Economics for Managers Chapter 8

Question 1

Market Power

Answer 1

The ability of a firm to influence the prices of its products and develop other competitive strategies that enable it to earn large profits over longer periods of time.

Question 2

Monopoly

Answer 2

A market structure characterized by a single firm producing a product with no close substitutes.

Question 3

Price-setter

Answer 3

A firm in imperfect competition that faces a downward sloping demand curve and must set the profit-maximizing price to charge for its product.

Question 4

Barriers to Entry

Answer 4

The structural, legal, or regulatory characteristics of a firm and its market that keep other firms from producing the same or similar products at the same costs. (Economies of scale, barriers created by government, input barriers, brand loyalties, consumer lock-in and switching costs, network externalities).

Question 5

Lock-in and Switching Costs

Answer 5

A form of market power for a firm in which consumers become locked into purchasing certain types or brands of products because they would incur substantial costs if they switched to other products.

Question 6

Network Externalities

Answer 6

A barrier to entry that exists because the value of a product to consumers depends on the number of consumers using the product.

Question 7

Lerner Index

Answer 7

A measure of market power that focuses on the difference between a firm’s product price and its marginal cost of production. L=(P-MC)/P

Question 8

Concentration Ratios

Answer 8

A measure of market power that focuses on the share of the market held by the X largest firms, where X typically equals four, six, or eight.

Question 9

Herfindahl-Hirschman Index (HHI)

Answer 9

A measure of market power that is defined as the sum of the squares of the market share of each firm in an industry.

Question 10

Antitrust Laws

Answer 10

Legislation, beginning with the Sherman Act of 1890, that attempts to limit the market power of firms and to regulate how firms use their market power to compete with each other.

Question 11

Monopolistic Competition

Answer 11

A market structure characterized by a large number of small firms that have some market power from producing differentiated products. This market power can be competed away over time.