Market Power and Concentration Flashcards
In the cournot model for a case of an oligopoly with more than two firms, what does each firms profit depend on?
the total output produced by all firms, irrespective of individual firms’ outputs.
Why is perfect competition justified as a good reference point for markets where there are many firms
The Cournot model converges to perfect competition as the number of firms goes to infinity
True or false:
Under the cournot model in a duopoly, the equilibrium output per firm decreases as the number of firms increases, and total output increases with more firms, eventually converging to the level seen in perfect competition.
True
market performance under oligopoly lies ____ the extremes of perfect competition and monopoly
between
Do models like cournot describe dynamic processes that lead from one equilibrium to another?
No they are static and eventually converge to the Nash equilibrium over time
The price cost margin (P - MC) can be used to measure __________ in symmetric markets
Market power
Does it take a large number of identical firms for the performance of the cournot model to be very close to perfect competition?
No
An inverse of the number of firms can be used to measure ________ in symmetric markets
market concentration
In asymmetric firms (more generally), market power can be measured by ________
The Lerner index
“The weighted average of each firms margin, with weights given by the firms market shares” is the definition for ________
The Lerner index
What is the most common index to measure market concentration?
Coeffecient Cm, where the sum of the market shares of the largest m firms is calculated (etc C5 ratio)
What does the value of C4 vary between?
0 (minimum concentration) and 1 (maximum concentration aka monopoly)
What does SCP stand for?
Structure-conduct-performance paradigm. Where structure = how concentrated, conduct = the behaviour of its firm, performance = market power, allocative efficiency etc
Apart from the Cm index, how can market concentration be measured?
The Herfindahl index (HHI)
What does the value of HHI vary between?
0 and 1 but usually is multiplied by 10,000 so 0 and 10,000
Why is the HHI harder to compute than the C4 measure?
Knowledge of the market shares for all firms in the industry is required, not just 4
The greater the market concentration (H) the ____ the degree of market power (L)
greater
Consider two markets with identical demands. In one market, there are two firms with identical market shares. In the other market, there is one firm with a 70% market share and two small firms with 15% each. Assuming that both markets are in a Cournot equilibrium, where is market power the greatest?
whichever market has the greatest concentration, as measured by the Herfindahl index. In this case even though the second market has more firms (n is greater), the disparity in their sizes (i.e., market shares) leads to a higher concentration and thus more market power.
What does allocative efficiency mean?
resources are distributed in a way that maximises the net benefit to society.
How do structure, conduct and performance relate
structure influences conduct, both structure and conduct influence performance
Explain the relationship between conduct and performance
the more competitively firms behave the lower the degree of market power and the greater the allocative efficiency
Explain the relationship between structure and performance
A more concentrated industry, where a few firms hold significant market share, tends to exhibit greater market power due to less competitive pressure.
The relation between noncompetitive behaviour and market power (hence concentration) is a) positive or b) negative
a) Positive