11.1 How
does monopolistic competition differ from pure competition in its
basic characteristics? From pure monopoly? Explain fully what product
differentiation may involve. Explain how the entry of firms into, its
industry affects the demand curve facing a monopolistic competitor and
how that, in turn, affects its economic profit. L01
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11.2 Compare
the elasticity of a monopolistic competitor’s demand with that of a
pure competitor and a pure monopolist. Assuming identical long-run
costs, compare graphically the prices and outputs that would result in
the long run under pure competition and under monopolistic competition.
Contrast the two market structures in terms of productive and allocative
efficiency. Explain: “Monopolistically competitive industries are
populated by too many firms, each of which produces too little.” LO2
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11.3 “Monopolistic
competition is monopolistic up to the point at which consumers become
willing to buy close- substitute products and competitive beyond that
point.” Explain. L02
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11.4 “Competition
in quality and service may be just as effective as price competition in
giving buyers more for their money.” Do you agree? Why? Explain why
monopolistically competitive firms frequently prefer nonprice
competition to price competition. LO2
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11.5 Critically evaluate and explain: LO2a.
In monopolistically competitive industries, economic profits are
competed away in the long run; hence, there is no valid reason to
criticize the performance and efficiency of such industries.b. In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.
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11.6 Why
do oligopolies exist? List five or six oligopolists whose products you
own or regularly purchase. What distinguishes oligopoly from
monopolistic competition? L03
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11.7 Answer the following questions, which relate to measures of concentration: L03a.
What is the meaning of a four-firm concentration ratio of 60 percent? 90
percent? What are the shortcomings of concentration ratios as measures
of monopoly power?b. Suppose that the
five firms in industry A have annual sales of 30, 30, 20, 10, and 10
percent of total industry sales. For the five firms in industry B, the
figures are 60, 25, 5, 5, and 5 percent. Calculate the Herfindahl index
for each industry and compare their likely competitiveness.
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11.8 Explain
the general meaning of the profit payoff matrix at the top of the next
column for oligopolists X and Y. All profit figures are in thousands. LO4
a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.
b. Assuming no collusion between X and Y, what is the likely pricing outcome?
c. In
view of your answer to 8b, explain why price collusion is mutually
profitable. Why might there be a temptation to cheat on the collusive
agreement? ...
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11.9 What
assumptions about a rival’s response to price changes underlie the
kinked-demand curve for oligopolists? Why is there a gap in the
oligopolists’ marginal-revenue curve? How does the kinked-demand curve
explain price rigidity in oligopoly? What are the shortcomings of the
kinked- demand model? L05
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11.10 Why
might price collusion occur in oligopolistic industries? Assess the
economic desirability of collusive pricing. What are the main obstacles
to collusion? Speculate as to why price leadership is legal in the
United States, whereas price-fixing is not. L06
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11.11 Why
is there so much advertising in monopolistic competition and
oligopoly? How does such advertising help consumers and promote
efficiency? Why might it be excessive at times? L07
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11.12 ADVANCED ANALYSIS
Construct a game-theory matrix involving two firms and their decisions
on high versus low advertising budgets and the effects of each on
profits. Show a circumstance in which both firms select high
advertising; budgets even though both would be more profitable with low
advertising budgets. Why won’t they unilaterally cut their advertising
budgets? L07
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11.13 LAST WORD What firm dominates the U.S. beer industry? What demand and supply factors have contributed to “fewness” in this industry?
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