Chapter 5 - competitors and competition

Question 1

competitors

Answer 1

competitors are firms whose strategic choices directly affect one another

Question 2

SSNIP

Answer 2

small but significant non transitory increase in price

Question 3

SSNIP criterion

Answer 3

according to DOJ, a market is well defined and all of the competitors within are identified, if a merge among them would lead to a small (+5%) but significant non transitory (+ 1 year) increase in price

Question 4

substitutes

Answer 4

two products x and y are substitutes if, when the price of x increases and the price of y stays the same, purchases of x go down and purchases of y go up

Question 5

products tend to be close substitutes when three conditions hold

Answer 5

• same/similar product performance characteristics (what it does for consumers)
• same/similar occasions for use (when, where and how it is used)
• sold in the same geographic market

Question 6

products are sold in different geographical markets if

Answer 6

• sold in different locations
• costly to transport the goods
• costly for consumers to travel to buy the goods

Question 7

empirical approaches to competitor identification

Answer 7

• cross-price elasticity of demand
• regression analysis
• diversion ratio analysis
• ad hoc product market definition

Question 8

degree to which products substitute is measured by the

Answer 8

cross-price elasticity of demand

Question 9

cross-price elasticity of demand

Answer 9

the percentage change in demand for good y that results in a 1% change in the price of good x

Question 10

regression analysis

Answer 10

uses statistical algorithms to isolate the effects of price changes on purchase pattern, while holding constant other demand-side factors

Question 11

diversion ratio analysis

Answer 11

another way to identify competitors

Question 12

ad hoc product market definition

Answer 12

SIC identifies products/services by a seven-digit identifier, with each digit representing a finer degree of classification

Question 13

geographic competitor identification

Answer 13

• flow analysis

- survey customers

Question 14

flow analysis

Answer 14

examining data on consumer travel patterns

Question 15

catchment area

Answer 15

contiguous area from which firm draws most of its customers

Question 16

measuring market structure

Answer 16

• N-firm concentration ratio (CR)
• Herfindahl index
• number-equivalent of firms

Question 17

market structure

Answer 17

the number and distribution of firms in a market

Question 18

N-firm concentration ratio (CR)

Answer 18

gives the combined market share of the N largest firms in the market, usually based on sales revenue

(invariant to changes in the sizes of the largest firms)

Question 19

herfindahl index

Answer 19

the sum of the squared market shares of all the firms in the market

(sufficient to restrict to firms with market shares of .01 or larger)

Question 20

number-equivalent of firms

Answer 20

the reciprocal of the herfindahl index. thus, a market whose herfindahl index = 0.2 has a numbers equivalent of 5

Question 21

Perfect competition

Answer 21

Range of herfindahls:
usually below .2

Intensity of price competition:
fierce

Question 22

monopolistic competition

Answer 22

Range of herfindahls:
usually below .2

Intensity of price competition:
May be fierce or light, depending on product differentiation

Question 23

oligopoly

Answer 23

Range of herfindahls:
.2 to .6

Intensity of price competition:
May be fierce or light, depending on interfirm rivalry

Question 24

monopoly

Answer 24

Range of herfindahls:
.6 and above

Intensity of price competition:
usually light, unless threatened by entry

Question 25

perfect competition

Answer 25

• many sellers

- homogeneous products

Question 26

monopoly power

Answer 26

the ability to act in an unconstrained way (e.g., increase price/reduce quality)

Question 27

monopolist

Answer 27

firm that faces little or no competition in its output market

Question 28

monopsonist

Answer 28

firm that faces little or no competition in its input markets

Question 29

cartel

Answer 29

several firms acting in concert to mimic behavior of a monopolist

Question 30

monopolistic competition

Answer 30

• many sellers, its actions will not materially affect others
• each seller offers a differentiated product. there is some price at which consumers prefer to purchase a particular product

Question 31

vertical differentiation

Answer 31

a product that is unambiguously better/worse than competing products, all consumers will value this enhancement, although willing to pay different prices

Question 32

horizontal differentiation

Answer 32

a product that only some consumers prefer over competing products

Question 33

idiosyncratic preferences

Answer 33

if tastes differ markedly from one person to the next

Question 34

search costs

Answer 34

how easy/hard it is for consumers to learn about alternatives

Question 35

oligopoly

Answer 35

a market where actions of individual firms materially affect the overall market

Question 36

cournot quantity competition

Answer 36

• only 2 firms
• produce identical goods
• forced to charge the same prices –> how much to produce each?

Question 37

cournot equilibrium

Answer 37

a pair of outputs Q1* and Q2, a market price P that satisfy three conditions:

C1. P* is the price that clears the market given the firms’ production levels

C2. Q1* is firm 1’s profit-max. output given that it guesses firm 2 will choose Q2*.

C3. Q2* is firm 2’s profit-max. output given that it guesses firm 1 will choose Q1*.

Question 38

reaction function

Answer 38

calculate each firm’s profits and solve for the value of Q that maximizes its profits to find the market equilibrium choices of Q1 and Q2

Question 39

revenue destruction effect

Answer 39

when one firm expands its output, it reduces the market price –> reduces revenues from all customers who would have purchased the product at a higher price

Question 40

Bertrand price competition

Answer 40

each firm selects a price to maximize its own profits, given the price it believes the other firm will select

only possible equilibrium: P1 = P2 = MC