Mod 4 - Topic 2 - Monopolistic Competition & Oligopoly

Question 1

What is imperfect competition?

Answer 1

• Some market power but not absolute
• Firms have ability to set prices within limits of constraints
• Mutual interdependence - interaction among competitors when making decisions

Question 2

What occurs if above normal profits are earned in monopolistic competition?

Answer 2

• New comers will enter the market
• Market supply curve shifts out and to the right
• Firm’s demand curve shifts down and to the left
• Ultimately in the long run, firms will earn only a normal profit.

Question 3

What is an oligopoly?

Answer 3

It is a market dominated by a relatively small number of large firms.

Question 4

What is the Herfindalal-Hirshman (HH) index?

Answer 4

It measures market concentration, maximum HH occurs at 10,000. Un-concentrated markets have HH

Question 5

What is mutual interdependence?

Answer 5

Relatively few sellers, mean that there is a situation where each is carefully watching the others as it sets price

Question 6

What is the implication of mutual interdependence?

Answer 6

There is a kinked demand curve model. The basic assumption is that competitors will follow a price decrease but will not make a change in relation to a price increase

Question 7

What is a price leader?

Answer 7

Where one firm in the industry takes the lead in changing prices and assumes that other firms will follow a price decrease, but will not go even lower to avoid a price war.

Question 8

What is a non-price leader?

Answer 8

A firm that leads with the differentiation of products on attributes other than price.

Question 9

What is non-price competition?

Answer 9

Any effort made by firms in order to change the demand for their product (other than price)

Question 10

What are the non-price determinants of demand (6) ?

Answer 10

• Tastes & preferences
• Income
• prices of substitutes and compliments
• number of buyers
• future expectations of buyers
• financing terms

Question 11

What are four examples of non-price influence?

Answer 11

• advertising & promotion
• location & distribution
• market segmentation
• loyalty programs
• product extensions & new products
• special customer services
• product lock in or tie in
• pre-emptive new product announcements

Question 12

What is the economic concept of ‘equalising at the margin’?

Answer 12

Concept which managers can use to help make an optimal decision, eg MR=MC is an example of equalising at the margin

Question 13

What is strategy?

Answer 13

The means by which an organisation uses its scarce resources to relate to the competitive environment in a manner that is expected to achieve superior business performance over the long run.

Question 14

Strategy is more important for what type of market - perfect or imperfect ?

Answer 14

Imperfectly competitive markets

Question 15

What is managerial economics?

Answer 15

The use of economic analysis to make business decisions involving the best use of an organisations scarce resources.

Question 16

What is industrial organisation?

Answer 16

It studies the way that firms and markets are organised and how this organisation affects the economy from the viewpoint of social welfare.

Question 17

What are the two key approaches to industrial organisation?

Answer 17

1) Structure -conduct-performance (SCP) and

2) ‘New’ Theory of Industrial Organisation

Question 18

What is the Structure-Conduct-Performance approach to Industrial Organisation?

Answer 18

It says structure affects conduct which then affects performance. The structure is the number of firms, conditions of entry, product differentiation. Conduct is the pricing strategy, advertising, legal tactics and product development. Performance is the maximisation of society’s welfare.

Question 19

Why is the Structure-Conduct-Performance approach criticised?

Answer 19

Because of the weak empirical evidence of the relationship between observed concentration and profit levels.

Question 20

What is the ‘New’ Theory of Industrial Organisation?

Answer 20

This says there is no necessary connection between observed industry structure and performance that uniquely leads to maximum social welfare.

Question 21

What is the Theory of Contestable Markets?

Answer 21

This indicates that performance by firms is ultimately influenced not by actual competition but by the threat of potential competition

Question 22

What is Porter’s Five Forces Model?

Answer 22

It illustrates the various factors that affect the ability of any firm in the industry to earn a profit.

Question 23

What are the four contributors under Porter’s Competitive Framework to cause Intra-Market Rivalry?

Answer 23

1. Potential entrants (threat of new entrants)
2. Customers (bargaining power of buyers)
3. substitute markets (threat of substitute products or services)
4. Suppliers (bargaining power of suppliers

Question 24

What are Porter’s generic strategies for earning above-average returns on investment (2)?

Answer 24

1. differentiation approach

2. cost leadership approach

Question 25

What is Porter’s differentiation approach?

Answer 25

For a monopoly or monopolistically competitive market - following the MR=MC rule, firm sets a price on the demand curve that is above AC.

Question 26

What is Porter’s cost leadership approach?

Answer 26

For perfect competition - maintain cost structure low enough so when P=MC there is a positive difference between P & AC.