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Econ 251 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Four-Firm Concentration Ratio

A

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

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2
Q

Herfindahl-Hirschman Index

A

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

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3
Q

3 Characteristics of Perfect Competition

A

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

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4
Q

Examples of Homogenous Products

A
  • eggs
  • soda
  • cigarettes
  • gasoline
  • aspirin
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5
Q

PC: Negative Example of Easy Entry and Exit

A

automobile industry

-having to invest 2 billion in a new plant

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6
Q

3 Characteristics of Monopolistic Competition

A

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

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7
Q

Perfect Example of Monopolistic Competition

A

fast food

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8
Q

3 Characteristics of Characteristics of Oligopoly

A

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

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9
Q

Examples of Oligopoly Products

A
  • Tobacco
  • Beer
  • Automobiles
  • Cellphone Providers
  • Airlines
  • Cable/Internet
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10
Q

Problems with Industrial Concentration

A
  • geographic
  • no foreign competition recognized
  • a lot of concentration depends on how the market is defined
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11
Q

DOJ HHI: Highly Concentrated

A

> 2500 (pre-merger)

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12
Q

DOJ HHI: Highly Concentrated PG

A

50 or Less

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13
Q

DOJ HHI:Moderately Concentrated

A

1500-2500

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14
Q

DOJ HHI: Moderately Concentrated PG

A

100 or less

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15
Q

DOJ HHI: Low Concentration

A

1500<

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16
Q

DOJ HHI: Low Concentration PG

A

undefined

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17
Q

Lerner Index Main Formula

A

p

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18
Q

Lerner Index Marginal Cost Formula

A

(1-L)P

19
Q

Lerner Index Price Formula

A

1
——————MC
1-L

20
Q

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

A

is equal to zero

21
Q

The higher the Lerner Index

A

the greater the firm’s markup

22
Q

Problems with Concentration: Global Markets

A

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

23
Q

Problems with Concentration: National,Regional,and Local Markets

A

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

24
Q

Problems with Concentration: Industry Definitions and Product Classes

A

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

25
Q

Examples of Monopolistic Competition

A
  • restaurants

- especially the fast food industry

26
Q

More on Monopolistic Competition

A
  • brand loyalty….want them to think we are better
  • considerable amount spent on advertising
  • some control over price
27
Q

More on Perfection Competition

A
  • no control over price

- same technology and similar products….so no real advantage

28
Q

Discuss oligopoly?

A

……………

29
Q

Vertical Merger

A

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

30
Q

Horizontal Integration

A

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

31
Q

Conglomerate Merger

A

involves the integration of different product lines into a single firm

32
Q

Advantages of Horizontal Integration

A
  • cost savings

- market power

33
Q

Benefits of a Conglomerate

A
  • 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
34
Q

More Examples of Oligopoly

A

-batteries
-light bulbs
-cereal
-cookies
crackers

35
Q

Lerner Index

A 
A measure of the
difference between
price and marginal
cost as a fraction of
the product’s price.
36
Q

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

A

close to zero

37
Q

Why do firms do horizontal integration?

A

1) to enjoy cost saving economies of scale

2) to enhance their market power

38
Q

Why might a firm engage in a conglomerate merger?!

A

1) having one superior CEO

2) improved cash flows for cyclical demands

39
Q

The difference between a 0 and 10000 HHI?

A

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

40
Q

Contrast horizontal vs vertical mergers

A

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.

41
Q

Example of Horizontal Merger

A

if two computer firms merged into a single firm,

horizontal integration would occur.

42
Q

Example of A Vertical Merger

A

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

43
Q

Contrast horizontal and conglomerate mergers.

A

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.

Econ 251 (14 decks)

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