Oligopoly Market Structures
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Questions and Answers

What is a characteristic of an oligopoly market structure?

  • Interdependence among a few firms in decision-making (correct)
  • Free entry and exit of firms in the market
  • Existence of one dominant firm with no competitors
  • Maintenance of rigid prices regardless of competition

    • In which model does a firm set a competitive price in an oligopoly?

  • Cartel model
  • Monopolistic competition model
  • Contestable market model (correct)
  • Kinked demand model

    • What result does implicit collusion lead to in an oligopoly?

  • Uniform pricing without coordinated agreement (correct)
  • Significant fluctuations in pricing based on output changes
  • Collaboration to fix prices above competition levels
  • Firms independently set prices based on market competition

    • What effect does a kinked demand curve have on prices in an oligopoly?

    <p>Prices tend to be sticky and don't change easily</p> Signup and view all the answers

    Which of the following correctly describes 'natural monopolies'?

    <p>They exist in markets where high fixed costs lead to one firm achieving cost advantages</p> Signup and view all the answers

    What defines a 'cartel' in the context of oligopolies?

    <p>An agreement between firms to control prices or output</p> Signup and view all the answers

    How does the North American Industry Classification System (NAICS) categorize industries?

    <p>By the type of economic activity and production processes</p> Signup and view all the answers

    What is a key outcome of having barriers to entry in an oligopoly?

    <p>Easier collusion and higher profit margins for firms</p> Signup and view all the answers

    What is a key characteristic of antitrust laws?

    <p>They are intended to prevent unfair business practices.</p> Signup and view all the answers

    How has globalization affected American competition ideology?

    <p>It has reshaped the understanding of market competition dynamics.</p> Signup and view all the answers

    What does the Efficient Market Hypothesis (EMH) suggest about stock prices?

    <p>Stock prices reflect all available information at any given time.</p> Signup and view all the answers

    Which statement best describes a Random Walk Hypothesis?

    <p>Stock prices evolve in an unpredictable manner.</p> Signup and view all the answers

    What is a proposed remedy for the issues regarding big platforms?

    <p>Prevent data collection and enforce platform accountability.</p> Signup and view all the answers

    Why might adopting technological standards in investment be inefficient?

    <p>It leads to the domination of underperforming technologies.</p> Signup and view all the answers

    What is an example of an inefficient business practice mentioned?

    <p>The practice of lazy monopolism.</p> Signup and view all the answers

    What is a fundamental characteristic of mutual funds compared to index funds?

    <p>Mutual funds typically have actively managed portfolios.</p> Signup and view all the answers

    What role does corporate takeover play in market efficiency?

    <p>It can lead to improved efficiency in firms.</p> Signup and view all the answers

    What is a characteristic of a firm that fails to exploit a monopolistic situation optimally?

    <p>It operates with self-interested managers.</p> Signup and view all the answers

    What is suggested by the concept of 'random selection of investments'?

    <p>It has been shown to yield higher returns compared to calculated strategies.</p> Signup and view all the answers

    How do competitive forces influence corporate behavior?

    <p>They can pressure companies to enhance efficiency.</p> Signup and view all the answers

    How does the semi-strong form of the Efficient Market Hypothesis differ from other forms?

    <p>It states that all public information is reflected in current stock prices.</p> Signup and view all the answers

    What is a disadvantage of actively managed funds compared to index funds?

    <p>They typically have higher fees that can eat into performance.</p> Signup and view all the answers

    What common misconception exists regarding the goals of firms operating under monopolistic conditions?

    <p>They often need to balance costs against profits.</p> Signup and view all the answers

    How does passive investment strategy affect portfolio risk?

    <p>It generally reduces risk through diversification.</p> Signup and view all the answers

    What constitutes a natural monopoly according to the content provided?

    <p>Large fixed costs and low marginal costs</p> Signup and view all the answers

    How can firms break down a monopoly?

    <p>Lobbying for government intervention or exploiting loopholes</p> Signup and view all the answers

    What is one challenge posed by technological advancements to natural monopolies?

    <p>They can lead to the establishment of virtual marketplaces that increase competition</p> Signup and view all the answers

    What is the effect of regulation on monopolies according to the described theories?

    <p>It sets fair prices without considering profit margins</p> Signup and view all the answers

    What is one implication of network externalities related to monopoly formation?

    <p>They increase an industry's tendency to become winner-take-all</p> Signup and view all the answers

    What role does cost-benefit analysis play in the context of market competition?

    <p>It determines the point where marginal cost equals marginal benefit</p> Signup and view all the answers

    What is a significant drawback of monopolies as identified in the description?

    <p>They may become inefficient and complacent due to lack of competition</p> Signup and view all the answers

    How do firms establish their position in a monopolistic market according to the provided information?

    <p>By leveraging brand names and achieving first mover advantage</p> Signup and view all the answers

    What does a Herfindahl index value less than 1000 indicate about an industry?

    <p>The industry has low market concentration.</p> Signup and view all the answers

    What is the primary purpose of the Sherman Antitrust Act of 1890?

    <p>To regulate the competitive process.</p> Signup and view all the answers

    Which measurement indicates the percentage of total industry sales accounted for by the top four firms?

    <p>Market concentration ratio.</p> Signup and view all the answers

    In the context of anti-trust policies, how is market competitiveness judged by structure?

    <p>By comparing market shares of firms in the industry.</p> Signup and view all the answers

    What is required for a firm to be found in violation of antitrust laws?

    <p>Using monopoly power to its advantage.</p> Signup and view all the answers

    What does the term 'Robber Barons' refer to in the context of industry structure?

    <p>Organizations exploiting market structures for personal gain.</p> Signup and view all the answers

    How is the competitiveness of a firm primarily judged by performance?

    <p>By evaluating its sales growth and profitability.</p> Signup and view all the answers

    What happens to the Herfindahl index if there is a decrease in price among firms in an industry?

    <p>It may decrease depending on the impact on market share.</p> Signup and view all the answers

    Study Notes

    Oligopoly

    • Market structure with few firms
    • Firms respond to each other's decisions
    • Can be collusive or non-collusive (cartel)
    • No single model of oligopoly

    Cartel Model

    • Sets monopoly price
    • Best strategy for maximizing profits
    • Problems:
      • Conflicting interests among firms
      • Difficulty maintaining cartel due to outside competition and individual firm incentives
      • Natural monopolies are less prone to cartel formation

    Contestable Market Model

    • Model of oligopoly where competitors can enter and exit freely (no barriers to entry/exit)
    • Price is driven by competitive prices
    • The competitive price lies between the actual and competitive prices
    • Even if only one firm, the market can still be competitive if entry is open

    Sticky Prices

    • Prices don't change often
    • Due to kinked demand curve
    • Gap in marginal revenue
    • If one firm raises its price, others won't follow
    • If one firm lowers price, others will follow

    North American Industry Classification System (NAICS)

    • Categorizes industries by economic activity
    • Groups firms with similar production processes
    • Used to categorize firms into broad and sub sectors, defining competitiveness

    Empirical Measures of Industry Structure

    • Herfindahl Index: Measures market concentration by summing the squared market shares of all firms in a market. A lower index suggests greater competitiveness.
    • Concentration Ratio: Measures the combined market share of the leading firms in an industry. A higher ratio implies less competition

    Anti-Trust Policy

    • Government policy towards promoting competition
    • Judgments based on performance or structure
    • Laws aimed at regulating business practices to prevent monopolies
    • Arguments for decrease in antitrust enforcement include that laws are well known to prevent monopolies and the pace of technological change makes it more difficult to detect anti-trust violations

    Real World Firms

    • Successful businesses can achieve lower costs
    • Short term profits are not always the priority
    • Competition is a process

    Lazy Monopolists

    • Firms that aren't efficient in maximizing profits, despite being in a position that would allow them to
    • Corporate takeovers/ mergers

    Platform Monopolies

    • Network externalities, two implications:
      • Winner take all
      • First mover advantage

    Stocks + Bonds

    • Efficient Market Hypothesis (EMH): Stock prices reflect all available information, so consistent "beating the market" is difficult
    • Random Walk Hypothesis: Stock prices vary randomly, without any predictable patterns

    Financial Instruments: Stocks

    • Ownership shares in a company
    • Often traded on stock exchanges
    • Issuers are private sector companies
    • Trackable performance measures

    Financial Instruments: Bonds

    • Loan agreements
    • Issuers: private and public entities
    • Bonds pay back a loan
    • Bonds price rising corresponds to a decrease in interest rates

    Distribution of Income

    • Measures of income distribution: share and socioeconomic divisions.
    • Lorenz Curve: visual representation of income inequality

    Real World Income Distribution

    • Unequally distributed over time
    • Impacts or influenced by factors: business cycles, government policies, competitiveness, demographics, and technological factors

    Poverty

    • Absolute vs. relative poverty
    • Poverty increases incentives for crime, but there is a correlation, not a causation
    • International dimensions: Income inequality varies between countries; some have more progressive tax systems

    Wealth

    • Value of assets owned less any amounts owed
    • Wealth is more unequally distributed than income
    • Measured by considering assets less liabilities

    Gender Pay Gap

    • Differences in median wages between men and women

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    Final Review of Oligopoly Markets PDF

    Description

    Explore the characteristics and models of oligopoly, including the cartel model and contestable market model. Understand the dynamics of few firms in the market, their pricing strategies, and challenges such as sticky prices. This quiz will test your knowledge on how oligopolies function and their implications for competition.

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