Question 1

As their respective names imply, monopoly and monopolistic competition are the most similar of the four market structures.

Accepted Answer

Monopoly is a market structure where a single firm controls the entire market, while monopolistic competition involves many firms selling similar but not identical products, making them significantly different in terms of competition and market control.

Question 2

Efforts by firms to secure patents increase the amount of competition in the affected markets.

Accepted Answer

Efforts by firms to secure patents create a temporary monopoly for the patent holder, reducing competition in the affected market. However, once the patent expires, other firms are free to enter the market, increasing competition.

Question 3

A decrease in the number of competitors in a monopolistically competitive market causes an increase in the price elasticity of demand for the output of each of the remaining firms in the market.

Accepted Answer

A decrease in the number of competitors leads to a decrease in the substitution effect as consumers have fewer options to choose from. This reduces the price elasticity of demand for the remaining firms in the market.

Question 4

If the cross-price elasticity of demand between two products is positive, we can conclude that the two products are substitutes.

Accepted Answer

A positive cross-price elasticity of demand indicates that an increase in the price of one product will result in an increase in the demand for the other product. This suggests that the two products are substitutes, as consumers are willing to switch to the alternative product when the price of the first increases.

Question 5

As the price elasticity of demand for a particular good decreases, the corresponding Lerner Index, and hence the amount of market power attributed to the firm that produces the product in question, decreases as well.

Accepted Answer

The Lerner Index is calculated as (P - MC) / P, where P is the price of the good and MC is the marginal cost of production. As the price elasticity of demand decreases (i.e. becomes more inelastic), the firm can increase its price without experiencing a significant decrease in demand. This means that the firm has more market power, and the Lerner Index increases. Therefore, the statement is false.

Question 6

The addition of gasoline pumps at a grocery store is a good example of a network externality.

Accepted Answer

The addition of gasoline pumps at a grocery store would create a network externality because it would increase the number of customers who visit the store. These customers may also purchase groceries while they are filling up with gas, creating a positive feedback loop that benefits both the store and the customers.

Question 7

Patents have become less important than such factors as secrecy, lead time, and increased sales and service efforts as a means to maintain a competitive advantage in the pharmaceutical industry.

Accepted Answer

Patents remain critically important in the pharmaceutical industry as they provide exclusive rights to market a new drug for a certain period, allowing companies to recoup their investment in research and development. This exclusivity is a key factor in maintaining a competitive advantage.

Question 8

Assume the market shares of the six largest firms in an industry are 15 percent each. The six-firm concentration ratio would indicate that the industry is highly concentrated, while the Herfindahl- Hirschman Index would not.

Accepted Answer

The six-firm concentration ratio is calculated by adding up the market shares of the six largest firms in the industry. In this case, the ratio would be 90 percent (15 percent x 6). A ratio above 50 percent indicates that the industry is highly concentrated. However, the Herfindahl- Hirschman Index takes into account the market shares of all firms in the industry, not just the six largest. Therefore, even if the six largest firms each have a 15 percent market share, there may be many smaller firms in the industry that prevent it from being considered highly concentrated based on the Herfindahl- Hirschman Index.

Question 9

Studies suggest that brand loyalty is based primarily on real differences among competing products, suggesting that persuasive advertising is an ineffective means to maintain or increase market share.

Accepted Answer

Brand loyalty often stems from perceived value, emotional connections, and brand identity rather than just real differences among products. Persuasive advertising can significantly influence brand loyalty by shaping perceptions and creating emotional attachments to the brand.

Question 10

The proposed merger between Staples and Office Depot and the FTC's opposition to it underscore the importance of how a market is defined when assessing the amount of market power possessed by an individual firm.

Accepted Answer

The statement is true. The definition of the relevant market is crucial in determining the level of market power that a firm has. In this particular case, the FTC opposed the merger between Staples and Office Depot based on the belief that the two companies were the only two significant office supply retail chains, and therefore, the merger would result in a reduction of competition in the market.

Question 11

For lock-in to be an effective competitive strategy, a firm must successfully raid the customer base of competing firms on a regular basis.

Accepted Answer

Lock-in as a competitive strategy focuses on retaining a firm's existing customer base by creating barriers to entry for competitors. It does not necessarily require raiding the customer base of competing firms.

Question 12

Describe the basic characteristics of the monopoly model and explain how these characteristics affect the ability of a monopolist to earn positive economic profits, both in the short run and over time.

Accepted Answer

The answer of Describe the basic characteristics of the monopoly...

Question 13

The monopoly characteristic of monopolistically competitive firms ensures that such firms will earn positive economic profits over the long run.

Accepted Answer

The monopoly characteristic of monopolistically competitive firms allows them to set their own prices to a certain extent, but competition from other firms leads to economic profits being eroded over time as other firms enter the market or existing firms expand production. Therefore, monopolistically competitive firms may earn positive economic profits in the short run, but in the long run, profits will be driven to zero.

Question 14

Microsoft was charged with violating the antitrust laws not because it had a virtual monopoly in the form of its Windows operating system, but because it acted like a monopolist in trying to control the market for certain software applications.

Accepted Answer

This is an accurate statement regarding the antitrust case against Microsoft. The company was accused of using its dominant position in the market for operating systems to stifle competition in the market for other software applications, such as web browsers.

Question 15

Assume the firms in a monopolistically competitive market are currently incurring economic losses. Because they are price searchers, existing firms will raise their prices until the losses are eliminated and each firm is once again earning zero economic profit.

Accepted Answer

Monopolistically competitive firms do not necessarily have the ability to raise their prices without losing customers, as there are close substitutes available in the market. Therefore, the assumption that existing firms will raise their prices to eliminate losses may not be accurate. Instead, firms may seek to differentiate their products or lower their costs in order to compete more effectively in the market.

Question 16

The Lerner Index is preferred to the Herfindahl-Hirschman Index as a measure of market power due to the former's simplicity and straightforward interpretation.

Accepted Answer

The Lerner Index and the Herfindahl-Hirschman Index (HHI) serve different purposes: the Lerner Index measures a firm's pricing power above marginal cost, while the HHI measures market concentration. Their preference depends on the context of the analysis rather than simplicity or interpretation alone.

Question 17

Compare and contrast the potential for a perfectly competitive firm and a monopolistically competitive firm to earn positive economic profits in the short run versus the long run. Explain your reasoning.

Accepted Answer

The answer of Compare and contrast the potential for a...

Question 18

All else constant, so long as it is negative, as the cross price elasticity of demand between a firm's product and those of its competitors increases, so does the market power possessed by the firm.

Accepted Answer

The statement is false. As the cross price elasticity of demand between a firm's product and those of its competitors increases (meaning that customers are more likely to switch to a competitor's product if the firm raises its prices), the firm's market power decreases. Higher cross price elasticity of demand indicates that the firm faces more competition and has less ability to raise prices without losing customers.

Question 19

The various antitrust laws are written in very specific terms. Thus, there is little or no question as to when a firm has run afoul of one or more of these laws.

Accepted Answer

While antitrust laws do provide specific guidelines and rules for firms to follow, there is still interpretation involved and cases may not always have a clear cut answer. Courts and government agencies must analyze the specific facts and circumstances of each case to determine if a firm has violated antitrust laws.

Question 20

The purpose of the Horizontal Merger Guidelines developed by the Department of Justice and the FTC is to prevent customers from being harmed by the increased market power that might result from a merger of two or more firms.

Accepted Answer

The Horizontal Merger Guidelines aim to protect customers and prevent harm to competition in the market by assessing the potential impact on market power that might result from a merger.

Quiz 8: Market Structure: Monopoly and Monopolistic Competition