Deck 15: Oligopoly and Antitrust Policy

Question 1

Firms base decisions on the decisions of other firms in the market in:

A) a monopolistic industry.
B) an oligopolistic industry.
C) a monopolistically competitive industry.
D) a perfectly competitive industry.

Answer 1

B

Question 2

The oligopoly model is the only model that explicitly considers how the pricing and output decisions of one firm affect other firms.

Answer 2

True

Question 3

In the 1945 ALCOA case, the court used company performance rather than the structure of the market to determine whether the company was in violation of antitrust laws.

Answer 3

False

Question 4

According to the contestable market model, if there are no barriers to entry or exit, the price an oligopolist sets will be equivalent to average total cost.

Question 5

The only way to judge monopoly is to use both structure and performance criterion simultaneously.

Question 6

Which of the following market structures does not have predictable price and output decisions at which the firms will arrive rationally?

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

Question 7

When government uses the judgment by structure criterion, a firm is considered a monopoly only if, for example, it charges excessive prices.

Question 8

Suppose there are only four airlines that service the air route between two cities. If there is a barrier to entering the market (such as a limited number of gates), the market is best characterized as:

A) a pure monopoly.
B) monopolistically competitive.
C) oligopolistic.
D) perfectly competitive.

Question 9

The cartel model of oligopoly assumes that firms jointly behave as a monopolist in order to maximize joint profits.

Question 10

The Herfindahl index is calculated by adding the squared value of the market shares of all the firms in the industry.

Question 11

According to the contestable market model, the higher an industry's concentration ratio, the more profitable the industry.

Question 12

Under oligopoly:

A) there are many sellers in the industry.
B) there are only a few sellers in the industry.
C) the demand for each firm's output is perfectly elastic.
D) there are no barriers to entry.

Question 13

The higher an industry's concentration ratio is, the more competitive the industry is.

Question 14

When government uses the judgment by performance criterion, a firm is considered a monopoly if it controls a significant segment of the market.

Question 15

According to the contestable market model, if there are no barriers to entry or exit, the price an oligopolist sets will provide no economic profits in the long run.

Question 16

When the FTC investigated whether firms conspired to fix prices of computer memory called dynamic random-access memory (DRAM) chips, Samsung, Micron Technology, Hynix Semiconductor, and Infineon controlled more than 75 percent of the market for DRAM chips. The market for these chips is most likely:

A) monopolistic.
B) perfectly competitive.
C) monopolistically competitive.
D) oligopolistic.

Question 17

Implicit collusion occurs when oligopolistic firms negotiate a common price.

Question 18

Taking explicit account of a rival's expected response to a decision you are making is called:

A) economic decision making.
B) monopolistic decision making.
C) strategic decision making.
D) competitive decision making.

Question 19

The central element of the oligopoly model is that each firm produces a differentiated product.

Question 20

Strategic decision making is most likely to occur in which market structure?

A) Monopolistic competition
B) Oligopoly
C) Perfect competition
D) All firms engage in strategic decision making.

Question 21

Competition in markets defined as platform monopolies is most likely to come from:

A) foreign firms.
B) government.
C) small competitors.
D) new technologies.

Question 22

If a profit-maximizing oligopolist has a kinked demand curve, a downward shift in its marginal cost curve:

A) may not affect output or price.
B) increases output or price but not both.
C) reduces both output and price.
D) reduces output but not price.

Question 23

Cartels are organizations that:

A) keep markets contestable.
B) encourage price wars.
C) coordinate the output and pricing decisions of a group of firms.
D) use predatory pricing to monopolize industries.

Question 24

In the market for bank credit, a large bank sometimes announces a change in interest rates. After the changes in interest rates are announced, other banks in the industry usually react by changing their rates in the same way. This is an example of:

A) a cartel.
B) monopolistic competition.
C) implicit collusion.
D) the kinked demand curve model.

Question 25

Which of the following market structures is characterized by interdependent pricing and output decisions?

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

Question 26

The central characteristic of oligopolistic industries is:

A) interdependent pricing decisions.
B) flexible prices.
C) price competition.
D) few or no economies of scale.

Question 27

According to the kinked demand curve theory of sticky prices, in an oligopolistic market:

A) a price decrease by one firm will not be followed by the other firms.
B) a price increase by one firm will be followed by the other firms.
C) the kinked demand curve is inelastic in the upper portion and elastic in the lower portion of the curve.
D) the kinked demand curve is elastic in the upper portion and inelastic in the lower portion of the curve.

Question 28

When four Infineon Technologies executives participated in an international conspiracy to fix prices for computer memory chips, they were acting with other firms as:

A) if they were in a contestable market.
B) if they faced kinked demand curve.
C) a cartel.
D) an industry with monopolistic competition.

Question 29

A cartel is:

A) legal in the United States as long as collusion is explicit.
B) a group of firms that collude to maximize group profits.
C) found in monopolistically competitive industries.
D) a group of fringe firms.

Question 30

Platform businesses tend to be:

A) natural oligopolies.
B) natural monopolies.
C) artificial oligopolies.
D) artificial monopolies.

Question 31

To be successful in increasing prices for their product, members of a cartel:

A) do not talk to one another.
B) limit output.
C) encourage entry.
D) engage in predatory pricing.

Question 32

When OPEC reduces output to keep prices high, OPEC is acting as a:

A) cartel.
B) price taker.
C) producer in a contestable market.
D) producer moving along a supply curve, cutting output as price falls.

Question 33

A market structure in which there are a few interdependent firms is called:

A) monopolistic competition.
B) monopoly.
C) oligopoly.
D) perfect competition.

Question 34

Platform monopolies initially make large losses because they:

A) receive subsidies from government.
B) receive subsidies from other businesses.
C) are trying to gain market share as quickly as possible.
D) have to hire high-salary tech employees.

Question 35

Network externalities create a push toward:

A) natural monopoly.
B) government deregulation.
C) foreign competition.
D) perfect competition.

Question 36

In the cartel model of oligopoly, the firms would decide how much to produce where:

A) marginal cost equals marginal revenue.
B) marginal cost equals price.
C) marginal cost equals average total cost.
D) the kink in the demand curve is.

Question 37

Suppose an oligopolistic firm assumes that its rivals will ignore a price increase but match a price cut. In this case, the firm perceives its demand curve to be:

A) kinked, being steeper above the going price than below.
B) kinked, being steeper below the going price than above.
C) linear, being less elastic at lower prices.
D) linear, being more elastic at higher prices.

Question 38

Oligopoly is characterized by:

A) no barriers to entry.
B) low market concentration.
C) inability to set price.
D) few sellers.

Question 39

From society's perspective, a possible benefit of a cartel is that it could:

A) provide incentives for firms to cooperate in setting price and output.
B) not earn economic profits.
C) minimize average total costs.
D) provide incentives for the introduction of superior products by competitors.

Question 40

The cartel model of oligopoly assumes that:

A) monopolists sometimes act like oligopolists when they pit divisions of the same corporation against one other.
B) oligopolies act as if they are perfectly competitive when there are no barriers to entry.
C) oligopolies act as if they are monopolists by assigning output quotas to each member so that joint profits are maximized.
D) oligopolies act as if they are monopolists by setting prices competitively for each member.

Question 41

Platform monopolies are most likely:

A) natural monopolies.
B) contestable monopolies.
C) cartels.
D) perfect competitors.

Question 42

The contestable market model of oligopoly bases pricing and output decisions on:

A) the threat of new entrants into the market.
B) market structure.
C) the degree of product differentiation.
D) market share.

Question 43

An attorney for a firm that is arguing that its market is competitive rather than monopolistic would be most likely to argue that the relevant market is shown by a:

A) three-digit North American Industry Classification System (NAICS) industry.
B) four-digit North American Industry Classification System (NAICS) industry.
C) five-digit North American Industry Classification System (NAICS) industry.
D) six-digit North American Industry Classification System (NAICS) industry.

Question 44

In the contestable market model, an oligopoly with no barriers to entry sets a:

A) monopoly price.
B) price that significantly exceeds average total cost.
C) price that is equal to average total cost.
D) collusive price.

Question 45

The top four firms in the industry have 10 percent, 8 percent, 8 percent, and 6 percent of the market. The four-firm concentration ratio of this market is:

A) 8.
B) 32.
C) 66.
D) 264.

Question 46

The difference between a three-digit North American Industry Classification System (NAICS) industry and a six-digit NAICS industry is that:

A) the three-digit industry is more specifically defined than the six-digit code.
B) the six-digit industry is more specifically defined than the three-digit code.
C) three-digit codes apply to a different set of industries than six-digit codes.
D) three-digit codes are used to classify industries whereas six-digit codes are used to classify firms.

Question 47

Refer to the graph shown. If a firm operating as if it were faced with a kinked demand curve believes that if it lowers price from P₂ to P₄, its rival will match the price cut, then:

A) the demand curve used by the firm for decision making is highly elastic.
B) it probably will lower price, since doing so will increase sales.
C) it probably won't lower price, since the percentage decline in price will exceed the percentage increase in quantity sold.
D) D₁ is the relevant demand curve.

Question 48

Refer to the table shown. Using the four-firm concentration ratio, the tire industry is best categorized as: $$\begin{array} { | c | c | c | } \hline \text { Industry } & \begin{array} { c } \text { Number of } \\\text { sellers }\end{array} & \begin{array} { c } \text { \% of shipments accuunted far by the } 4 \\\text { larget comnanies }\end{array} \\\hline \text { Tires } & 15 & 95 \\\hline \begin{array} { c } \text { Upholstered } \\\text { furniture }\end{array} & 2,000 & 15 \\\hline\end{array}$$

A) perfectly competitive.
B) a pure monopoly.
C) monopolistically competitive.
D) oligopolistic.

Question 49

For a cartel to be successful in increasing economic profits for its members:

A) entry of new firms must be blocked.
B) price must be set equal to marginal cost.
C) individual firms must be encouraged to adjust output so as to maximize their own profits at the cartel price.
D) price must be set equal to average total cost.

Question 50

Refer to the graph shown. The oligopolist shown currently charges a price P₁. It believes that rival firms will:

A) gain market share if it lowers price.
B) lose market share if it lowers price.
C) raise price if it raises price.
D) lower price if it lowers price.

Question 51

Suppose there are no barriers to entry in the market for facial tissues, where two brands dominate the industry. According to the theory of contestable markets, the price charged for facial tissues will be:

A) far below the cost of producing a box of facial tissue.
B) far above the cost of producing a box of facial tissue.
C) roughly equal to the cost of producing a box of facial tissue.
D) much higher for the number-one-selling brand than it is for the number-two-selling brand.

Question 52

According to contestable market theory:

A) barriers to entry are much more important than market structure in determining the degree of price competition in an industry.
B) barriers to entry are much less important than market structure in determining the degree of price competition in an industry.
C) barriers to entry and market structure are both important in determining the degree of price competition in an industry.
D) neither barriers to entry nor market structure affects the degree of price competition in an industry.

Question 53

In a contestable market model of oligopoly, prices are determined by:

A) costs and barriers to exit.
B) costs and barriers to entry.
C) costs, barriers to entry, and barriers to exit.
D) costs alone.

Question 54

There is only one firm in the market. The economist analyzing that market has said she would expect the price to equal the firm's average total costs.

A) She must be analyzing this market using a contestable market model.
B) She must be analyzing this market using a game theory model.
C) She must be analyzing this market using a cartel model.
D) She must not be an economist, because that answer is clearly wrong.

Question 55

Refer to the graph shown. If a firm operating as if it were faced with a kinked demand curve believes that if it raises price from P₂ to P₁, its rival will not go along, then:

A) the demand curve used by the firm for decision making is highly inelastic.
B) it probably won't raise price, since doing so would cause sales to drop from Q₃ to Q₁.
C) it probably will raise price, since lower output means lower costs and greater profit.
D) D₂ is the relevant demand curve.

Question 56

Oligopolistic firms:

A) may seek to drive competitors out of business for personal reasons, even at great expense.
B) would not drive competitors out of business to gain control of the market.
C) know that their competitors pay no attention to their pricing decisions and therefore hope to gain market share by lowering price.
D) do not pay attention to a competitor's prices because there's nothing they can do about them.

Question 57

In which of the following models of firm behavior do firms make strategic pricing decisions and also charge a perfectly competitive price?

A) Cartel model of oligopoly
B) Contestable market model of oligopoly
C) Perfectly competitive model
D) Monopoly model

Question 58

The North American Industry Classification System (NAICS) categorizes firms by:

A) market structure, ranking them from perfectly competitive to monopoly.
B) profits, since profits tend to be higher in more concentrated industries.
C) type of economic activity, and groups firms with like production processes.
D) market share, and groups firms with like market power.

Question 59

In the North American Industry Classification System (NAICS) classification system, the broadest classification would be:

A) a two-digit industry.
B) a three-digit industry.
C) a four-digit industry.
D) a five-digit industry.

Question 60

Refer to the graph shown, which shows an oligopolist facing a kinked demand curve. The firm will not increase price when marginal costs fluctuate between which two points?

A) a and b
B) b and c
C) c and d
D) a and d

Question 61

Strategic decision making is most important in:

A) competitive markets.
B) monopolistically competitive markets.
C) oligopolistic markets.
D) monopolistic markets.

Question 62

A market has the following characteristics: There is strategic pricing, output is somewhat restricted, there is interdependent decision making, and some long-run economic profits are possible. This market is:

A) a monopoly.
B) an oligopoly.
C) monopolistically competitive.
D) perfectly competitive.

Question 63

Several firms are operating in a market where they take the other firms' response to their actions into account. This market is:

A) a competitive market.
B) a monopolistically competitive market.
C) an oligopolistic market.
D) a monopoly.

Question 64

The higher the concentration ratio in a given industry, the:

A) closer the industry is to a perfectly competitive market structure.
B) larger the market shares of the smallest four firms in the industry.
C) closer the industry is to an oligopolistic or monopolistic type of market structure.
D) smaller the market shares of the largest four firms in the industry.

Question 65

An industry in which 5 firms each have a 10 percent market share and 50 firms each have a 1 percent market share will have a Herfindahl index equal to:

A) 500.
B) 550.
C) 1,100.
D) 1,500.

Question 66

Refer to the table above. Using the four-firm concentration ratio, the upholstered furniture industry is best categorized as: $$\begin{array} { | c | c | c | } \hline \text { Industry } & \begin{array} { c } \text { Number of } \\\text { sellers }\end{array} & \begin{array} { c } \text { \% of shipments accuunted far by the } 4 \\\text { larget comnanies }\end{array} \\\hline \text { Tires } & 15 & 95 \\\hline \begin{array} { c } \text { Upholstered } \\\text { furniture }\end{array} & 2,000 & 15 \\\hline\end{array}$$

A) perfectly competitive.
B) a pure monopoly.
C) monopolistically competitive.
D) oligopolistic.

Question 67

A four-firm concentration ratio of 75 tells you that the top:

A) firm in the industry produces 75 percent of the industry's output.
B) four firms in the industry produce 75 percent of the industry's output.
C) four firms in the industry produce 25 percent of the industry's output.
D) four firms in the industry earn 75 percent of the industry's profits.

Question 68

If an industry has a Herfindahl index of 3,000, the contestable market model probably would predict that the industry would be more likely to have a:

A) monopolistic price.
B) competitive price.
C) monopolistic price if there are no barriers to entry.
D) competitive price if there are no barriers to entry.

Question 69

One advantage of the Herfindahl index over the concentration ratio is that it:

A) takes into account only the leading firms in an industry.
B) gives extra weight to firms that are especially large.
C) tells about only the top 50 firms in an industry.
D) is easier to calculate.

Question 70

Judgment by performance means that the competitiveness of a market is determined by:

A) the actual behavior of firms in the market.
B) the structure of the industry.
C) the number of firms in the market.
D) technological considerations.

Question 71

The Herfindahl index is calculated by:

A) adding the squared value of the market shares of all the firms in the industry.
B) multiplying the squared value of the market shares of all the firms in the industry.
C) adding the percentage of industry output produced by the largest four firms.
D) adding the percentage of industry output produced by the largest eight firms.

Question 72

If an industry has exactly 20 firms with identical sales, the Herfindahl index must be:

A) less than 100.
B) greater than 100 but less than 200.
C) greater than 200 but less than 400.
D) greater than 400.

Question 73

A market has the following characteristics: There is strategic decision making, output is somewhat restricted, there are few firms, and some long-run economic profits are possible. This market is:

A) a monopoly.
B) an oligopoly.
C) monopolistically competitive.
D) perfectly competitive.

Question 74

In a market, there are many firms selling differentiated products. This market is:

A) a competitive market.
B) a monopolistically competitive market.
C) an oligopolistic market.
D) a monopoly.

Question 75

The concentration ratio is defined as the:

A) percentage of industry output produced by a specific firm.
B) percentage of total industry output produced by the top firms.
C) squared value of the market shares of all the firms in an industry.
D) squared value of the market shares of the largest four firms in the industry.

Question 76

If an industry has exactly 10 firms with identical sales, the four-firm concentration ratio must be:

A) 10.
B) 40.
C) 60.
D) 90.

Question 77

The top four firms in the industry have 10 percent, 8 percent, 8 percent, and 6 percent of the market. The Herfindahl index of this market is closest to which of the following?

A) 8
B) 32
C) 66
D) 264

Question 78

Suppose an industry has a four-firm concentration ratio of 20 percent and a Herfindahl index of 600. According to the cartel model, the industry would be more likely to have:

A) a monopolistic price.
B) a competitive price.
C) either a monopolistic or a competitive price, depending on barriers to entry and exit.
D) a price war.

Question 79

The Herfindahl index and the concentration ratio fail to give a complete picture of an economy's competitiveness because:

A) they measure each firm's share of sales rather than each firm's share of profits.
B) many corporations are conglomerates, spanning a variety of different industries.
C) they don't account for mergers within an industry.
D) they are based on market share, not market size.

Question 80

One advantage of the Herfindahl index over the concentration ratio is that the:

A) Herfindahl index ignores the small firms that always exist on the fringes of any industry.
B) Herfindahl index is easier to compute.
C) Herfindahl index takes into account all firms in an industry.
D) concentration ratio excludes the largest firms in an industry.