Deck 11: Market Power,collusion,and Oligopoly

Question 1

Consumers will be better off when the government imposes minimum quality standards.

Answer 1

False

Question 2

Social welfare would be increased if a monopolistically competitive industry were replaced with a competitive industry.

Answer 2

False

Question 3

The Stigler and Friedland study shows that regulation always has significant effects on price,although those effects may be positive or negative.

Answer 3

False

Question 4

Social welfare consequences are ambiguous when two or more manufacturers merge to take advantage of economies of scale.

Question 5

The Peltzman study shows consumers overall have benefited from the requirement that drug manufacturers prove the safety and effectiveness of their products.

Question 6

A buy-out is more likely to delay a rival's reemergence than is predatory pricing.

Question 7

A merger between Gateway,a manufacturer of computers,and Logitech,a manufacturer of components for computers,would be an example of horizontal integration.

Question 8

Economic analysis suggests that resale price maintenance is primarily used by manufacturers to keep prices artificially high.

Question 9

Firms' total output is higher in the Cournot oligopoly model than in the Bertrand oligopoly model.

Question 10

The Axelrod study shows that "Tit-for-Tat" is a successful strategy for playing a repeated Prisoners' Dilemma game.

Question 11

The Robinson-Patman Act was designed to stop resale price maintenance.

Question 12

In a contestable market with room for many firms,industry output will be the same as in a successful cartel.

Question 13

In both competition and monopolistic competition,free entry and exit guarantee that the industry's output is produced at the least possible cost.

Question 14

It is possible for a firm engaging in predatory pricing to make a profit on the good even thought the price is set artificially low.

Question 15

Contestable market conditions will cause a natural monopoly to produce the competitive quantity.

Question 16

The Prisoners' Dilemma game is another situation where the Invisible Hand Theorem is true.

Question 17

A firm has the incentive to cheat on a cartel agreement only when it fears that other cartel members will also cheat.

Question 18

The Cournot oligopoly model is based on the assumption that firms treat their rivals' output as fixed and given.

Question 19

The Sherman Act of 1890 and the Clayton Act of 1914 gave courts the power to prevent mergers that reduce competition and provided clear criteria to apply in determining when a merger would do so.

Question 20

When a monopoly supplier acquires a monopoly manufacturer,the vertical merger intensifies the supplier's use of monopoly power over the manufacturer.

Question 21

When a monopolist integrates vertically with another monopolist the result:

A) is always beneficial to consumers.
B) is never beneficial to consumers.
C) may or may not be beneficial to consumers.
D) does not have any effect on consumers.

Question 22

According to the Bertrand model,price and output is higher under oligopoly than under competition.

Question 23

When a supplier imposes resale price maintenance on its dealers,social gain will increase as long as

A) the supplier chooses to charge a competitive price for its product.
B) the value consumers receive from dealer services outweighs their cost.
C) dealers are allowed to charge consumers less than the supplier's recommended retail price.
D) dealers are able to enter and exit the industry costlessly.

Question 24

History and Adam Smith both point out that people of the same trade

A) often face the temptation to engage in collusion.
B) rarely consider engaging in collusion.
C) meet only to consider how to improve the quality of their products.
D) scrupulously avoid engaging in discussions about their trade since they are competitors.

Question 25

The amount of output produced by two firms in a Cournot oligopoly setting is greater than that produced by a monopoly,but smaller than that which would be produced if the market were perfectly competitive.

Question 26

An attorney that finds a loophole in a law has formed a creative response to the law.

Question 27

A cartel member has the incentive to cheat on the cartel agreement because

A) it fears that other members may also cheat on the agreement.
B) the cartel prevents the member from charging the monopoly price.
C) undercutting the cartel price will increase the cartel member's profit.
D) the cartel outcome is not Pareto optimal for the cartel members.

Question 28

Elite Astin-Martin Cars offers its customers a fancy showroom and a knowledgeable sales force.If Astin-Martins Are Us opens an outlet nearby,offering cut rate prices and little service,then Elite Astin-Martin Cars will likely find

A) more customers attracted to buying Astin-Martins and its sales will increase.
B) more customers visiting its showroom,but lower sales.
C) fewer customers visiting its showroom and lower sales.
D) fewer customers visiting its showroom but more of them making a purchase.

Question 29

A vertical merger,like the merger of Seagate and Dell,would be attractive

A) only to Dell because it then avoids paying monopoly prices to Seagate.
B) only to Seagate because it can then obtain two monopoly rents.
C) to both Seagate and Dell but not to consumers who would find no difference in their welfare.
D) to Seagate,Dell and consumers,all of whom would stand to benefit in some way.

Question 30

The practice of a firm setting a price so low that all firms incur losses is called

A) a tournament.
B) predatory pricing.
C) a buy-out strategy.
D) a contestable market.

Question 31

Horizontal Merger

The following questions refer to the accompanying diagram, which shows the effects of a horizontal merger. Before the merger, the firm behaves competitively producing Q0 and charging P0. The merger lowers the firm's marginal cost and gives the firm enough market power to switch to the monopoly equilibrium.



-Refer to Horizontal Merger.After the merger,producer's surplus is equal to

A) area A + C + F.
B) area C + D + F + G.
C) area C + D + E - F - G.
D) area C + D.

Question 32

Horizontal Merger

The following questions refer to the accompanying diagram, which shows the effects of a horizontal merger. Before the merger, the firm behaves competitively producing Q0 and charging P0. The merger lowers the firm's marginal cost and gives the firm enough market power to switch to the monopoly equilibrium.



-Refer to Horizontal Merger.As a consequence of the merger,consumers lose surplus equal to

A) Area A + B.
B) Area C + D.
C) Area C + D + E.
D) Area G.

Question 33

Horizontal Merger

The following questions refer to the accompanying diagram, which shows the effects of a horizontal merger. Before the merger, the firm behaves competitively producing Q0 and charging P0. The merger lowers the firm's marginal cost and gives the firm enough market power to switch to the monopoly equilibrium.




-Refer to Horizontal Merger.If area F + G is larger than area E,we can conclude that the horizontal merger

A) will reduce economic efficiency.
B) causes both consumers' and producer's surplus to rise.
C) will not increase the firm's profit and thus will not be undertaken.
D) creates an increase in social gain.

Question 34

Advocates of limiting anti-trust action to cases which would promote economic efficiency believe that

A) courts should consider the distribution of income between producers and consumers.
B) the welfare of small firms should be a factor in pursuing anti-trust action.
C) preventing mergers that would benefit consumers constitutes a misapplication of the law.
D) more competition is always preferred to less.

Question 35

BP and Exxon both produce petroleum products and sell them at the wholesale and retail levels.One of them is also in the coal business.The merger of the two firms is an example of

A) horizontal integration.
B) vertical integration.
C) both horizontal and vertical integration.
D) a tournament.

Question 36

An example of a horizontal integration would be a merger between

A) a newspaper and a television station.
B) two grocery store chains.
C) Intel and Dell.
D) Delta Airlines and American Airlines.

Question 37

Before Walmart's entry into the retail pharmacy business which drove down prices,existing pharmacies

A) were operating efficiently,so this is an example of predatory pricing.
B) were colluding on price,so this is an example of a contestable market.
C) were not operating as efficiently as afterwards,so this is not a case of predatory pricing.
D) did not advertise but were forced to do so by the new competition.

Question 38

Fair trade refers to the fact that retailers are free to set their price in the absence of resale price maintenance.

Question 39

It is possible to avoid the prisoners' dilemma as long as the interaction is repeated and has a definite ending date.

Question 40

Economists are skeptical about the degree to which predatory pricing is used because

A) "price wars" are rarely observed in actual markets.
B) when used as a warning to potential rivals,predation has minimal value.
C) buy-outs are less costly than predation and have no offsetting disadvantages.
D) firms can easily counter predation by "laying low" or borrowing funds.

Question 41

In the absence of natural monopoly conditions,firms in a contestable market will

A) choose their price and output competitively.
B) be able to successfully form a cartel and share monopoly profit.
C) will not produce their output at the lowest possible cost.
D) produce more than a monopoly but less than a competitive industry.

Question 42

The Benham study suggests that professional societies may prefer to restrict advertising by their members because

A) the costs of advertising would unnecessarily add to the price of their product.
B) with advertising,it would be harder for new members to compete with established members.
C) limiting information for consumers makes it easier for their members to charge higher prices.
D) advertising lowers the status of the profession in the public's eyes.

Question 43

Which oligopoly model results in firms successively undercutting their rivals' prices until the competitive outcome is reached?

A) The contestable market model.
B) The Cournot model of oligopoly.
C) The Bertrand model of oligopoly.
D) The monopolistic competition model.

Question 44

The market for airplane service on a particular route is a commonly cited example of

A) resale price maintenance.
B) monopolistic competition.
C) the benefits of vertical integration.
D) a contestable market.

Question 45

In the Cournot model of oligopoly,firms produce

A) the competitive quantity.
B) the monopoly quantity.
C) more than the monopoly quantity,but less than the competitive quantity.
D) less than the monopoly quantity.

Question 46

Horizontal Merger

The following questions refer to the accompanying diagram, which shows the effects of a horizontal merger. Before the merger, the firm behaves competitively producing Q0 and charging P0. The merger lowers the firm's marginal cost and gives the firm enough market power to switch to the monopoly equilibrium.



-Refer to Horizontal Merger.The result of the merger is

A) a decrease in marginal costs.
B) an increase in the quantity supplied.
C) a decrease in the price.
D) an increase in consumer surplus.

Question 47

An individual firm desiring to obey the letter of the law while avoiding the effects of regulation may use

A) predatory pricing.
B) tit-for-tat strategies.
C) creative response.
D) collusion.

Question 48

Firms in monopolistic competition resemble monopolies in that both types of firms

A) earn positive economic profits in the long run.
B) charge prices higher than their marginal costs.
C) possess barriers to entry that keep potential rivals out of the market.
D) produce their output so that their average cost is minimized.

Question 49

The key defining feature of oligopoly,in addition to firms' market power,is

A) collusion.
B) free entry and exit.
C) firms take rivals' actions into account.
D) the Prisoner's Dilemma.

Question 50

Which of the following is an example of regulating quality standards?

A) Advertising bans.
B) Blue laws.
C) The minimum wage.
D) Professional licensing requirements.

Question 51

Which model highlights the effects of market power obtained from product differentiation?

A) The contestable market model.
B) The Cournot model of oligopoly.
C) The Bertrand model of oligopoly.
D) The monopolistic competition model.

Question 52

Being a member of a cartel is similar to being in a Prisoner's Dilemma situation because

A) each firm is being held hostage by the decisions of the other firms.
B) of anti-trust laws which make price fixing a criminal offense.
C) to obtain the best possible outcome for all,an enforcement mechanism is needed.
D) of the presence of organized crime in industries with cartels.

Question 53

Industries often lobby against the removal of regulations because

A) the regulations often enforce a de facto cartel agreement.
B) their customers would be made worse off without government-proscribed standards.
C) the largest firms could then dominate the industry.
D) deregulation would cause higher entry prices for new firms.

Question 54

Monopoly Supplier and Manufacturer

The following questions refer to the accompanying diagram, which shows a monopoly leather supplier selling leather to a monopoly shoe manufacturer. The leather supplier initially produces QM and charges the shoe manufacturer PM. Then the leather supplier acquires the shoe manufacturer in a vertical merger.


-Refer to Monopoly Supplier and Manufacturer.After the merger,the leather company will earn surplus of

A) Area A + B.
B) Area A + B + C + D + E.
C) Area F + G + H.
D) Area A + B + C + D + E + F + G + H.

Question 55

Why has the cartel in diary farming not been broken up?

A) Organized crime is used to enforce a dairy compact.
B) The dairy industry is exempt from anti-trust laws.
C) Consumers do not mind paying higher prices for milk.
D) Economic studies indicate that to do so would decrease efficiency.

Question 56

In the Bertrand model of oligopoly,each firm chooses its output assuming that its rivals

A) do not change their price.
B) do not change their output.
C) can enter and exit the industry costlessly.
D) use the tit-for-tat strategy.

Question 57

Monopoly Supplier and Manufacturer

The following questions refer to the accompanying diagram, which shows a monopoly leather supplier selling leather to a monopoly shoe manufacturer. The leather supplier initially produces QM and charges the shoe manufacturer PM. Then the leather supplier acquires the shoe manufacturer in a vertical merger.



-Refer to Monopoly Supplier and Manufacturer.After the merger,the leather supplier will

A) continue to produce Q_M.
B) reduce its production from Q_M to force the shoe manufacturer to pay higher prices.
C) increase production to Q_C.
D) produce more than Q_M but less than Q_C.

Question 58

In what way is monopolistic competition superior to perfect competition?

A) The cost of producing the industry's output is lower in monopolistic competition.
B) Consumers benefit from having differentiated products instead of identical products.
C) Long-run profits are higher in monopolistic competition than in pure competition.
D) In monopolistic competition,firms can fully exploit any existing economies of scale.

Question 59

The Peltzman study suggests that minimum standards of quality

A) overall create a net benefit for consumers by protecting them from dangerous products.
B) overall hurt consumers by limiting entry and raising prices.
C) are beneficial to consumers only when they are strictly enforced.
D) rarely have any significant effect on the market.

Question 60

Monopoly Supplier and Manufacturer

The following questions refer to the accompanying diagram, which shows a monopoly leather supplier selling leather to a monopoly shoe manufacturer. The leather supplier initially produces QM and charges the shoe manufacturer PM. Then the leather supplier acquires the shoe manufacturer in a vertical merger.


-Refer to Monopoly Supplier and Manufacturer.The vertical merger causes social gain to

A) increase by area A + B.
B) increase by area E + H.
C) decrease by area B + D + G.
D) remain equal to area A + B + C + D + F + G.

Question 61

What is resale price maintenance and why would a manufacturer want to use it? Under what circumstances would resale price maintenance increase social gain?

Question 62

Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms’ product has demand Q = 100 - P.



-Refer to Cournot Problem.Total industry output will be

A) 30 units.
B) 45 units.
C) 60 units.
D) 90 units.

Question 63

The term prisoners' dilemma

A) refers only to situations where prisoners' must confess on one another.
B) is in agreement with Adam Smith's invisible hand idea.
C) represents situations where people do not act in their own self interest.
D) can be applied to show why cartels are difficult to maintain.

Question 64

Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms’ product has demand Q = 100 - P.



-Refer to Cournot Problem.Each firm will produce.

A) 22.5 units
B) 30 units.
C) 45 units.
D) 90 units.

Question 65

Consider a firm with constant marginal cost that behaves competitively.A horizontal merger lowers the firm's marginal cost and causes the firm to behave like a monopoly.How does the merger affect producer's surplus,consumers' surplus,and social gain? Explain.

Question 66

Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms’ product has demand Q = 100 - P.



-Refer to Cournot Problem.In the Nash Equilibrium,consumer surplus will be

A) $900
B) $1800
C) $2700
D) $3600

Question 67

Does the Invisible Hand Theorem remain true in the Prisoners' Dilemma game? Why or why not? What implication does this result have for cartels?

Question 68

Suppose a Cournot oligopoly is operating in a market where demand is linear and marginal costs are constant.We can conclude that the total output supplied is

A) 1/3 of the perfectly competitive output.
B) 1/2 of the perfectly competitive output.
C) 2/3 of the perfectly competitive output.
D) equal to the competitive output.

Question 69

The Cournot model specifies how two firms in an oligopoly compete in terms of quantity.Briefly describe how the outcome of Cournot oligopoly competition relates to the outcomes of perfect competition and monopoly in terms of output and market efficiency/inefficiency.Can you be more precise about the relation between Cournot,monopoly,and perfectly competitive outputs if you know that demand is linear and marginal costs are constant? Explain.

Question 70

What is required for a market to be considered monopolistically competitive? How does the equilibrium in a monopolistically competitive market resemble that in a perfectly competitive market? How are they different?

Question 71

Two identical firms have access to a spring.Their marginal cost of bottling water from the spring is a constant 10¢ per bottle.The market demand for bottled spring water is P = 250 - 20Q,where P is the price (in cents per bottle)and Q is the quantity demanded (in hundreds of bottles).

Question 72

Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms’ product has demand Q = 100 - P.



-Refer to Cournot Problem.The market price for this good will be

A) $10
B) $40
C) $55
D) $70

Question 73

Under the Bertrand Model of oligopoly

A) output will be greater than under monopoly but less than competitive output.
B) output will be less than under monopoly but greater than competitive output.
C) output will be equal to competitive output.
D) output will be equal to monopoly output.

Question 74

Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms’ product has demand Q = 100 - P.



-Refer to Cournot Problem.In the Nash Equilibrium,each firm will receive producer surplus of

A) $300
B) $450
C) $600
D) $900

Question 75

Cournot Problem. Consider a Cournot oligopoly with two identical firms. These firms each have constant marginal costs of $10. The market for these firms’ product has demand Q = 100 - P.



-Refer to Cournot Problem.In the Nash Equilibrium,the deadweight loss will be

A) $300
B) $450
C) $600
D) $900