Deck 15: Monopolistic Competition and Oligopoly

Question 1

Why is competition in platform monopolies ususally connected to technological change?

Answer 1

Platform monopolies tend to be natural monopolies. This means that once a platform is established, there will be strong barriers to entry, which provide existing firms with significant market power. New technologies, however, can provide totally new ways of providing the service that the platform business provides by creating a whole new platform. This undermines the intial platform monopolies monopoly.

Question 2

What are the three main U.S. antitrust laws and the main provisions of each?

Answer 2

The three main U.S. antitrust laws are the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. The Sherman Act has two sections. Section one outlaws restraints of trade. Section two outlaws attempts to monopolize. The Clayton Act made four specific monopolistic practices illegal. They are: price discrimination, tie-in contracts, interlocking directorships, and purchase of a competitor's stock. The Federal Trade Commission Act created the Federal Trade Commission and made it illegal for firms to use "unfair methods of competition" and to engage in "unfair or deceptive acts or practices."

Question 3

What is the contestable market model?

Answer 3

The contestable market model is a model of oligopoly in which barriers to entry and barriers to exit, not the structure of the market, determine a firm's price and output decisions.

Question 4

In Industry 1, Firm A, B, C, D and E each has 20 percent of the market. In Industry 2, Firm A has 75 percent of the market, Firm B has 2 percent, Firm C has 2 percent, and Firm D and 20 other firms all have 1 percent each. Which of these two industries do you consider likely to be more competitive, and why?

Question 5

What standard of judgment was used to decide, and what was the outcome of the following cases:
(1) Standard Oil (1911)
(2) ALCOA (1945)

Question 6

Given the market share information in the table below, calculate the four firm concentration ratio and the Herfindahl index.

Question 7

Why is allocation of market share such a central feature in determining the decisions of firms in the cartel model of oligopoly and what is the central feature determining the decisions of firms in the contestable market model of oligopoly?

Question 8

What is the difference between the judgment by performance and the judgment by structure methods of assessing competition? What are the problems associated with applying each standard?

Question 9

Why was antitrust policy in other countries not as restrictive as in the U.S. and how has increased international competition changed antitrust policy in the United States?

Question 10

What are the three main differences between the monopolistic competition and oligopoly market structures with respect to the following: (a) the number of firms, (b) barriers to entry and (c) the interactions between firms?

Question 11

What is the central characteristic of oligopoly?

Question 12

To measure industry structure economists use the concentration ratio and the Herfindahl index. Describe each of these indexes. How is the Herfindahl index used in determining public policy? Why is the Herfindahl index the preferred index of market concentration in setting government policy?

Question 13

Both structure and performance criteria have ambiguities, and in the real world there are no definitive criteria for judging whether a firm has violated the antitrust statutes. Explain.

Question 14

What was the outcome in the following cases and were they decided by the standard of structure or performance? The cases are: (a) The Standard Oil case (b) The ALCOA case (c) The U.S. Steel case.

Question 15

What is the cartel model of oligopoly?

Question 16

How, if at all, does the kinked demand curve model contribute to the theory of oligopoly pricing decisions?

Question 17

What do economists mean by the term "market structure?"

Question 18

(a) For each of the following calculate the four-firm concentration ratio and the Herfindahl index.
Industry 1: 44 firms in the industry. The four largest firms each have a 15% market share, the remaining firms each have a 1% market share.
Industry 2: 7 firms in the industry. The six largest firms each have a 15% market share, the remaining firm has a 10% market share.
(b) Is it possible to state with certainty which industry is more competitive? Explain your answer by using your calculations from (a) in your explanation.

Question 19

What are three causes of the decline in U.S. antitrust enforcement?

Question 20

How does the contestable market model of oligopoly compare to the cartel model?

Question 21

What are the differences between the ALCOA case and the Standard Oil and American Tobacco cases in terms of the Court's approach to antitrust law?

Question 22

How has increased international competition changed antitrust policy in the United States?

Question 23

Suppose your professor has announced to the class that she grades on a curve. The top scorer and those who score at least 95% of his or her score get an A, the next lower five percent (90 - 95% of his or her score) get a B, the next lower five percent (85 - 90% of his score) get a C, and so on. While studying in the library, you see a number of people from the class gathered together, and wander over to see what they are talking about. One of the students is proposing to the others that a cartel be formed. "It will be really easy to make sure we all get A's," he says to the others. "All we need to do is agree on a percentage score low enough that anyone can get it, and all get around the same score ... and then she'll have to give us all As! I propose we all try to get a score of 50 percent."
Offer several reasons why the professor need not be overly concerned that such a plot will ever be successful and ruin the integrity of her grading system. Briefly explain what this example has to do with oligopoly theory.

Question 24

You are a manufacturer of fine fountain pens. The industry you are a part of consists of only a handful of companies (such as Mont Blanc, Pelican, Aurora, Parker, and Waterman). You are organizing a fountain pen association whose purpose is to coordinate activities with your fellow pen makers. What incentive can you offer to your competition to join your association? Why might some of them be reluctant to join?

Question 25

Explain the difference between the judgment by performance and the judgment by structure methods of assessing competition.

Question 26

Why have new types of antitrust remedies recently developed?

Question 27

Why, in recent years, have many potential mergers never even proposed? Give three reasons why the government has been lenient in interpreting anti-trust laws.

Question 28

Predatory pricing is a pricing strategy by which firms keep their prices low to prevent potential entry by competition. Is it true that all firms that are found pricing their products low are in violation of antitrust policy?

Question 29

Over time both the judgment by performance and judgment by structure standards have been used in deciding antitrust cases in the U.S. Briefly trace the history of the application of these standards, including references to key cases as appropriate.

Question 30

Use the kinked demand curve diagram to illustrate and describe why prices are often sticky in an oligopoly market.

Question 31

What is antitrust policy? What does "trust" mean in this context?

Question 32

Consider two industries described by the data below. Should we use a structural analysis of markets approach or a contestable market approach to analyze the competitiveness of each industry? Analyze the industries using the correct approach and explain what information we need to use the other approach.

Question 33

If the four-firm concentration ratio is 80, what is the highest Herfindahl index that industry could have? What is the lowest?