Market Structures and Competition Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Market Structures and Competition flashcards as text
Game theory's Nash equilibrium in an oligopoly is defined as a situation where:
Answer: Each firm's strategy is a best response to the strategies of all other firms
A Nash equilibrium occurs when no firm can improve its payoff by unilaterally changing its strategy, given the strategies chosen by all rivals.
Which of the following best illustrates tying as an anticompetitive practice?
Answer: A seller requires buyers of its dominant product to also purchase a separate tied product
Tying forces buyers of a primary (tying) good to also purchase a secondary (tied) good, potentially leveraging market power from one market into another.
Network externalities contribute to monopoly power by:
Answer: Increasing the value of a product as more users adopt it, locking consumers into one platform
Positive network externalities create a self-reinforcing cycle where the dominant platform becomes more valuable as adoption grows, raising switching costs for consumers.
The merger of two firms in the same industry (horizontal merger) is most likely to raise antitrust concern when:
Answer: The post-merger HHI exceeds 2,500 and increases by more than 200 points
U.S. DOJ/FTC guidelines flag horizontal mergers as presumptively anticompetitive when the resulting HHI exceeds 2,500 with a delta above 200 points.
Bundling as a pricing strategy is most profitable for a firm when:
Answer: Consumer valuations for the two goods are negatively correlated
Negative correlation in valuations means that consumers who highly value one good value the other less, making a bundle extract more total surplus than separate pricing.
An effective limit pricing strategy by an incumbent monopolist sets price:
Answer: Low enough that a potential entrant cannot earn non-negative profit if it enters
Limit pricing keeps price below the level that would attract entry by ensuring potential entrants expect losses post-entry, sacrificing some profit to deter competition.
Which outcome is characteristic of Bertrand competition with differentiated products (as opposed to homogeneous products)?
Answer: Firms maintain prices above marginal cost and earn positive profit in equilibrium
Product differentiation softens Bertrand competition because consumers are not perfectly willing to switch, allowing firms to hold prices above marginal cost and earn positive profit.