2. Market Structure and Performance

Question 1

What are the two dimensions of any market?

Answer 1

Product market definition

Geographic market definition

Question 2

Describe the SSNIP test

Answer 2

Small but significant non- transitory increase in price. Start with a narrow market definition, would a hypothetical monopolist benefit from a small price increase? If no include the closest substitute and repeat. If yes this collection of products in the area is the market

Question 3

What is the most commonly used characteristic of market structure?

Answer 3

Seller concentration

Question 4

Seller concentration

Answer 4

It reflects the implications of structure on nature of competition in a relatively simple numericsl indicator. It illustrates both nunber of firms and size distribution

Question 5

Concentration curve

Answer 5

Plots the cumulative market share of an industry starting with the largest

Question 6

CRm

Answer 6

A figure allowing for comparison of the market share of the largest m number of firms in a market

Question 7

Advantages of CRm

Answer 7

It only uses the data of the largest firns so this may be practical

Question 8

Disadvantages of CRm

Answer 8

• it only uses data of large firms
• a merger doesnt necessarily increase CRm
• doesnt take into account size distribution
• result might depend on m chosen

Question 9

Herfindahl- Hirschman index

Answer 9

H is the value of the sum of the squares of each firms market share

Question 10

What does H=1 mean?

Answer 10

There is a monopoly

Question 11

Limitations to concentration measures

Answer 11

• market definitions might be questionable
• vertical relationships not reflected
• seller concentration is only one characteristic of structure, doesnt consider entry and exit

Question 12

Lerner index

Answer 12

L=(P-MC)/P

The larger the index the greater the market power

Question 13

What does a lerner index of 0 mean?

Answer 13

There is perfect competition

Question 14

What is the inverse elasticity rule?

Answer 14

1/elasticity= (P-MC)/P

Question 15

Limitations to lerner index

Answer 15

• in reality firms dont have the same cost structure
• requires an estimate of firms MC
• despite this lerner index remains important to measure market power

Question 16

Most important characteristics of structure

Answer 16

• number of firms
• barriers to entry
• degree of product differentiation

Question 17

Assumptions of perfect competition

Answer 17

• lots of firms
• no barriers to entry or exit
• homogenous product
• no informational problems
• firms are price takers
• firms can sell at any q
• firms market share is so small that varying it doesnt affect total output or price
• firms produce where P=MC

Question 18

Characteristics of monopoly

Answer 18

• one seller
• strong barriers
• unique product
• maybe information problems and transportation costs

Question 19

Why does a monopolist produce on the elastic part of the demand curve?

Answer 19

If they were producing on the inelastic part then increasing price would increase revenue so they wouldnt produce here

Question 20

When does allocative efficiency occur?

Answer 20

When P=MC

Question 21

What is productive efficiency?

Answer 21

Given factors of input, the max output level is produced and costs are minimised

Question 22

Characteristics of monopolistic competition

Answer 22

• lots of buyers and sellers
• no barriers
• similar products
• maybe info problems, transportation costs

Question 23

What is the demand function for a monopolistic firm like?

Answer 23

Downward sloping but more elastic than a monopolist’s

Question 24

Why cant monopolistic firms make LR profit?

Answer 24

In SR they make abnormal profits. New firms enter which shifts each firm’s individual demand curve left, reducing their AR until AR=AC when MC=MR so firms make zero profits

Question 25

Characteristics of dominant firm and competitive fringe

Answer 25

• a dominant price setter
• a fringe of small price taking firms
• dominance usually justified through cost advantage

Question 26

Coase conjecture

Answer 26

Durability might greatly reduce, if not eliminate, the ability of the monopolist to set prices above the efficient level.