Chapter 10

Question 1

Ways to measure market concentration (3)

Answer 1

1/n. In practice not really used as firms have different market shares

Cm = Σsi –> sum of market shares of the largest m firms

Herfindahl index: H = Σ si^2. Better measure than Cm, but harder to compute as we need all of the market shares (0 < index < 10.000). Index decreases with fewer firms and bigger difference in average market shares.

Question 2

Measuring market power

Answer 2

Lerner Index: weighted average of each firm’s margin with weights given by the firm’s market share: market share * market power

Question 3

Cournet equilibrium, firm’s profit

Answer 3

Profit (n) = S(((a-c)/(n+1))^2) - F

Question 4

Free-entry equilibrium

Answer 4

Characterized by a set of active firms such that no firms wants to enter or exit the market

Profit (current n) => 0 en Profit (current n + 1) <=0

Equilibrium value of n = (a - c) * srqt(S/F) - 1 , round down

Question 5

Market size and concentration

Answer 5

Relationship between market size (S) and n equilibrium is not proportional. –> approximate quadratic.

Due to increased competition, the equilibrium number of firms varies less than proportional with respect to market size.

Question 6

Minimum efficient scale (MES)

Answer 6

The lowest point where the plant can produce such that its long run average costs are minimized. It is also the point at which the firm can achieve necessary economies of scale for it to compete effectively within the market.

MES = F / (c’ - c)

Question 7

Coefficient of scale economies

Answer 7

p = AC / MC = ((F/q)+c) / c = 1 + F / cq

if p > economies of scale
if p < diseconomies of scale

Greater f > greater degree of economies of scale

Question 8

MES and economies of scale

Answer 8

Barriers to entry

Concentration is generally greater the greater the minimum efficient scale (MES) and the greater the degree of economies of scale

Question 9

Assumptions model of industry concentration

Answer 9

All firms have access to the same unique available technology
Firms have perfect information
Entry process itself is well coordinated
Firms make their entry decisions sequentially

Question 10

Maintaining the advantage even when patent expire

Answer 10

Moving down the learning curve, transforming a first-mover advantage into a sustainable competitive advantage

Question 11

History and market structure

Answer 11

Particular historical details of the evolution of an industry may in some cases determine the long-run market structure in ways that go beyond the simple technological determinants.

Question 12

Endogenous entry costs

Answer 12

Equilibrium of entrant: equilibrium n = S/F

If entry costs are endogenous, then the number of firms is less sensitive to changes in market size.

When endogenous entry costs are important, the relation between market size and the number of firms if flatter than when entry costs are exogenous

Question 13

Price regulation and market structure

Answer 13

equilibrium n = (1/(E+F))* (p-c) * D(P)

The more intense market competition is the lower the number of equilibrium firms

Question 14

Structure-Conduct-Performance paradigm

Answer 14

Propounds that there is a casual relationship between structure, conduct, and performance: structure influences conduct; and both structure and conduct influence performance

1. Several reasons why structure influences conduct are discussed in previous chapters
2. The more competitively firms behave, the lower the degree of market power and the greater allocative efficiency.
3. L = H / - elasticity, exemplifies that structure influences performance. The more concentrated the industry is the greater the degree of market power.

Question 15

Structure-performance hypothesis

Answer 15

Hypothesis that there is a positive relationship between concentration and market power

Question 16

Collusion hypothesis

Answer 16

Concentration implies market power through increased collusion between firms. If this is the case, then policy makers should be concerend with anything that increases industry concentration.

Question 17

Efficiency hypothesis

Answer 17

An alternative interpretation for the positive relation between structure and performance. The policy implications are nearly the opposite of the collusion hypothesis.

An increase in power is mainly associated with an increase in product efficiency.

Question 18

Business stealing effect

Answer 18

A transfer between firms which does not correspond to a benefit to society

Question 19

Product differentiation, free entry, and efficiency

Answer 19

If product differentiation is very important or if competition is very fierce, then free entry implies insufficient entry from a social point of view. Conversely, if product differentiation is unimportant and competition is soft then the business-stealing effect dominates, whereby the free-entry equilibrium entails excessive entry.

Question 20

Firm heterogeneity, free entry and efficiency

Answer 20

Firm entry and exit, as well as the reallocation of capital among incumbents, are important components of industry productivity growth