Deck 21: Government and the Firm

Question 1

Economists often compare perfect competition and monopoly. They criticise monopolies for producing ______and charging _________ .

A) less; more
B) more; more
C) more; less
D) less; less

Answer 1

less; more

Question 2

Which of the following is not an advantage of a monopoly over perfect competition?

A) An incentive for efficiency
B) Profits for reinvestment
C) Profits for R&D
D) Ability to exploit economies of scale

Answer 2

An incentive for efficiency

Question 3

Which type of merger is likely to be the most damaging to competition?

A) Horizontal
B) Vertical
C) Corporate
D) Conglomerate

Answer 3

Horizontal

Question 4

Supporters of anti- monopoly enforcement argue that the real gain from such enforcement is that

A) it forces firms to produce efficiently.
B) this policy deters firms from engaging in practices such as collusion, price- fixing and deceptive advertising.
C) it encourages firms to engage in research, which leads to new products being produced.
D) the revenue generated from the fines is paid by those individuals who are found guilty of anti- trust violations.

Question 5

Anti- monopoly laws are based on the proposition that ___________is the best way to achieve efficiency.

A) increasing market power
B) competition
C) regulation
D) public ownership

Question 6

A merger in which firms at various stages in a production process combine is a

A) production merger.
B) vertical merger.
C) conglomerate merger.
D) diagonal merger.
E) horizontal merger.

Question 7

A merger between a paper producer and a book publisher is an example of

A) a horizontal merger.
B) a conglomerate merger.
C) a complementary products merger.
D) a vertical merger.
E) a natural merger.

Question 8

A conglomerate merger is a merger of

A) firms at various stages in a production process.
B) firms producing the same product.
C) firms producing complementary products.
D) firms producing unrelated products.

Question 9

Which of the following statements does not apply to Article 101 of EU legislation?

A) It is concerned with restrictive practices rather than the abuse of a dominant position.
B) It covers agreements between firms, joint decisions and concerted practices that prevent, restrict or distort competition.
C) It is designed to prevent collusive behaviour including price fixing, quota allocation, discriminatory practices and limiting production or technical development.
D) It concerns the abuse of market power by firms trading between EU members, but does not cover monopolies or oligopolies operating solely within a member country.

Question 10

Under which type of merger is cross- subsidisation most likely to occur?

A) Conglomerate
B) Vertical
C) Horizontal
D) Natural
E) A collusive oligopoly

Question 11

A horizontal merger is a merger of

A) firms at various stages in a production process.
B) firms producing complementary products.
C) firms producing unrelated products.
D) firms producing the same product.

Question 12

Which of the following is a restrictive practice?

A) Cross- subsidisation
B) Price discrimination
C) Individual resale price maintenance
D) A collusive oligopoly

Question 13

What is the main criterion used in the UK when deciding whether action should be taken against a firm with monopoly power?

A) How much its share of the market exceeds 15%
B) Whether it engages in excessive advertising
C) Whether its behaviour is anti- competitive along with a market share exceeding 40%
D) How high its profits are

Question 14

Anti- monopoly legislation is undertaken to____ competition, and market regulation is undertaken to_______ competition.

A) promote; promote
B) restrict; promote
C) promote; restrict
D) restrict; restrict

Question 15

The EU merger control measures were adopted in 1990 and amended in 2004. Which of the following is not a characteristic of this measure?

A) The process of control is very slow, laborious and administratively expensive.
B) The regulations are highly inflexible.
C) The control is weak.
D) None of these are characteristics of the measure

Question 16

Which of the following are concerned with mergers within the UK?
(i) The OFT (Office of Fair Trading)
(ii) The CC (Competition Commission)
(iii) The Restrictive Practices Court
(iv) The President of the Board of Trade
(v) The European Commission

A) (i), (ii), (iii) and (v)
B) (i), (iii) and (iv)
C) (i) and (ii)
D) (ii), (iv) and (v)
E) (i), (ii), (iii) and (iv)

Question 17

Which of the following does the EU consider to be anti- competitive practices?

A) Limit production
B) Price fixing
C) Fixing market shares
D) All of the above

Question 18

Which of the following anti- competitive practices are forms of oligopolistic collusion (restrictive practices)?
(i) Collusive tendering
(ii) Price discrimination
(iii) Market- sharing agreements
(iv) Rental- only contracts
(v) Tie- in sales
(vi) Vertical price squeezing
(vii) Selective distribution
(viii) Price rings

A) (i), (ii), (iii), (v) and (viii)
B) (i), (ii), (iii) and (v)
C) (iii), (vi) and (vii)
D) (ii), (iv) and (v)
E) (i), (iii) and (viii)

Question 19

Which of the following anti- competitive practices are directly concerned with controlling supply or sales?
(i) Collusive tendering
(ii) Price discrimination
(iii) Market- sharing agreements
(iv) Rental- only contracts
(v) Tie- in sales
(vi) Vertical price squeezing
(vii) Selective distribution
(viii) Price rings

A) (iii), (iv), (v) and (vii)
B) (i), (iii), (v) and (viii)
C) (i), (iv) and (vi)
D) (i), (ii), (iv), (v) and (viii)
E) (ii), (iv) and (viii)

Question 20

In business, it is important for companies to be aware of competition policy. Which of the following categories of practices has not been identified by the OFT as being overly anti- competitive?

A) Price discrimination
B) Price skimming
C) Vertical restraints
D) Charging excessively high prices
E) Predatory pricing

Question 21

Which of the following is not an example of an abuse of market power?

A) Making firms that sign contracts accept unfavourable obligations in unrelated areas
B) Limiting innovation to the detriment of consumers
C) Limiting production to the detriment of consumers
D) All of the above

Question 22

Under EU monopoly policy, which of the following are examples of the abuse of market power?
(i) Limiting production, markets or technical developments to the detriment of consumers
(ii) Charging unfairly high prices to consumers
(iii) Charging unfairly low prices to suppliers
(iv) Using price discrimination or other discriminatory practices to the detriment of certain parties
(v) Making other firms that sign contracts accept unfavourable obligations which, by their nature, have no connection with the subject of such contracts

A) (i), (ii) and (v)
B) (i), (ii), (iii), (iv) and (v)
C) (i), (iii) and (iv)
D) (ii), (iii) and (iv)
E) (ii), (iv) and (v)

Question 23

Which of the following are likely reasons for the proposed merger (writing in May 2013) between the OFT and the Competition Commission?

A) To reduce the duration of investigations, thereby cutting costs
B) To benefit from economies of scale
C) To reduce the duplication of processes
D) To increase business confidence in regulation
E) All of the above F) A, B and D

Question 24

Which of the practices below do not constitute a 'cartel agreement'?

A) Agreements to limit production
B) Collusive tendering
C) Horizontal price fixing
D) Resale price maintenance

Question 25

Why may firms wish to form a cartel?

A) To make demand more elastic
B) So they can collectively act like a monopoly
C) To increase product innovation
D) To make supply more inelastic

Question 26

What are vertical restraints?

A) A supplying firm imposes restrictions on another supplying firm
B) Vertical mergers in a supply chain
C) A purchasing firm imposes restrictions on another purchasing firm
D) A supplying firm imposes restrictions on the purchasing firm (or vice versa)

Question 27

What is collusive tendering?

A) Where two or more firms agree to adopt common practices to restrict competition
B) Where two or more firms secretly agree on the prices they will tender for a contract, which will be above those in a competitive market
C) Where the manufacturer of a product insists that the product should be sold at a specified retail price
D) Where a firm uses the profits made in one industry to subsidise its activities in another industry

Question 28

Resale price maintenance is an example of a

A) vertical price- fixing arrangement.
B) horizontal price- fixing arrangement.
C) merger policy.
D) conglomerate price- fixing arrangement.
E) collusive practice.

Question 29

Which of the following will not encourage research and development?

A) Patents
B) R&D free- riders
C) Public provision of R&D funding
D) Inter- firm co- operation

Question 30

Firms are unlikely to invest sufficiently in R&D leading to technological constraints owing to

A) risk and uncertainty.
B) competitive market structures.
C) R&D free- riders.
D) A and C

Question 31

Patents create difficulties for competition policy because they

A) reduce the incentive for firms to innovate.
B) reduce profits.
C) encourage R&D but create monopoly power.
D) create lots of paperwork.

Question 32

Since 1990, the level of R&D expenditure in the UK has been

A) above that of its main economic rivals.
B) below that of its main economic rivals.
C) rising as a percentage of GDP.
D) B and C

Question 33

Reducing the length of time for which a company can hold a patent will

A) raise concentration ratios.
B) lead to more monopoly power.
C) increase the total private benefits of the R&D activity that occurs.
D) increase R&D activity.

Question 34

Which of the following sectors would you expect to be the most R&D intensive?

A) Automobiles and parts
B) Electronic equipment
C) Chemicals
D) Biotechnology

Question 35

Policies to improve worker skill levels are called

A) regulatory policies.
B) supply- side policies.
C) physical capital policies.
D) demand- side policies.

Question 36

Policies to improve worker skill levels should

A) lower the average variable cost curves faced by firms.
B) raise wage costs and hence product prices.
C) raise the average variable cost curves faced by firms.
D) increase monopoly power.

Question 37

Which of the following statements are true?
(i) Public sector expenditure on training is higher in Germany than in the USA.
(ii) Skill levels have a negligible effect on social welfare and employment.
(iii) The UK has tended to lag behind other developed countries in terms of worker productivity.
(iv) Output per worker in the UK is the highest of the G7 countries.
(v) The proportion of adults in the UK without a basic school- leaving qualification is half that of Canada and Germany.
(vi) One of the factors contributing towards the UK's low productivity levels is workers' poor skill level.

A) (i), (iii) and (vi)
B) (i), (iv) and (v)
C) (i), (ii) and (vi)
D) (ii), (iv), (v) and (vi)

Question 38

Monopoly policy, under both EU and UK legislation, is only directed towards monopolies.

Question 39

A horizontal merger is a merger of firms producing complementary products.

Question 40

The UK 2002 Enterprise Act made it a criminal offence for firms to agree with each other the price at which they would submit tenders for contracts.

Question 41

Competition policy concerns investigating firms with monopoly power and collusive practices in an oligopolistic market and mergers. It also targets high prices due to high fixed costs.

Question 42

Restrictive practices is the main problem that has been targeted by government policy.

Question 43

Article 101 of EU policy refers to the abuse of market power.

Question 44

A conglomerate is likely to be the most damaging to competition.

Question 45

The EU and UK approaches to restrictive practices are very similar. Article 101 of the Treaty of the Functioning of the European Union and Chapter 1 of the UK's 1998 Competition Act do not seek to ban all agreements between oligopolies, but rather to ban various types of anti- competitive behaviour by oligopolists.

Question 46

At the time of writing, a merger between the OFT and the Competition Commission has been proposed to cut costs, reduce the duplication of processes and increase business confidence in regulation.

Question 47

A market- sharing agreement is when firms divide up the market between them and agree not to compete in each other's part of the market.

Question 48

Collusive practices will decrease profits.

Question 49

Under UK regulation, regulators are only concerned with pricing decisions.

Question 50

Technology policy refers to a series of government initiatives to promote faster technical change and innovation.

Question 51

Patents discourage firms from innovating.

Question 52

A firm that charges all its customers the same price is probably cross- subsidising.

Question 53

The existence of free- riders in research and development (R&D) will increase R&D expenditure as it lowers the costs of R&D.

Question 54

Training policies are thought to increase innovation as well as labour productivity.

Question 55

Training policy in the UK has largely been the responsibility of the firm in respective industries. The result was market failure and, as a result, no optimum amount of training has been provided.

Question 56

A country with a high labour turnover would be most likely to have larger investment in training.

Question 57

At which of the problems is each of the policies targeted?

-An increase in industrial concentration

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
(b) The government nationalises the national electricity grid.
(c) The government makes collusive agreements between oligopolists illegal.
(d) The government sets up a body which can investigate any firm with a share of the market above a certain level.
(e) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
(f) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
(g) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 58

At which of the problems is each of the policies targeted?

-The exercise of monopoly power

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
B) The government nationalises the national electricity grid.
C) The government makes collusive agreements between oligopolists illegal.
D) The government sets up a body which can investigate any firm with a share of the market above a certain level.
E) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
F) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
G) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 59

At which of the problems is each of the policies targeted?

-Restrictive practices

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
B) The government nationalises the national electricity grid.
C) The government makes collusive agreements between oligopolists illegal.
D) The government sets up a body which can investigate any firm with a share of the market above a certain level.
E) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
F) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
G) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 60

At which of the problems is each of the policies targeted?

-Resale price maintenance

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
B) The government nationalises the national electricity grid.
C) The government makes collusive agreements between oligopolists illegal.
D) The government sets up a body which can investigate any firm with a share of the market above a certain level.
E) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
F) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
G) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 61

At which of the problems is each of the policies targeted?

-Excessive industrial concentration

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
B) The government nationalises the national electricity grid.
C) The government makes collusive agreements between oligopolists illegal.
D) The government sets up a body which can investigate any firm with a share of the market above a certain level.
E) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
F) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
G) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 62

At which of the problems is each of the policies targeted?

-Natural monopolies

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
B) The government nationalises the national electricity grid.
C) The government makes collusive agreements between oligopolists illegal.
D) The government sets up a body which can investigate any firm with a share of the market above a certain level.
E) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
F) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
G) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 63

At which of the problems is each of the policies targeted?

-Cross- subsidisation

A) The government makes it illegal for manufacturers to set the price at which their products must be sold by shops. _
B) The government nationalises the national electricity grid.
C) The government makes collusive agreements between oligopolists illegal.
D) The government sets up a body which can investigate any firm with a share of the market above a certain level.
E) Firms are prohibited from using unfair competitive practices whereby they use profits in one market to charge prices below cost in another, and thereby drive competitors out of business. _
F) A regulatory body has the power to limit a firm's price increases where this would result in 'excessive' supernormal profits.
G) The government passes legislation that enables an investigation of any mergers that will lead to the merged firm having more than a certain percentage share of the market.

Question 64

In each of the following possible circumstances, decide whether the effect will be to:

-The market is contestable. _

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 65

In each of the following possible circumstances, decide whether the effect will be to:

-The firm(s) achieve substantial economies of scale.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 66

In each of the following possible circumstances, decide whether the effect will be to:

-The firm(s) suffer from considerable X- inefficiency.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 67

In each of the following possible circumstances, decide whether the effect will be to:

-The firm(s) use a large proportion of their profits for investment in more efficient capital equipment.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 68

In each of the following possible circumstances, decide whether the effect will be to:

-The barriers to the entry of new firms are strong.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 69

In each of the following possible circumstances, decide whether the effect will be to:

-The firms are not aggressive profit- maximisers.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 70

In each of the following possible circumstances, decide whether the effect will be to:

-After a merger, firms engage in a process of rationalisation.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 71

In each of the following possible circumstances, decide whether the effect will be to:

-Firms engage in extensive advertising.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 72

In each of the following possible circumstances, decide whether the effect will be to:

-The firms experience managerial diseconomies of scale.

A) reduce the size of monopoly profits.
B) prevent prices being considerably above the competitive level.
C) both
D) neither

Question 73

Imagine that a firm with monopoly power is suspected of acting against the public interest. Arrange events
(a-h) in the correct sequence of how this case would be pursued.
a) The President of the Board of Trade refers the case to the MMC. ________
b) The OFT makes a preliminary report to the President of the Board of Trade. ________
c) The President of the Board of Trade takes action against the firm (seeking prior parliamentary approval if necessary). ________
d) The MMC seeks voluntary compliance with its recommendations. ________
e) The OFT makes a preliminary investigation. ________
f) The OFT seeks initial voluntary compliance with its recommendations. ________
g) The MMC publishes its report. ________
h) The MMC carries out an investigation into the case. ________

Question 74

Match the anti- competitive practices to the definitions.

-Tie- in sales

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.

Question 75

Match the anti- competitive practices to the definitions.

-Collusive tendering

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.

Question 76

Match the anti- competitive practices to the definitions.

-Selective distribution

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.

Question 77

Match the anti- competitive practices to the definitions.

-Price rings

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.

Question 78

Match the anti- competitive practices to the definitions.

-Price discrimination

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.

Question 79

Match the anti- competitive practices to the definitions.

-Rental- only contracts

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.

Question 80

Match the anti- competitive practices to the definitions.

-Market- sharing agreements.

A) A firm is only prepared to supply certain selected retail outlets.
B) A vertically integrated firm controls the supply of an input and charges competitors a high price for that input so that they cannot compete with it in selling the finished good.
C) Firms divide up the market between them, agreeing not to compete in each other's part of the market.
D) Firms bidding for a contract e.g. to supply building materials for a new office development) all agree beforehand to bid high prices.
E) A firm sells the same good at a different price relative to costs) in different sectors of the market.
F) A firm is only prepared to hire out equipment and not sell it outright.
G) A firm controlling the supply of one product insists that its customers also buy a second product from it rather than from its rivals.
H) A firm sells a product below cost in order to drive competitors from the industry.
I) Firms get together to agree on a common price.