Deck 26: Product Differentiation and Innovation in Markets

Question 1

In the circle model with constant marginal cost,each point on the circle will contain a firm in equilibrium if fixed entry costs are zero.

Answer 1

True
All market power vanishes when fixed entry costs go away -- causing each firm to supply only to those whose ideal point is precisely the product characteristic produced.

Question 2

In a monopolistically competitive equilibrium,firms outside the industry could make at most zero profit by entering the industry.

Answer 2

True
If this were not the case,the industry would not be in equilibrium since firms outside would have an incentive to enter.

Question 3

Under monopolistic competition,the number of firms increases as fixed entry costs fall and as demand for the type of good produced in the market increases.

Answer 3

True
Fixed entry costs keep firms from coming into the market to make the positive profit that firms in the market are earning -- so a decrease in fixed entry costs implies more firms will enter.And as more consumers demand these goods,there is more "room" in the market for firms to enter.

Question 4

In a monopolistically competitive market with Dixit-Stiglitz preferences,equilibrium price falls as the goods in the differentiated product market become more substitutable.

Question 5

In a monopolistically competitive market with Dixit-Stiglitz preferences,the number of firms in the differentiated product market falls as goods in that market become less substitutable.

Question 6

Comment on the following statement: "Since product differentiation allows price competitors to establish some market power,it would be more efficient to not permit product differentiation."

Question 7

Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.

Question 8

Most firms produce where marginal revenue is equal to marginal cost,but firms in a monopolistically competitive industry instead choose output where average cost is equal to demand.

Question 9

Since firms within a monopolistically competitive industry set output where marginal revenue is equal to marginal cost,the size of the fixed entry cost does not impact the equilibrium price.

Question 10

Information advertising might provide information about prices in stores,or it might provide information about product characteristics that consumers might not know about.Which one do you think is more likely to be efficient?

Question 11

If price is regulated in a 2-firm oligopoly modeled along the Hotelling line,firms will compete by differentiating their products.

Question 12

Bertrand price competitors can recover some market power when they differentiate their products.

Question 13

Since firms outside an industry cannot have an incentive to enter the industry in equilibrium,firms inside a monopolistically competitive equilibrium must be making zero profit.