EC208 Industrial Economics

Question 1

Profit maximisation condition

Answer 1

MR = MC

Question 2

Normal profits condition

Answer 2

P = AC

Question 3

Firm short-run shut down condition

Answer 3

AVC > MC

Question 4

Firm long-run shut down condition

Answer 4

ATC > MC

Question 5

Why Structure -> Conduct -> Performance

Answer 5

Cooperative oligopoly / Collusion

Barriers to entry

Question 6

Bain (1956)’s 3 main barriers to entry

Answer 6

Absolute cost advantages
Product differentiation advantages
Economies of scale

Question 7

All barriers to entry

Answer 7

Absolute cost advantages
Product differentiation advantages
Economies of scale

Switching costs
Network externalities
Legal barriers to entry
Geographic barriers to entry
Control of key inputs

Question 8

Why Structure <- Conduct -> Performance

Answer 8

Noncooperative oligopoly (such as models of entry deterrence)

Demsetz (1973) - profits may not reflect industry structure. If they did, all firms in an industry should have similar levels of profit regardless of firm size

Question 9

Because Demsetz (1973) didn’t like S -> C -> P, what did he suggest instead?

Answer 9

The efficiency hypothesis - profits reflect the greater efficiency of some firms.

S -> C -> P suggests the market structure is the key influencer of profit, which is not what Demsetz (1973) believed.