Questions for Review without Answers
Chapter 14. Competition Theory II. Imperfect Competition
I. Basics
1) The theory of imperfect competition is the same as the theory of market structures and also the same as the theory of industrial organisation. Explain.
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2) What about perfect competition: is it also a market structure and a form of industrial organisation?
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3) How does the OECD classify market structures?
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4) What question is answered by applying the concentration ratio?
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5) How does the Herfindahl index measure concentration?
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II. Two Charts to Compare Perfect and Imperfect Competition
6) Here are some characteristics that all imperfect competitors have in common. Explain each of them and contrast them with the characteristics of perfect competitors.
A. They have normal rather than horizontal demand curves.
B. Marginal revenue is below price.
C. Marginal cost is below price.
D. Imperfect competitors do not maximise total surplus.
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III. Monopoly
7) What is a natural monopoly?
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8) Explain why the lack of substitutes is a sine-qua-non for monopolist power.
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9) What is a cartel?
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10) Explain how a monopoly determines the quantity supplied and price.
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11) Why is maximising total surplus simply impossible for a monopolist?
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12) A monopoly increases output from 10 to 11 units and lowers price from $2,000 to $1,900. What is its marginal revenue?
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13) Do you remember between which points in the standard graph the welfare-loss triangle is located?
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IV. Oligopoly
14) What sort of game is the prisoners' dilemma?
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15) What lessons does it convey?
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16) What is Nash equilibrium?
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17) What does contestability stand for?
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V. Monopolistic Competition
18) Monopolistic firms cannot minimise average total costs. Why not?
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19) Explain a monopolistic firm's price formation.
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VI. Chart to Compare All Four Kinds of Market Structure
20) You have seen that there are four market structures: perfect competition and the three structures comprised by imperfect competition. To which of them do the statements below apply?
A. Output is such that MC = MR.
B. The marginal revenue curve slopes downwards.
C. The demand curve is above the marginal revenue curve.
D. The marginal cost curve slopes upwards.
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VII. The Costs and Benefits of Advertising and Differentiation
21) Which firms neither advertise nor differentiate their products?
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22) Advertising of incumbent firms is a sizeable entry barrier for newcomers. Why?
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23) Why do firms spend so much on advertising although they know that we do not like it?
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