Part 4

Question 1

How to identify competition?

Answer 1

1) Cross PED; positive – substitutes, negative – complements
2) Diversion Analysis; calculating market share of consumer’s second choice
3) Standard Industrial Classification Codes
4) Geographical Identification; flow analysis

Question 2

The Austrian School; Schumpeter

Answer 2

• Competition driven by innovation

- Innovative firms become monopolists, then others catch up

Question 3

Structure Conduct Performance Model (SCP), Harvard School

Answer 3

• Market structure (concentration) affects conduct (strategy) which affects performance (market power)
• Market structure driven by basic supply, demand, cost functions

Question 4

How to measure concentration?

Answer 4

1) N-firm concentration ratio; combined market share of N largest firms
2) Herfindahl Index; sum of squared market shares

Question 5

Cartels can work, if..

Answer 5

• Enforcement mechanisms
• Producers have little variation in MC
• L.r. profits associated w/ not cheating outweigh s.r. gains of cheating

Question 6

Structural Barriers to Entry:

Answer 6

1. Control of Essential Resources
2. Economies of Scale & Scope
3. Marketing Advantages

Question 7

Strategic Barriers to Entry:

Answer 7

1. Limit Pricing; incumbent sets price to discourage entrants
2. Predatory Pricing; setting pries below s.r. MC expecting to recoup losses via monopoly profits after
3. Expanding Capacity; incumbent threatens to lower price if entry occurs
4. Strategic Bundling; combining goods/services to sell them for less than separate prices

Question 8

Barriers to Exit

Answer 8

1. Sunk costs
2. Relation-specific assets
3. Government regulations

Question 9

How to measure conduct?

Answer 9

1) Pricing of products
2) Investments
3) M&A’s

Question 10

How to measure performance?

Answer 10

1) Price-cost margin; Lerner’s Index (P-MC/P)
2) Profitability
3) Production Efficiency
4) Innovative Performance

Question 11

Chicago School:

Answer 11

• firm’s choice influence market structure; ‘reverse causation’
• more efficient firms are more profitable and grow large
• firms influence the entry decisions of other firms

Question 12

The Collusion Hypothesis vs the Efficiency Hypothesis

Answer 12

Collusion H – positive relation between concentration & profitability is evidence of collusion (Harvard)

Efficiency H – positive relation between conc. and profitability reflects the natural tendency for efficient firms to be successful (Chicago)

Question 13

Horizontal Differentiation

Answer 13

• Only some consumers prefer the product to others

Question 14

Cournot Competition

Answer 14

The strategic choices of each firm are the amounts they will produce

Question 15

Bertand Competition

Answer 15

firms compete in terms of price of products, not quantity

Question 16

Three Entry Conditions:

Answer 16

1) Blockaded Entry; structural barriers so high that incumbent doesn’t need to act
2) Accommodated Entry
3) Deterred Entry

Question 17

Judo Economics

Answer 17

small firms and potential entrants use the incumbents size to THEIR advantage; when incumbent slashes prices, it hurts its own revenue more than rivals

Question 18

Rent-seeking behaviour

Answer 18

costly activities intended to increase the chances of landing available profits