Question 1

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 is a strategy where a firm makes it difficult or costly for customers to switch to a competing product or service. The focus is on retaining the current customer base rather than raiding that of the competitors. However, if a firm can successfully implement lock-in, it may discourage customers from switching to competitors, indirectly affecting their customer base as well. So, while raiding competitor's customer base is not the main goal of lock-in, it may be a byproduct of its successful implementation.

Question 2

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 3

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 adds up the market shares of the six largest firms, which in this case is 90 percent (15 percent x 6). This indicates high concentration in the industry. However, the Herfindahl-Hirschman Index takes into account the market shares of all firms in the industry, not just the six largest. Therefore, if there are many small firms in the industry with low market shares, the HHI may not indicate high concentration.

Question 4

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 FTC opposed the merger because it believed that the combined company would have too much market power in the office supplies market. The definition of the market is therefore critical in determining whether a particular firm or merger would be anti-competitive.

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 and MC is the marginal cost. As the price elasticity of demand decreases, the firm has more pricing power and can increase the price above the marginal cost, leading to a higher Lerner Index and more market power. Therefore, the statement in the question is false.

Question 6

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 in a monopolistically competitive market would lead to an increase in the market power of the remaining firms. This will result in a decrease in the price elasticity of demand for their output, as consumers will have fewer substitutes to choose from.

Question 7

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 8

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

Microsoft was not charged for having a monopoly, but for trying to use its monopoly power to control the market for certain software applications.

Question 9

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 provide guidance on what actions are prohibited, there is still room for interpretation and legal disputes. Courts often have to examine individual cases to determine whether a firm has violated antitrust laws.

Question 10

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 leads to an increase in the demand for the other product, suggesting that the two products are substitutes.

Question 11

Use Figure 8.2, which represents the situation faced by a monopolist, to answer questions a-c.
  
a. In Figure 8.2, indicate the profit maximizing price and output level and label them P1 and Q1.
b. Shade in the area that represents the firm's economic profit (or loss).
c. If this firm wished to discourage entry by other firms it could produce the output level at which it earns only a zero economic profit. Indicate the price and output level associated with a zero economic profit and label them P2 and Q2.

Accepted Answer

The answer of Use Figure 8.2, which represents the situation...

Question 12

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 13

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 markets are characterized by firms having some degree of market power and being able to charge a price above their marginal cost. Therefore, if firms are currently incurring economic losses, they cannot simply raise their prices to eliminate the losses because consumers will switch to other, similar products. In the long run, new firms may also enter the market, which will increase competition and further lower prices. Therefore, monopolistically competitive firms will not necessarily eliminate their losses by raising prices.

Question 14

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 15

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 are designed to prevent harm to customers and competition that could result from mergers between two or more companies. The guidelines provide the Department of Justice and the Federal Trade Commission with a framework for evaluating the potential effects of merger transactions and determining whether they are likely to be anticompetitive.

Question 16

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 17

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 can create a network externality, whereby people are more likely to shop at that particular grocery store because they can also fill up their gas tanks in the same location. This can increase the value of the grocery store to consumers and potentially drive more traffic to the store.

Question 18

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

Accepted Answer

Monopolistically competitive firms face competition from close substitutes, which limits their ability to set prices and earn economic profits in the long run. Any positive economic profits that are earned in the short run will attract new firms to enter the market, which increases competition and reduces profits.

Question 19

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 20

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.

Quiz 8: Market Structure: Monopoly and Monopolistic Competition