Chapter 7

Question 1

Four-Firm Concentration Ratio

Answer 1

the fraction of total industry sales generated by the four largest firms in the industry

Question 2

Herfindahl-Hirschman Index

Answer 2

the sum of the squared market shares of firms in a given industry multiplied by 10000

Question 3

3 Characteristics of Perfect Competition

Answer 3

1) large number of very small firms
2) Product is homogenous
3) easy entry and exit

Question 4

Examples of Homogenous Products

Answer 4

• eggs
• soda
• cigarettes
• gasoline
• aspirin

Question 5

PC: Negative Example of Easy Entry and Exit

Answer 5

automobile industry

-having to invest 2 billion in a new plant

Question 6

3 Characteristics of Monopolistic Competition

Answer 6

1) large number of small firms
2) easy entry and exit
3) differentiate product

Question 7

Perfect Example of Monopolistic Competition

Answer 7

fast food

Question 8

3 Characteristics of Characteristics of Oligopoly

Answer 8

1) costly/difficult entry
2) differentiated or homogenous product
3) small number of firms

Question 9

Examples of Oligopoly Products

Answer 9

• Tobacco
• Beer
• Automobiles
• Cellphone Providers
• Airlines
• Cable/Internet

Question 10

Problems with Industrial Concentration

Answer 10

• geographic
• no foreign competition recognized
• a lot of concentration depends on how the market is defined

Question 11

DOJ HHI: Highly Concentrated

Answer 11

> 2500 (pre-merger)

Question 12

DOJ HHI: Highly Concentrated PG

Answer 12

50 or Less

Question 13

DOJ HHI:Moderately Concentrated

Answer 13

1500-2500

Question 14

DOJ HHI: Moderately Concentrated PG

Answer 14

100 or less

Question 15

DOJ HHI: Low Concentration

Answer 15

1500<

Question 16

DOJ HHI: Low Concentration PG

Answer 16

undefined

Question 17

Lerner Index Main Formula

Answer 17

p

Question 18

Lerner Index Marginal Cost Formula

Answer 18

(1-L)P

Question 19

Lerner Index Price Formula

Answer 19

1
——————MC
1-L

Question 20

When the firm sets it price equal to the cost of marginal production the Lerner Index

Answer 20

is equal to zero

Question 21

The higher the Lerner Index

Answer 21

the greater the firm’s markup

Question 22

Problems with Concentration: Global Markets

Answer 22

-this tends to overstate the true level of concentration in industries in which a significant number of foreign producers serve the market

Question 23

Problems with Concentration: National,Regional,and Local Markets

Answer 23

indexes of market structure based on national data tend to understate the degree of concentration when the relevant markets are local

Question 24

Problems with Concentration: Industry Definitions and Product Classes

Answer 24

the definition of product classes used to define an industry also affects indexes

Question 25

Examples of Monopolistic Competition

Answer 25

- restaurants | - especially the fast food industry

Question 26

More on Monopolistic Competition

Answer 26

- brand loyalty....want them to think we are better - considerable amount spent on advertising - some control over price

Question 27

More on Perfection Competition

Answer 27

- no control over price | - same technology and similar products....so no real advantage

Question 28

Discuss oligopoly?

Answer 28

...............

Question 29

Vertical Merger

Answer 29

is the integration of two or more firms that produce components for a single product

Question 30

Horizontal Integration

Answer 30

is the merging of the production of similar products into a single firm

Question 31

Conglomerate Merger

Answer 31

involves the integration of different product lines into a single firm

Question 32

Advantages of Horizontal Integration

Answer 32

- cost savings | - market power

Question 33

Benefits of a Conglomerate

Answer 33

- Revenues derived from one product line can be used to generate working capital for another - one great CEO can exceed the combined efforts of managers of independent firms

Question 34

More Examples of Oligopoly

Answer 34

-batteries -light bulbs -cereal -cookies crackers

Question 35

Lerner Index

Answer 35

``` A measure of the difference between price and marginal cost as a fraction of the product’s price. ```

Question 36

In industries in which firms rigorously compete for consumer sales by attempting to charge the lowest price in the market, the Lerner index is

Answer 36

close to zero

Question 37

Why do firms do horizontal integration?

Answer 37

1) to enjoy cost saving economies of scale | 2) to enhance their market power

Question 38

Why might a firm engage in a conglomerate merger?!

Answer 38

1) having one superior CEO | 2) improved cash flows for cyclical demands

Question 39

The difference between a 0 and 10000 HHI?

Answer 39

0 is numerous infinitesimally small firms and then 10000 is 1 firm

Question 40

Contrast horizontal vs vertical mergers

Answer 40

Horizontal integration involves merging two or more final products into a single firm, whereas vertical integration involves merging two or more phases of production into a single firm.

Question 41

Example of Horizontal Merger

Answer 41

if two computer firms merged into a single firm, | horizontal integration would occur.

Question 42

Example of A Vertical Merger

Answer 42

An example of a vertical merger is a car manufacturer purchasing a tire company

Question 43

Contrast horizontal and conglomerate mergers.

Answer 43

A conglomerate merger is similar to a horizontal merger in that it involves merging final products into a single firm. It differs from a horizontal merger because the final products are not related.