Market Structures and Competition Flashcards
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Read the first 7 Market Structures and Competition flashcards as text
In a Cournot oligopoly with two identical firms, each firm's equilibrium output equals what fraction of the competitive output?
Answer: One-third
In Cournot duopoly each firm produces 1/3 of the competitive quantity, yielding a combined industry output of 2/3 of the competitive level.
Which condition best describes the Bertrand paradox in oligopoly theory?
Answer: Two price-setting firms with identical costs drive price to marginal cost
The Bertrand paradox shows that just two identical firms competing on price undercut each other until price equals marginal cost, replicating perfect competition.
A 'natural monopoly' arises when:
Answer: Average cost declines over the entire relevant range of market output
Natural monopoly exists when economies of scale are so extensive that one firm can serve the entire market at lower average cost than multiple firms could.
Which market structure is characterized by a kinked demand curve model used to explain price rigidity?
Answer: Oligopoly
The kinked demand curve model (Sweezy) applies to oligopoly, arguing rivals match price cuts but not price increases, creating a kink that leads to stable prices.
A firm practicing first-degree price discrimination extracts:
Answer: All consumer surplus, converting it to producer surplus
Perfect (first-degree) price discrimination charges every consumer their maximum willingness to pay, capturing the entire consumer surplus as producer surplus.
The Herfindahl-Hirschman Index (HHI) is calculated by:
Answer: Summing the squares of each firm's percentage market share
The HHI equals the sum of squared market share percentages; a higher HHI signals greater market concentration and potential monopoly power.
Under monopolistic competition in long-run equilibrium, a firm produces:
Answer: To the left of minimum average cost, resulting in excess capacity
Free entry in monopolistic competition drives economic profit to zero but leaves firms on the downward-sloping portion of their AC curve, creating excess capacity.