Econ chapter 11

 Market Structure: Refers to the organizational characteristics of a market within which

firms operate.
 Oligopoly: A market structure characterized by a small number of large firms dominating the
market.
 Contestable Market: A market where entry and exit are relatively easy and firms behave
competitively.
 Concentration Ratio: Measures the extent of market control exercised by a certain number
of leading firms.
 Market Share: Percentage of total market sales held by a single firm or group of firms.
 Product Differentiation: Strategy where firms distinguish their products from competitors'
products.
 Game Theory: Analytical tool used to study strategic behavior among competing firms.
 Price Fixing: Collusion among firms to set prices at a certain level.
 Price Leadership: Strategy where one firm sets the price and others follow.
 Cartel: Formal agreement among firms to coordinate prices and outputs.
 Predatory Pricing: Strategy of temporarily setting prices low to drive competitors out of the
market.
 Barriers to Entry: Factors that make it difficult for new firms to enter a market.
 Market Failure: Situation where the market does not allocate resources efficiently.
 Antitrust: Laws aimed at preventing anti-competitive behavior in markets.
 Herfindahl-Hirschman Index (HHI): Measure of market concentration calculated by
summing the squares of market shares of all firms in the market.

 List the two reasons why Oligopoly may exist. [page 246]

 Oligopoly may exist due to economies of scale and significant barriers to entry.

 List the four determinants of market power. [page 246]

 The four determinants of market power are:

1. Number of firms in the market.
2. Market share of each firm.
3. Product differentiation.
4. Barriers to entry.

 Identify the critical determinant of market power. [page 247]

 The critical determinant of market power is barriers to entry.

 If an Oligopoly market is contestable, what could happen to the current firms in the
market? [page 247]
  If an Oligopoly market is contestable, current firms may face entry by new firms,
potentially reducing their market power.

 What value must the Concentration Ratio take on in order for Economists to consider
the industry an Oligopoly? [page 247]

 Economists typically consider an industry to be an oligopoly if the Concentration Ratio is

40% or higher.

 Be able to identify several real-world examples of industries characterized as Oligopoly.

[Table 11.2 on page 248]

 Real-world examples of industries characterized as oligopoly include airlines,

telecommunications, and automobile manufacturing.

 Explain why this market is likely to exhibit great internal tension. [pages 250 – 251]

 In an oligopoly market like the computer industry, firms closely monitor each other's
actions and respond strategically, leading to intense competition for market share and
profitability.

 Explain WHY increased sales at the prevailing market price by one Oligopoly firm will
be noticed by the other Oligopoly firms. [page 251]

 Increased sales by one oligopoly firm at the prevailing market price will be noticed
because firms in oligopoly are interdependent and closely observe each other's
performance to strategize their own actions.

 Increases in the market share of one Oligopoly firm must _______________________ the
market shares of the other Oligopoly firms. [page 251]

 Increases in the market share of one oligopoly firm must decrease the market shares of
the other oligopoly firms.

 Explain WHY increased sales at reduced prices by one Oligopoly firm will be noticed by
the other Oligopoly firms. [page 251]

 Reduced prices by one oligopoly firm will be noticed because it can trigger price
competition and affect the profitability and market position of other firms in the
oligopoly.

 What two things can Oligopoly firms do to retaliate against another Oligopoly firm that
is attempting to increase its own sales at the prevailing market price? [pages 251 – 253]

 Oligopoly firms can retaliate by matching price cuts or increasing non-price competition
(e.g., marketing efforts, product innovation).
 Discuss how a firm can step up its marketing efforts. [page 252]

 A firm can step up its marketing efforts by increasing advertising expenditures, launching
promotional campaigns, or enhancing brand recognition and loyalty.

 Specifically, what was Dr. Pepper’s new marketing campaign in 2018? Did it increase
Dr. Pepper’s sales and market share? [page 252]

 Dr. Pepper's new marketing campaign in 2018 focused on promoting new flavors and
targeting younger demographics. Details on its impact on sales and market share would
need to be referenced from the specific page in your textbook.

 Explain WHY an attempt by one Oligopoly firm to increase its sales at reduced prices
will lead to a general reduction in the market price. [pages 252 – 253]

 Reduced prices by one oligopoly firm can lead to price competition, as other firms may
lower their prices in response to maintain market share, leading to a general reduction in
market price.

 Explain how Netflix responded to the entry of Disney+ and Peacock into the movie
streaming market. [page 253]

 Netflix responded by increasing investment in original content, expanding its global

reach, and adjusting subscription plans to retain and attract customers.

 Complete this sentence: “This is why Oligopoly firms avoid price competition and
instead pursue...” [page 253]

 "...pursue non-price competition such as product differentiation, branding, and

marketing."

 Under what conditions will the demand curve for Oligopoly products be kinked? [pages
254 – 255 and Figure 11.3]

 The demand curve for oligopoly products will be kinked when competitors react
asymmetrically to price changes, such as cutting prices but not raising them.

 What two conclusions can be drawn from Figure 11.3? [page 255]

 From Figure 11.3, it can be concluded that oligopoly firms may avoid changing prices
and that marginal revenue may be discontinuous.

 What must an Oligopoly firm consider when formulating its own price and output
strategies? [page 256]
  An oligopoly firm must consider how competitors will react and the potential impact on
market share and profitability when formulating price and output strategies.

 What makes oligopoly particularly interesting? [page 256]

 Oligopoly is particularly interesting due to the strategic interactions and complex

decision-making among a small number of large firms.

 For an oligopoly firm, the decision to initiate a price cut boils down to...what? [page 256]

 The decision to initiate a price cut in oligopoly boils down to considering the likely
reactions of competitors and the potential impact on overall profitability.

 Identify the formula used to calculate the expected payoff of a price cut. [page 257]

 The expected payoff of a price cut can be calculated using a formula that considers
changes in market share and profit impacts.

 If a collusive Oligopoly is really a shared Monopoly, then how will it make its
production decision? [pages 257 – 259 and Figure 11.4]

 A collusive oligopoly, acting like a shared monopoly, will collectively determine

production levels to maximize joint profits.

 Using a graph similar to the one provided in Figure 11.4, be able to analyze the
Production Decision of a collusive oligopoly. [page 258]

 Analyzing the production decision of a collusive oligopoly involves determining the

output level that maximizes total profits for all firms involved.

 Explain why there is an inherent conflict in the joint and individual interests of
Oligopoly firms. [page 259]

 There is conflict because while firms in oligopoly benefit collectively from coordination,
they also have individual incentives to deviate and increase their own profits.

 To avoid self-destructive behavior, Oligopoly firms must coordinate their behavior so

that what two conditions are satisfied? [page 259]

 Oligopoly firms must coordinate to satisfy stability in pricing and avoid price wars,
ensuring sustainable profits for all firms involved.

 What is the most explicit form of coordination among oligopoly firms? [page 260]

 The most explicit form of coordination among oligopoly firms is through formal
agreements such as cartels.
 Provide two examples of industries with firms convicted of price-fixing. [pages 260 –
261]

 Examples include the oil industry and electronics manufacturing.

 Identify a more subtle way of achieving a uniform price within an oligopoly. [page 261]

 A more subtle way is through tacit collusion or informal signaling, where firms adjust
prices in response to each other's actions without explicit agreements.

 Which industry has been accused of using a Price Leadership strategy? How did the
firms do this? [page 261]

 The airline industry has been accused of using a Price Leadership strategy, where one
dominant firm sets prices and others follow to maintain price stability and avoid
competition.

 Under what condition can Economic Profit be maintained over the long run? [page 262]

 Economic profit can be maintained over the long run if barriers to entry prevent new
firms from entering the market and eroding profits.

 Explain how patents can create a barrier to entry in Oligopoly markets. [page 262]

 Patents can create a barrier to entry by granting exclusive rights to produce a product or
use a technology, thereby limiting competition.

 Explain how distribution control can create a barrier to entry in Oligopoly markets.
[pages 262 – 263]

 Control over distribution channels can create a barrier to entry by restricting access to
retail outlets or supply chains.

 Explain how input lock-ups can create a barrier to entry in Oligopoly markets. [page
263]

 Input lock-ups occur when firms control essential resources or raw materials, making it
difficult for new entrants to secure necessary inputs.

 Explain how mergers and acquisitions can create a barrier to entry in Oligopoly
markets. [pages 263 – 264]

 Mergers and acquisitions can create a barrier to entry by consolidating market power and
reducing the number of independent competitors.
 Explain how government regulation can create a barrier to entry in Oligopoly markets.
[pages 264 – 265]

 Government regulations such as licensing requirements or high compliance costs can

deter new entrants and protect existing firms.

 Explain how non-price competition (advertising) can create a barrier to entry in

Oligopoly markets. [page 265]

 Heavy investment in advertising and branding can create brand loyalty and customer
switching costs, making it challenging for new entrants to attract customers.

 Explain how training can create a barrier to entry in Oligopoly markets. [page 265]

 Specialized training or knowledge required to operate effectively in an industry can act as

a barrier to entry by increasing costs for new entrants.

 Explain how network economies can create a barrier to entry in Oligopoly markets.
[page 265]

 Network economies occur when the value of a product or service increases with the
number of users, creating a barrier for new entrants without an established network.

 Under what conditions does market power lead to market failure? [page 265]

 Market power can lead to market failure when firms use their dominance to restrict
output, raise prices, and reduce consumer welfare, leading to inefficiencies.

 Describe how a value for the Herfindahl-Hirshman Index (HHI) of market

concentration is calculated. [page 268]

 The HHI is calculated by summing the squares of the market shares of all firms in the
market.

 Explain how the HHI differs from the Concentration Ratio, which was discussed earlier
in this chapter. [page 268]

 The HHI provides a more detailed measure of market concentration by considering the
distribution of market shares among all firms, whereas the Concentration Ratio sums the
market shares of a certain number of leading firms.

 Explain how the US Justice Department uses the HHI to evaluate proposed mergers
between companies. [page 268]

 (a) Mergers and acquisitions in industries with an HHI value of less than 1,500 will not
be challenged by the US Justice Department.
  (b) If an industry has an HHI value between 1,500 and 2,500, the US Justice Department
will challenge any merger that increases the HHI value by 100 points or more.
 (c) Any merger that creates an HHI value over 2,500 will be challenged by the US Justice
Department.

 The US Justice Department reviews about _________________ mergers a year but

challenges fewer than ___________. [page 268]

 The US Justice Department reviews about 2,000 mergers a year but challenges fewer than
20.