of firms in an oligopoly must be:
Small enough so that one firm’s decisions have a significant impact on the decisions of the other firms in the industry.
8. Which of the following may characterize an oligopoly?
A) A few firms. B) High barriers to entry. C) Significant market power
9. It is most difficult for new firms to enter into .
An oligopolistic market.
11. Which of the following is a determinant of market power?
A) Number of producers. B) Barriers to entry. C) Availability of substitutes.
13. The correct ranking of degree of market power (from highest to lowest) is:
Monopoly, oligopoly, monopolistic competition, perfect competition.
14. The correct ranking of barriers to entry (from highest to lowest) in the market is:
A) Monopoly, oligopoly, monopolistic competition, perfect competition.
15. A similarity of an oligopoly and a monopoly is:
The existence of market power.
17. A contestable market is:
B) An imperfectly competitive situation that is subject to entry.
19. The measure of market power found by adding together the market shares of the largest four firms is:
The concentration ratio.
20. Which of the following is the best indication of high market power?
A concentration ratio of 90 percent.
21. Which of the following is the best indication of high market power?
A small firm with a market share of 80 percent.
23. Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output:
Only for domestic production, when the true market boundaries are international for some markets.
24. A nationwide concentration ratio is likely to understate market power when:
The true markets are local and small.
25. Which of the following industries is likely to have the highest concentration ratio?
B) Video game systems.
26. Which of the following industries has the highest concentration ratio?
Soft drinks.
The market share of a monopolist is:
100 percent.
28. Market share can be computed by dividing:
The amount sold by a single firm by the total sold in the market.
32. Which of the following may characterize oligopolistic behavior?
A) Price leadership. B) Collusion. C) Retaliation.
33. Which of the following is evidence of the interdependence which characterizes the relationship among oligopolists?
A) Retaliation. B) Price wars. C) Gamesmanship.
34. When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in:
Product differentiation
35. Product differentiation is:
Involves advertising unique product features.
36. The kinked-demand curve indicates:
Why oligopoly prices might be sticky
37. The kinked-demand curve explains the observation that in oligopoly markets:
Prices may not change even in the face of cost increases.
38. Which of the following is true about the kink in the demand curve?
It occurs at the same rate of output as the vertical segment in the marginal revenue curve. ;
It leads to an explanation of sticky prices.
It is the result of the difference in rival responses to price increases and reductions.
39. The kinked-demand curve explains:
The consequences of the interdependent behavior of oligopolists
41. Which of the following types of pricing by rivals is consistent with a kinked oligopoly demand curve?
Matching price decreases only
42. 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:
It will lose market share to the firms that do not follow the price increase.
43. 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:
Its market share will not be affected.
44. A kinked-demand curve indicates that rival oligopolists match all:
Price reductions.
45. What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?
Cut their prices.
46. If an oligopolist is going to change its price or output, its initial concern is:
The response of its competitors.
48. Game theory is:
The study of how decisions are made when interdependence exists between firms.
49. The study of decision making in situations where strategic interaction between rivals occurs is known as:
game theory
52. The goal of an oligopoly is to maximize:
Market share to achieve long-run economic profit.
53. If a market changes from oligopoly to perfect competition, then as a result:
Output should increase in the long run
54. Oligopolists will maximize total profits for all of the firms in the market at the rate of output where:
MR = MC for the market.
(Market Revenue=Market Cost Curve)
56. If one firm in an oligopoly market increases its advertising expenditures in an effort to increase market share, the most likely response by its competitors would be to:
Keep the price of their products the same but increase advertising expenditures even if it means reducing profits.
57. In oligopoly markets sticky prices are the result of:
The uncertainty of competitor responses to price changes.
58. As long as the marginal cost curve continues to intersect the gap in the marginal revenue curve for a kinked-demand curve, the oligopolist will:
Maintain both production rates and prices.
61. A gap in the marginal revenue curve results from:
A kinked demand curve
63. If the marginal cost curve shifts but remains in the gap in the marginal revenue curve, the result will be:
No change in price or output.
65. Suppose costs for all oligopolists in an industry increase to such an extent that the marginal cost curve shifts out of the gap in the marginal revenue curve. Which of the following is the most probable response of oligopolists?
One of the oligopolists would raise prices and the other firms would follow.
66. One reason why prices tend to be less flexible in oligopoly markets than in other market structures is because:
According to the kinked-demand model, a firm will tend to become worse off if it increases or decreases its prices.
68. In an effort to maximize profits, oligopolists will participate in:
Price leadership. B) Price fixing. C) Cartels.
69. The pricing strategy in which there is an explicit agreement among producers regarding price is called:
Price fixing
71. When oligopolists coordinate price, the market demand curve will be:
Strongly inelastic like a monopolist’s.
72. Oligopolists have an incentive to coordinate price because with coordination:
Each firm faces a relatively inelastic demand for its product.
73. Price leadership is a method by which oligopolies can:
Increase prices without explicit price fixing
74. Price leadership:
Helps achieve monopoly profit for the market.
76. The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called:
Price leadership
78. Open and explicit agreements concerning pricing and output shares transform an oligopoly into a:
79. Temporary price reductions intended to drive out competition are referred to as:
Predatory pricing
80. Which of the following may characterize oligopolistic behavior?
A) Price leadership. B) Price fixing. C) Predatory pricing
81. Which of the following functions as a barrier to entry into an oligopoly market?
A) Patents. B) The expense involved in nonprice competition. C) Control of distribution outlets.
83. For an oligopoly, above-normal profits cannot be maintained in the long run unless:
Barriers to entry exist
84. In the long run, an oligopolist is most likely to:
Experience economic profits because of barriers to entry.
85. The most common form of nonprice competition is:
88. Market power leads to market failure when it results in:
Decreased market outpuT; Increased market prices; Long lasting, above normal economic profits.
89. Collusion is undesirable and illegal because:
Resources are misallocated and suboptimal outputs are produced.
Oligopolistic behavior includes:
Tacit collusion
the property of a good whereby a person can be prevented from using it
rivalry in consumption
the property of a good whereby one person’s use diminishes other people’s use
private goods
goods that are both excludable and rival in consumption
public goods
goods that are neither excludable nor rival in consumption
common resources
goods that are rival in consumption but not excludable
club goods
goods that are excludable but not rival in consumption
free rider
a person who receives the benefit of a good but avoids paying for it
cost-benefit analysis
a study that compares the costs and benefits to society of providing a public good
Tragedy of the Commons
a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
A market with only one seller.
Limit pricing
Setting the price lower than the monopoly price to keep competitors out.
Market power
Ability to affect the price.
Price ceiling
Maximum legal price that can be charged for a product or service.
Price discrimination
Charging different prices to different customers.
Reservation price
Maximum price a buyer is willing to pay.
Game theory
The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions. Firms are mutually interdependent.
Nash equilibrium
A concept for solving games that states that each player has a set of strategies, and these strategies should be that no player can improve her utility by unilaterally changing her own strategy.
A market with only a few sellers.
A market with only two sellers.
Sticky prices
Prices that are resistant to change.
Monopolistic competition
A market structure with many producers selling products that are not identical but are close substitutes and with no barriers to entry.
a firm that is the sole seller of a product without close substitutes
*the firm = the industry
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
*occurs when the ATC of a single firm falls over such an extended range of output that 1 firm can produce the TOTAL QUANTITY sold at a LOWER ATC than could 2 firms
*Examples: electricity, gas, water
*Size of market – determines whether industry is a natural monopoly
1) small market – natural monopoly
2) large market – competitive market
price discrimination
business practice of selling the same good at different prices to different customers
*there are NO cost differences that account for the price differences
Examples: Movie Tickets, Airline Prices, Discount Coupons, Financial Aid
*who pays low/high – observe & separate customers based on willingness to pay
price searcher
a firm that either sells a significant share of the market and/or sells a product differentiated from other firms in the industry
*marginal revenue < price
5 Reasons Monopoly Arises
*fundamental cause = barriers to entry
1) control over an input/resource
2) ownership of a patent
3) legal monopoly (Post Office, Ex: 1st Class)
4) natural monopoly
5) collusive monopoly – independent firms grouped together to gain the advantage of monopoly(cartel, Ex: OPEC)
Marginal Revenue (Monopoly)
*monopoly marginal revenue is always LESS THAN the price of its good (MR < Price)
Total Revenue (Monopoly)
*Effects on TR when a monopoly increases the amount it sells
*Output effect = more output is old, so Quantity is higher, which INCREASES TR
*Price effect = price falls, so price is lower, which DECREASES TR
Profit Maximization (Monopoly)
monopoly profit maximization quantity output is determined by the intersection of the marginal revenue curve and the marginal-cost curve
Price > MR = MC
Profit = (P – ATC)*Q
an agreement among firms in a market about quantities to produce or prices to charge.
prisoners dilemma
a particular “game” between 2 captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players.
sell two things for a single price.