Deck 14: Limiting Market Power: Antitrust and Regulation

Question 1

Google's 88 percent market share of web search services makes it a monopolist.

Answer 1

False

Question 2

Increasing concentration always means an industry has become effectively monopolized.

Answer 2

False

Question 3

The government used the Herfindahl-Hirschman index to determine if a proposed merger will lead to excessive concentration.

Answer 3

True

Question 4

From 1992 to 2012, many industries have increased in concentration.

Question 5

Firms with monopoly power tend to be more efficient than competitive firms.

Question 6

In a market with only one firm (a pure monopoly), the Herfindahl-Hirschman Index (HHI) would equal 10,000.

Question 7

Antitrust laws prohibit undesirable business practices by firms holding monopoly power.

Question 8

The goal of all regulation is the creation of perfectly competitive markets.

Question 9

An exclusive supply contract is a contract between a firm and its input suppliers that requires the suppliers to sell only to that firm, not anyone else.

Question 10

Selling at a price that is only slightly above the firm's cost of production is called predatory pricing.

Question 11

Microsoft has been accused of violating an antitrust law pertaining to bundling.

Question 12

All large firms have monopoly power.

Question 13

It is easy to discern the difference between vigorous competition and the exercise of monopoly power.

Question 14

Monopoly pricing reduces consumer surplus.

Question 15

A concentration ratio provides a better assessment of market power than the Herfindahl-Hirschman index does.

Question 16

The concentration ratio of an industry is a measure that captures the share of the industry's total output that is produced by its four largest firms.

Question 17

Highly concentrated markets have a large number of price-taking firms.

Question 18

Market power allows firms to raise prices significantly above the competitive level.

Question 19

The antitrust laws are enforced by government agencies such as the Federal Trade Commission and the Department of Justice.

Question 20

Firms that coordinate economic activities to reduce competition is considered illegal per se.

Question 21

The Sherman Act was the first established antitrust law.

Question 22

Economies of scope are present when a bank also sells insurance and provides brokerage services for stocks and bonds.

Question 23

Regulation began in the United States in the 1950s.

Question 24

The "universal service" argument often requires that some products be sold at a loss while other products be sold at profits higher than normal.

Question 25

Economies of scale and scope encourage free competition.

Question 26

By definition, an industry with high concentration also is highly competitive.

Question 27

Economists believe mergers can sometimes achieve greater efficiency than two companies that do not merge.

Question 28

Economies of scale tend to create natural monopolies.

Question 29

Prices that maximize the public interest will always allow reasonable profits for firms.

Question 30

The Department of Justice and the Federal Trade Commission enforce antitrust laws.

Question 31

Regulation of industry is usually carried out by special government agencies that administer and interpret the law.

Question 32

Powers of many regulatory agencies are designed to protect public health and safety.

Question 33

Universal service means that one company provides service to all consumers, everywhere.

Question 34

If an industry consists of five firms each with a 20 percent market share, then the Herfindahl-Hirschman index would equal 1,600.

Question 35

Many regulated industries are not pure monopolies.

Question 36

Cross-subsidization implies that a loss from one product's sales will be made up by the profit from another product's sales.

Question 37

The concept of economies of scope describes the savings acquired from simultaneous production of different products.

Question 38

Many industries are regulated in the United States, from railroads and electric utilities to cable TV.

Question 39

The antitrust laws are sometimes used by companies to reduce competition in their markets rather than enhance it.

Question 40

Universal service may require making a service available in small communities where the limited scale of operations may make costs extremely high.

Question 41

Regulated industries that exhibit economies of scale and marginal cost pricing will lead to losses.

Question 42

One economically valid approach to regulation is simply to break all large firms into many smaller ones.

Question 43

Regulatory agencies always protect consumers by forcing regulated firms to sell at the lowest possible price.

Question 44

Deregulation of the airline and trucking industries was followed by the creation of many new firms.

Question 45

In regulated industries, the optimal regulation is to set price such that MC=P.

Question 46

Airline deregulation led to the demise of many smaller airlines but large carriers were not materially affected.

Question 47

The most important advantages of bigness will be found in industries that show increasing returns to scale.

Question 48

Serious concern for deregulation began to appear in Congress in the 1970s.

Question 49

Firms violating antitrust laws are likely to be sued by the federal government, but not by rival firms.

Question 50

Economists ordinarily favor setting price equal to marginal cost when this option is feasible.

Question 51

If a firm is a natural monopoly, society will benefit if it is broken into several small companies.

Question 52

Bottlenecks may force competitors to offer services within the same network.

Question 53

In most industries, deregulation has led to lower prices.

Question 54

Beginning in the mid-1970s, Congress deregulated several industries including airlines and trucking.

Question 55

Regulating firms so that they always receive a guaranteed profit rate will lead to greatest efficiency.

Question 56

Service to consumers of deregulated products has generally not diminished.

Question 57

Unrestrained monopolies are criticized because they restrict output and reduce innovation.

Question 58

Deregulation has dramatically decreased airline safety.

Question 59

Deregulation has led to higher prices.

Question 60

Monopoly rights give inventors and entrepreneurs incentives to innovate and create new products and services.

Question 61

The share of industry output sold by the top four steel producers in the country are 19 percent, 15 percent, 12 percent, and 9 percent, respectively.The four-firm concentration ratio for the steel industry is

A)0.19.
B)0.55.
C)0.138.
D)0.65.

Question 62

Which of the following is a valid effect of monopoly power?

A)Desirable effects on the distribution of wealth
B)Efficient resource allocation
C)Fostering of innovation
D)Obstacle to efficiency

Question 63

Which statement about market power is incorrect?

A)It can lead to price increases that exploit consumers.
B)It can lead to resource misallocation.
C)It can lead to inefficient production and the lack of innovation.
D)Monopoly power can lead to decreases in producer surplus.

Question 64

What does the Herfindahl-Hirschman Index value near zero imply about the market?

A)Monopoly
B)Perfect competition
C)Monopolistic competition
D)Oligopoly

Question 65

What is defined as the ability of a firm to earn high profits by raising and keeping the prices of its products substantially above the levels at which those products would be priced in competitive markets?

A)Economies of scope
B)Tacit collusion
C)Monopoly power
D)Perfect competition

Question 66

If the four-firm concentration ratio in an industry increases, the industry

A)must have become more competitive.
B)must have become a monopoly.
C)must have become less competitive, although not necessarily a monopoly.
D)may or may not have become less competitive.

Question 67

Government agencies may fail to identify anticompetitive behavior if

A)competitors have been forced out of business due to inefficient production and the inability to keep prices low.
B)dominant firms raise prices to keep rivals competitive.
C)cartel members decide to disinherit a member firm.
D)Wall Street supports lower prices.

Question 68

If the automobile industry has become highly concentrated and cartelized.To maintain profits, firms may

A)allow newcomers to favorably enter the market.
B)become price takers.
C)prevent entry.
D)lower prices to raise revenues.

Question 69

Archer Daniels Midland (ADM) was convicted for this anticompetitive practice in the lysine market.

A)Price fixing
B)Predatory pricing
C)Bundling
D)Exclusive supply contracts

Question 70

Policies that preclude the deliberate creation of monopoly and undesirable practices are called

A)antitrust policies.
B)antimonopoly policies.
C)anticompetitive policies.
D)socialism.

Question 71

Which of the following events would increase the four-firm concentration ratio in a milk industry with six firms?

A)The two largest milk producers merge.
B)The largest milk producer buys an ice cream-making plant.
C)The largest milk producer lures customers away from the second largest producer.
D)The four largest milk producers collusively fix prices.

Question 72

The Herfindahl-Hirschman Index measures

A)concentration in the industry.
B)industrial average output.
C)economies of scale.
D)consumer confidence.

Question 73

Under a tying contract,

A)the price a buyer must pay for a good is tied to the size of his or her purchase.
B)a customer agrees as a condition of buying a good to purchase one or more additional goods from the same seller.
C)a firm agrees to allow members of its competitors' boards of directors to sit on its board.
D)a firm agrees to pay an intermediary for having arranged a business deal for the firm.

Question 74

____ occur(s) when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per-unit costs become.

A)Economies of scope
B)Scale economies
C)Product differentiation
D)Perfect competition

Question 75

Modern antitrust policy began in response to

A)abuses of market power in the oil industry.
B)the inability of railroads to compete effectively with the new trucking industry.
C)the charge that the rights of big business were not adequately protected.
D)attempts by business leaders to pack Congress with corrupt legislators.

Question 76

Which of the following acts prohibits directors of one company from sitting on the board of a competitor?

A)Sherman Act
B)Federal Trade Commission Act
C)Robinson-Patman Act
D)Clayton Act

Question 77

Major firms charged with predatory pricing defend by saying that their prices are low because of superior efficiency.

Question 78

The four-firm concentration ratio for an industry is

A)the number of firms in the industry, divided by four.
B)the share of industry output sold by the four largest firms in the industry.
C)the percentage of total industry profits claimed by the four largest firms.
D)the share of industry output sold by the fourth largest firm in the industry.

Question 79

The Clayton Act prohibits "all contracts, combinations and conspiracies in restraint of trade."

Question 80

Price discrimination by a firm is

A)illegal under all circumstances.
B)legal if the firm can show that the difference in the prices charged customers is justified by a difference in the costs of serving them.
C)legal if the firm can show that the demand for its good is relatively elastic.
D)legal under all circumstances.