Deck 20: Market Entry and the Emergence of Perfect Competition

Question 1

When one firm sets a positive output level in a two-firm market with a linear demand curve, this choice

A) decreases the demand curve facing the other firm
B) has no effect on the demand curve facing the other firm
C) increases the demand curve facing the other firm

Answer 1

decreases the demand curve facing the other firm

Question 2

In the entry-prevention game, the incumbent firm makes an implicit threat in period 0

A) and definitely carries out the threat in period 1
B) but may not want to carry out the threat in period 1
C) but absolutely will not carry out the threat in period 1

Answer 2

but may not want to carry out the threat in period 1

Question 3

A strategy in which the established firms in an oligopolistic market can deter entry by setting their output at such a level that the remaining demand in the market is too low for a potential entrant to earn a profit at any price it can charge is called limit pricing.

Answer 3

True

Question 4

The price an incumbent monopolist sets that enables it to impede entry into the market is called the

A) limit price
B) monopolist price
C) welfare-optimizing price

Question 5

If you are a monopolist who sets the monopoly price, a potential entrant

A) may or not earn extra-normal profit
B) is guaranteed to earn an extra-normal profit
C) is guaranteed not to earn an extra-normal profit

Question 6

A limit price is the price an incumbent monopolist sets that enables entry into the market.

Question 7

A market in which there are many firms, each of which has an insubstantial share of the market; there is free entry into the market and no barriers exist to prevent entry; there is a homogeneous product and all firms in the industry produce exactly the same product; there is perfect factor mobility and the factors of production are free to move between industries; and there is perfect information in the sense that all participants in the market are fully informed about its price and about its profit opportunities is a perfectly competitive market.

Question 8

A limit quantity is the quantity an incumbent monopolist sets that enables it to impede entry into the market.

Question 9

Other firms will be attracted to a monopolist's market because of extra-normal profits. The monopolist, therefore, must be prepared to develop a strategy that will

A) collude with the potential rivals
B) prevent the entry of potential rivals
C) passively accept the development of a perfectly competitive market

Question 10

Blockaded entry occurs when the incumbent firm is able to deter entry by simply pursuing a policy that is best for

A) itself as a monopolist
B) the potential entrant firm
C) social welfare

Question 11

A residual demand curve is the demand curve that describes the demand remaining for the potential entrant after the incumbent firm has set its output level.

Question 12

A Cournot model is a model where an incumbent firm uses a pricing strategy to make it unprofitable for any potential competitor to enter a market.

Question 13

Which of the following assumptions is critical to the Bain, Modigliani, Sylos-Labini model?

A) The potential entrant believes that, if it enters the market, the incumbent firm will continue to produce at its pre-entry level of output regardless of any actions the entrant takes and regardless of the prevailing market price
B) There are two periods, the pre-entry period and the entry period
C) Demand does not change over time

Question 14

A model where an incumbent firm uses a pricing strategy to make it unprofitable for any potential competitor to enter a market is called the

A) Bain, Modigliani, Sylos-Labini model
B) Dixit-Spence model
C) Milgrom-Roberts model

Question 15

A model of entry prevention where the strategy of the incumbent monopolist is to overinvest in production capacity in order to make entry unprofitable is called the Bain, Modigliani, Sylos-Labini model.

Question 16

As additional firms enter a market, it moves from monopoly through oligopoly to perfect competition, in which case the profits of the former monopolist

A) increase
B) stay constant
C) diminish

Question 17

An overinvestment strategy is an entry-prevention strategy for an incumbent firm in which the incumbent monopolist overinvests in production capacity to make a credible threat to increase its output beyond the limit quantity (and thereby sell the goods at a price below the limit price) if any competitor enters the market.

Question 18

Impeded entry occurs when the incumbent firm is able to deter entry by simply pursuing a policy that is best for itself as a monopolist.

Question 19

A situation where the monopolist must choose a less advantageous level of output in order to deter entry is known as impeded entry.

Question 20

In the entry-prevention game, the incumbent firm will continue to earn the profits associated with the quantity set in period 0 if the potential entrant chooses to

A) stay out
B) enter
C) make a buy-out offer

Question 21

According to Dixit and Spence, the capacity of the incumbent firm must be large enough that the threat to produce an entry-preventing level of output is

A) credible
B) noncredible
C) random

Question 22

In the Dixit-Spence model, the incumbent firm prevents entry by threatening to produce a level of output beyond the limit quantity. What makes this threat credible?

Question 23

If entry occurs, by assumption the entrant will choose the output level that corresponds to the

A) Dixit-Spence optimum
B) social-welfare optimum
C) Cournot equilibrium

Question 24

Why does a monopolist wish to prevent entry of competing firms?

Question 25

When a number of firms are producing a product, the MR received by any single firm is _______________ it would be if the firm were a monopolist.

A) less than
B) greater than
C) equal to what

Question 26

An equilibrium to a game of incomplete information where players of different types take different actions so that others are able to learn their type from the action they take is called a

A) Nash equilibrium
B) pooling equilibrium
C) separating equilibrium

Question 27

In the Dixit-Spence model, we assume that the marginal cost of producing gadgets depends on the

A) amount of production capacity a firm has
B) long-run fixed cost of the firm
C) relative position of the average total cost curve of the firm

Question 28

In the Dixit-Spence model, the limit quantity is an output level for the incumbent that will drive the price down sufficiently to force the entrant

A) into the market
B) to earn extra-normal profits
C) out of the market

Question 29

A disadvantage of overinvestment is that the incumbent firm builds capacity it never uses, which is

A) somewhat wasteful of resources
B) an efficient use of resources
C) socially optimal

Question 30

The elasticity of demand of an industry is the same as the elasticity of demand of the only existing firm when an industry is a(n)

A) oligopoly
B) monopoly
C) perfect competitive industry

Question 31

List the characteristics of a perfectly competitive market.

Question 32

As an increasing number of firms enter a market, the demand curve facing any given firm must have an elasticity approaching

A) infinity
B) zero
C) one

Question 33

Is the predicted outcome of the Bain, Modigliani, Sylos-Labini model a subgame perfect equilibrium? Why or why not?

Question 34

A model of entry prevention where the strategy of the incumbent monopolist is to overinvest in production capacity in order to make entry unprofitable is called the

A) Stackelberg model
B) Dixit-Spence model
C) Bain, Modigliani, Sylos-Labini model

Question 35

You are considering starting a business to compete against a monopolist. According to Dixit and Spence, your decision to enter or stay out will depend on the

A) level of profits being earned by the incumbent
B) amount of production capacity built by the incumbent firm so far
C) price that is optimal for society

Question 36

In the Dixit-Spence model, the marginal cost for an entrant is

A) v + s no matter how much output it decides to produce
B) v up to the capacity level of K
C) v + s beyond the capacity level of K

Question 37

As the number of firms in an industry grows, price will move toward

A) average fixed cost
B) marginal cost
C) the amount of capital investment, K

Question 38

Which of the following characterizes the subgame perfect equilibrium of the entry-prevention game?

A) the incumbent firm sets the monopoly output in period 0
B) the incumbent firm changes its output in period 1 to the Cournot equilibrium output
C) Both answers are correct

Question 39

If the incumbent firm installs sufficient excess capacity, the potential entrant knows that equilibrium will involve a too high level of output by the incumbent firm

A) only hypothetically
B) after entry
C) at no time in the foreseeable future

Question 40

Explain the difference between blockaded entry and impeded entry.