Chapter 10 - Market Structure

Question 1

market concentration

Answer 1

n = the number of firms

the lower the n, the more concentrated the industry is

Question 2

Coefficient Cm

Answer 2

the sum of the market shares of the largest m firms

alternative to counting the number of firms

Question 3

Herfindahl index

Answer 3

provides better measure of market concentration

difficult to compute: requires knowledge of the market share of all firms in the industry

Question 4

using the price cost margin to compute market power

Answer 4

[p - MC] or [(p - MC)/p] or [(p - MC)/MC]

fine if all firms have the same costs

Question 5

Lerner index

Answer 5

weighted average of each firm’s margin, with weights given by the firm’s market share

Question 6

free-entry equilibrium

Answer 6

is characterized by a set of active firms such that

1) no active firm wishes to leave the market and
2) no inactive firm wishes to enter the market

Question 7

due to increased price competition, the equilibrium number of active firms varies … than proportionally with respect to market size

Answer 7

less

Question 8

increasing returns to scale

Answer 8

a firm in the left-hand side of the U-shaped average cost curve, that is a firm with decreasing average cost is said to operate under increasing returns to scale

Question 9

Minimum efficient scale

Answer 9

way to measure the relation between increasing returns to scale and market structure
the minimum scale at which a firm’ average cost is, say within 10% of the minimum
when the unit cost is at its lowest possible point while the company is producing its goods effectively.
MES allows a company to compete more effectively since it can produce its goods efficiently at the minimum cost per unit

Question 10

If both market size and MES increase by the same amount, then the equilibrium number of firms …

Answer 10

remain constant

Question 11

coefficient of scale economies

Answer 11

alternative way of measuring increasing returns to scale economies
defined as the ratio of average cost over marginal cost: P = AC/MC

Question 12

economies of scale

Answer 12

if P = AC/MC > 1

Question 13

diseconomies of scale

Answer 13

if P = AC/MC < 1

Question 14

concentration is generally greater the greater the minimum efficient scale (or the greater the degree of scale economies)

Question 15

both the minimum efficient scale and economies of scale are instances of barriers to entry. Thus, concentration is greater the … the barriers to entry are

Answer 15

higher

Question 16

first-mover advantage

Answer 16

service or product that gains advantage by being the first to market

Question 17

sustainable competitive advantage

Answer 17

company assets that are difficult to duplicate or exceed; and provide a superior or favorable long term position over competitors.
some firms managed to transform a first-mover advantage into a sustainable competitive advantage

Question 18

agglomeration economies

Answer 18

benefits that come when firms and people locate near one another together in cities and industrial clusters (Silicon valley)

Question 19

why does history matter?

Answer 19

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

Question 20

In order to enter a big industry with the already well-established firms, a new entrant would need to pay a much higher entry cost than an entrant into a smaller industry. When advertising is an important part of a firm’s strategy, …

Answer 20

entry costs are endogenous

Question 21

if a lottery is used, then the only entry cost F is an

Answer 21

exogenous cost

Question 22

if the license is auctioned, then the total entry costs are given by F+B (the bid for the license) an

Answer 22

endogenous cost

Question 23

if entry costs are endogenous, then the number of firms is … sensitive to changes in market size

Answer 23

less

Question 24

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

Answer 24

the intensity of competition has an effect on market structure: if competition is close to Bertrand, then the tendency is for the number of competitors to decrease; if competition is close to monopoly, then the tendency is for the number of competitors to increase

Question 25

Lerner index = H / -ϵ

Answer 25

ϵ is the industry price elasticity of demand and H is Herfindahl index
this formula generalizes the idea that the greater concentration is (as measured by H), the greater the degree of market power (as measured by L)

Question 26

(SCP paradigm)

Structure -> Conduct

Answer 26

example: small number of firms and similar firms facilitate collusion

Question 27

(SCP paradigm)

Conduct -> Performance

Answer 27

the more competitively firms behave, the lower the degree of market power and the greater the allocative efficiency

Question 28

(SCP paradigm)

Structure-Performance hypothesis

Answer 28

the more concentrated the industry is, the greater the degree of market power (positive relation)

Question 29

collusion hypothesis

Answer 29

concentration implies market power through increased collusion between firms

Question 30

efficiency hypothesis

Answer 30

the increase in market power is mainly associated in productive efficiency (alternative interpretation for the positive relation between structure and performance)

Question 31

excessive entry

Answer 31

free entry can result in excessive entry

Question 32

business stealing effect

Answer 32

the profits earned by the entrant are stolen from the incumbent firms.
a transfer between firms which does not correspond to a benefit to society (although obviously it benefits entrants)
Area A

Question 33

product differentiation and free entry

Answer 33

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