Market Structure and Concentration Ratios
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What is the 4-firm concentration ratio used to assess in an industry?

  • The total sales of all firms
  • The dominance of the four largest firms (correct)
  • The profitability of the industry
  • The average sales per firm

    • If the 4-firm concentration ratio is less than 40%, what type of market structure is suggested?

  • Oligopoly
  • Monopoly
  • Monopolistic competition (correct)
  • Perfect competition

    • For the given industry, what is the sales revenue of the largest firm?

  • $12 million
  • $17 million
  • $15 million
  • $22 million (correct)

    • What is the total sales revenue of the firms B, C, D, E, and F combined?

    <p>$42 million</p> Signup and view all the answers

    What type of market structure is indicated if the 4-firm concentration ratio exceeds 40%?

    <p>Oligopoly</p> Signup and view all the answers

    Which of the following sales figures corresponds to Company F?

    <p>$15 million</p> Signup and view all the answers

    How is the concentration ratio calculated for the four largest firms?

    <p>Total sales of the four largest firms divided by total industry sales</p> Signup and view all the answers

    In the industry with a total sales of $92 million, what is the 4-firm concentration ratio if the largest four firms' sales total $66 million?

    <p>72%</p> Signup and view all the answers

    What is the primary characteristic of a monopolistically competitive firm compared to a perfectly competitive firm?

    <p>It does not achieve productive efficiency.</p> Signup and view all the answers

    What factors contribute to excess capacity in a monopolistically competitive market?

    <p>Production below economic capacity.</p> Signup and view all the answers

    What is the effect of monopolistic competition on pricing compared to perfect competition?

    <p>Prices exceed marginal cost.</p> Signup and view all the answers

    What allows franchised firms to maintain a competitive advantage in their markets?

    <p>Exclusive geographic territories.</p> Signup and view all the answers

    Which of the following is NOT a characteristic of monopolistic competition?

    <p>Long-run equilibrium price equals minimum average total cost.</p> Signup and view all the answers

    How do monopolistically competitive firms maintain positive economic profits in the long run?

    <p>By blocking the entry of competitors.</p> Signup and view all the answers

    Which characteristic is NOT typical of an oligopoly?

    <p>Easy entry for new firms</p> Signup and view all the answers

    Which benefit is NOT typically associated with franchises?

    <p>Complete operational independence.</p> Signup and view all the answers

    In an oligopoly, how is mutual interdependence characterized?

    <p>Firms' actions depend on the anticipated reactions of rivals.</p> Signup and view all the answers

    What is the primary criterion for a firm operating in a monopolistic competition to produce its output?

    <p>Where marginal cost equals marginal revenue.</p> Signup and view all the answers

    What is the primary purpose of collusion among suppliers in an oligopoly?

    <p>To agree on product pricing or production quantities</p> Signup and view all the answers

    What does a Nash Equilibrium represent in game theory?

    <p>The best action for a firm given the actions of the others.</p> Signup and view all the answers

    If one firm in an oligopoly engages in non-price competition, what is likely to occur?

    <p>Other firms may follow with similar strategies.</p> Signup and view all the answers

    When two firms in an oligopoly face each other in a scenario where one features a high-profile endorsement, what is the first expected response from the rival firm?

    <p>To seek a similar endorsement deal</p> Signup and view all the answers

    Which of the following products typically represents a standardized product in an oligopoly?

    <p>Steel</p> Signup and view all the answers

    What is a common outcome when firms in an oligopoly engage in collusion?

    <p>They often stabilize prices and increase profits.</p> Signup and view all the answers

    What is a primary feature of monopolistic competition?

    <p>Many firms sell differentiated products</p> Signup and view all the answers

    Which of the following represents a method of product differentiation?

    <p>Developing a recognized brand name</p> Signup and view all the answers

    Why do firms in monopolistic competition tend to have excess capacity?

    <p>Competition leads to output not meeting demand</p> Signup and view all the answers

    What is a characteristic of oligopoly markets?

    <p>Market dominated by a small number of large firms</p> Signup and view all the answers

    What is a common reason large firms in oligopoly markets might collude?

    <p>To increase profit margins without risking market share</p> Signup and view all the answers

    What does the concentration ratio measure?

    <p>Percentage of sales controlled by the largest few firms</p> Signup and view all the answers

    What tendency is observed in oligopolistic firms regarding price changes?

    <p>They avoid changing prices to maintain market stability</p> Signup and view all the answers

    Which of the following is NOT a method of product differentiation?

    <p>Creating a competitive pricing strategy</p> Signup and view all the answers

    What characterizes a price leadership model in a non-collusive oligopoly?

    <p>A leading firm sets the price while others follow.</p> Signup and view all the answers

    What happens to demand when a firm raises its price in a kinked demand curve model?

    <p>Demand becomes elastic.</p> Signup and view all the answers

    Which statement accurately describes a common perception of oligopolies?

    <p>They are considered inefficient in both productive and allocative terms.</p> Signup and view all the answers

    What is a key aspect of firms in monopolistically competitive markets?

    <p>They experience excess capacity in the long run.</p> Signup and view all the answers

    What distinguishes the kinked demand curve from other demand curve models?

    <p>It reflects different elasticity of demand above and below the current price.</p> Signup and view all the answers

    What is a primary function of a cartel in an industry?

    <p>To act in unison to increase prices</p> Signup and view all the answers

    What happens to the price of oil when OPEC reduces its output assuming demand is inelastic?

    <p>The price increases from $2 to $8</p> Signup and view all the answers

    In the matrix, what are the profits for Spartan Inc when both firms cheat?

    <p>$15 million</p> Signup and view all the answers

    What is the potential profit increase for a firm if it cheats on a collusive agreement?

    <p>$10 million</p> Signup and view all the answers

    What might firms in a collusive oligopoly do to avoid competition?

    <p>Enter into an illegal agreement</p> Signup and view all the answers

    What is one consequence of cheating within a cartel?

    <p>One firm's profits increase while the other's decreases</p> Signup and view all the answers

    If both Spartan Inc and Trojan Ltd stick to the agreement, what is the profit for each firm?

    <p>$25 million</p> Signup and view all the answers

    What drives a cartel to function efficiently?

    <p>The absence of cheating among members</p> Signup and view all the answers

    Study Notes

    Imperfect Competition

    • Imperfect competition is a market structure where producers are identifiable and have some control over price.
    • Two forms of imperfect competition are monopolistic competition and oligopoly.

    Learning Objectives

    • Objective 1: Understand the importance and effects of product differentiation, including advertising.
    • Objective 2: Differentiate between monopolistic competition and oligopoly.
    • Objective 3: Understand why monopolistic competitive firms have excess capacity and are unlikely to earn long-run economic profits.
    • Objective 4: Describe the characteristics of oligopoly markets.
    • Objective 5: Explain why large firms are often tempted to collude and form cartels.
    • Objective 6: Explain price leadership and why oligopolistic firms are reluctant to change prices frequently.

    Product Differentiation

    • Firms try to distinguish their products from competitors through brand names, logos, packaging, location, exceptional service, product development, and advertising.

    Types of Imperfect Competition

    • Monopolistic Competition: Many firms sell differentiated products and have some control over price.
    • Oligopoly: A market dominated by a few large firms.

    Measuring Industry Concentration

    • Concentration ratio: Measures the percentage of an industry's sales controlled by the largest few firms.
      • 4-firm concentration ratio: Percentage of sales revenue by the four largest firms in the industry.
        • If < 40%, likely monopolistic competition.
        • If > 40%, likely an oligopoly.

    Test Your Understanding (Example)

    • Grummit Industry: Consists of 10 companies.
      • Calculate the 4-firm concentration ratio: 22 + 17 + 15 + 12 = 66. Ratio = 66 / 92 = 71%.
      • Type of market: Oligopoly (concentration ratio > 40%).

    LO3: Monopolistic Competition

    • Characteristics:
      • Many small firms acting independently.
      • Freedom of entry.
      • Differentiated products.
      • Each firm has some control over price.

    Elasticity in Monopolistic Competition

    • Demand elasticity depends on the number of rival firms and the degree of product differentiation.
    • In monopolistic competition, many rivals and minimal differentiation lead to high elasticity.

    Monopolistic Competition in the Short Run

    • May have economic profits in the short run.
    • Firms maximize profits by producing where Marginal Revenue (MR) equals Marginal Cost (MC).
    • If price (P) exceeds average cost (C), the firm has economic profits.

    Monopolistic Competition in the Long Run

    • Positive profits attract new firms, increasing the number of competitors.
    • Increased competition reduces demand for each firm's product (demand curve shifts left/down).
    • Firms will eventually have only normal profits in the long run (where price = average cost)

    Test Your Understanding (Example)

    • Economic losses in monopolistic competition: A series of events occurs:
      • Fewer firms exit the industry as they face ongoing losses.
      • Demand curves shift right for remaining firms in the industry.
      • Steps 1 and 2 continue until demand is tangent to the average cost curve, allowing normal profits.

    Excess Capacity

    • Occurs in monopolistic competition.
    • Monopolistically competitive firms produce below the economic capacity (QPC) of perfectly competitive firms (QMC). QPC-QMC = Excess capacity.

    Appraisal of Monopolistic Competition

    • Produces lower output than a perfectly competitive firm.
    • Does not achieve productive efficiency.
    • Charges a higher price than a perfectly competitive firm.
    • Does not achieve allocative efficiency (prices are above marginal costs).

    Franchises

    • Member firms pay a fee for franchise membership and receive exclusive geographic territories.
    • Limits competition from other potential competitors due to exclusive territories.

    Franchises (Benefits)

    • Large-scale advertising
    • Bulk purchasing
    • Branding

    Blocking Entry and Increasing Profit

    • If blocking entry, positive economic profits can be maintained in the long run.
    • Methods include professional associations, government policy (e.g. licensing), and franchising.

    LO4: Oligopoly

    • Characteristics:
      • Dominated by a few large firms.
      • Entry by new firms is difficult.
      • Non-price competition is widely practiced.
      • Each firm has significant control over price.
      • Firms are mutually interdependent, meaning firm decisions depend on anticipated reactions of rival firms.

    Oligopoly (Products)

    • Products can be either standardized or differentiated.

    LO5: The Temptation to Collude

    • Collusion: Agreement among sellers to set product prices or quantities.

    Game Theory

    • A method of analysing firm behaviour highlighting mutual interdependence between firms.
    • Nash Equilibrium: A situation where each rival chooses the best action given the anticipated actions of others.

    Test Your Understanding (Examples: Game Theory, Collusion)

    • Scenarios are provided, with firms being faced with different decisions between cooperating/colluding and cheating on the agreement.

    LO6: Noncollusive Oligopoly

    • Price Leadership: When rival firms engage in price fixing without direct collusion, the most efficient/largest firm will lead price changes and other firms follow.

    The Kinked Demand Curve

    • The demand curve for firms in an oligopoly facing inconsistent competitors reactions:
    • If one firm drops the price, others will follow. If one firm rises, others won't follow. Leading to an inelastic demand curve below the current price and elastic curve above.

    Appraisal of Oligopoly

    • Some views are that oligopolies are too powerful and unproductive/inefficient.
    • Other views suggest that they are at the forefront of technological development and drive down production costs in the long run.

    Key Concepts Summary

    • Product differentiation importance.
    • Monopolistic competition, oligopoly characteristics contrasted
    • Monopolistically competitive firms' normal profits and excess capacity in long run.
    • Collusion and price leadership strategies in oligopolies.

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    Related Documents

    Principles of Microeconomics (Sayre, Morris, Ghayad) Eleventh Edition Chapter 11 PDF

    Description

    This quiz explores key concepts related to market structures, specifically focusing on the 4-firm concentration ratio. It assesses understanding of different market types based on concentration levels and the characteristics of monopolistically competitive firms. Test your knowledge of industry sales and firm revenues.

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