File: ch05, Chapter 5: Competitors and Competition

Multiple Choice

1. Which U.S. agency is responsible for preventing anticompetitive conduct?

a) Securities and Exchange Commission
b) Department of Justice
c) Office of Fair Trading
d) Competition Commission
e) Competition Authority

Ans: b

Learning Objective: Discuss the effect on competition of perfect competition, monopoly, and
monopolistic competition
AASCB: Reflective Thinking
AICPA: Legal/Regulatory Perspective
IMA: Corporate Finance

Heading: Competitor Identification and Market Definition

Level: Easy

2. Which of the following is the definition of “competitors?”

a) Firms that manufacture similar products
b) Firms located in geographic proximity to each other
c) Firms that sell products to the same group of buyers
d) Firms whose strategic choices directly affect one another
e) Firms that purchase factors from the same suppliers

Ans: d

Learning Objective: Describe several approaches to identifying competitors

AASCB: Analytic
AICPA: Strategic/Critical Thinking
IMA: Business Economics

Heading: Competitor Identification and Market Definition

Level: Medium

3. What criterion developed by the DOJ is used to identify all potential competitors within the market?
a) Market competition criterion
b) DOJ competition criterion
c) SSNIP criterion
d) SIC criterion
e) DOJ market criterion
Ans: c

Learning Objective: Describe several approaches to identifying competitorsAASCB: Reflective

Thinking
AICPA: Legal/Regulatory Perspective
IMA: Business Application

Heading: Competitor Identification and Market Definition

Level: Easy

4. Which of the following is not a characteristic of substitute products X and Y?

a) They have the same or similar product performance characteristics
b) They have the same or similar occasions for use
c) They are sold in the same geographic market
d) Customers are indifferent between X and Y
e) A price increase of X while keeping the Y’s price constant leads to a drop in purchases of X and an
increase in purchases of Y

Ans: d

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Analytic
AICPA: Strategic/Critical Thinking
IMA: Business Economics

Heading: Competition Identification and Market Definition – Putting Competitor Identification into
Practice
Level: Hard

5. What empirical method generally is used to measure the degree to which products substitute for each
other?
a) Cross-price elasticity
b) Price comparison
c) Relatedness factor
d) Standard Industrial Classification
e) SSNIP

Ans: a

Learning Objective: Describe several approaches to identifying competitors

AASCB: Analytic
AICPA: Problem Solving and Decision Making
IMA: Quantitative Methods

Heading: Competitor Identification and Market Definition Identification

Level: Medium
6. What is a catchment area?
a) The area of a firm’s customers as defined by traditional county lines
b) The area a firm’s customers shops due to idiosyncratic reasons
c) The area a firm operates in which it has no competition
d) The area where a firms customer will go to shop in the event the firm were to raise prices
e) The contiguous area from which a firm draws most of its customers

Ans: e

Learning Objective: Describe several approaches to identifying competitors

AASCB: Reflective Thinking
AICPA: Measurement
IMA: Business Applications

Heading: Competition Identification and Market Definition – Geographic Competitor Identification

Level: Medium

7. What is defined by the number and size distribution of the firms in a market?
a) Herfindahl index
b) Market share
c) Market structure
d) SSNIP
e) Numbers-equivalent of firms

Ans: c

Learning Objective: Describe several approaches to identifying competitors

AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Measuring Market Structure

Level: Easy

8. What is the term for examining consumers travel patterns?

a) Flow analysis
b) Travel analysis
c) Purchase location analysis
d) Consumer distance analysis
e) None of the above

Ans: a

Learning Objective: Describe several approaches to identifying competitors

AASCB: Reflective Thinking
AICPA: Measurement
IMA: Decision Analysis

Heading: Competition Identification and Market Definition – Geographic Competitor Identification

Level: Easy

9. The Herfindahl index solves which problem with the N-Firm ratio?
a) Inaccuracy when dealing with more than 4 firms
b) Inability to measure concentration if market shares are split evenly
c) Inability to measure concentration across borders
d) Invariance with changes in the size of the largest firms
e) High variability when firm sizes are small

Ans: d

Learning Objective: Explain how to measure market structure using the Herfindahl index
AASCB: Analytic
AICPA: Measurement
IMA: Business Economics

Heading: Market Structure and Competition

Level: Medium

10. In what type of market structure do sellers set identical prices and are prices generally driven down to
marginal costs?
a) Perfect competition
b) Monopolistic competition
c) Oligopoly
d) Monopoly
e) Diversified

Ans: a

Learning Objective: Discuss the effect on competition of perfect competition, monopoly, and
monopolistic competition
AASCB: Analytic
AICPA: Strategic/Critical Thinking
IMA: Business Economics

Heading: Market Structure and Competition – Perfect Competition

Level: Medium

11. The causal connection between firms is known as the:

a) Market structure formula
b) Structure, Conduct, Performance paradigm
c) Competition index
d) Herfindahl Iindex
e) Concentration, Profit connection

Ans: b

Learning Objective: Discuss the effect on competition of perfect competition, monopoly, and
monopolistic competition
AASCB: Communication
AICPA: Communication
IMA: Business Application

Heading: Market Structure and Competition

Level: Easy

12. What term describes a firm that faces little or no competition in one of its input markets?
a) Monopolist
b) Monopsonist
c) Oligopolist
d) Oligopsonist
e) Cartelist

Ans: b

Learning Objective: Describe several approaches to identifying competitors

AASCB: Reflective Thinking
AICPA: Strategic/Critical Thinking
IMA: Business Economics

Heading: Market Structure and Competition – Monopoly

Level: Medium

13. What term describes the differentiation of a product when it is unambiguously better or worse than
competing products?
a) Horizontal differentiation
b) Vertical differentiation
c) Idiosyncratic differentiation
d) Spatial differentiation
e) Non-price differentiation

Ans: b

Learning Objective: Describe several approaches to identifying competitors

AASCB: Reflective Thinking
AICPA: Communication
IMA: Strategic Planning
Heading: Market Structure and Competition – Monopolistic Competition
Level: Medium

14. What term describes the differentiation of a product when only some consumers prefer it to competing
products (holding price equal)?
a) Horizontal differentiation
b) Vertical differentiation
c) Idiosyncratic differentiation
d) Spatial differentiation
e) Non-price differentiation

Ans: a

Learning Objective: Describe several approaches to identifying competitors

AASCB: Diversity
AICPA: Industry/Sector Perspective
IMA: Strategic Planning

Heading: Market Structure and Competition – Monopolistic Competition

Level: Medium

15. What group/type of preferences describes when tastes differ markedly from one person to the next and
result in horizontal differentiation?
a) Search preferences
b) Horizontal preferences
c) Consumer preferences
d) Spatial preferences
e) Idiosyncratic preferences

Ans: e

Learning Objective: Describe several approaches to identifying competitors

AASCB: Diversity
AICPA: Marketing/Client Focus
IMA: Strategic Marketing

Heading: Market Structure and Competition – Monopolistic Competition

Level: Medium

16. Of the following industries listed, which one is generally thought of as having the highest search
costs?
a) Consumer packaged goods
b) Electronics
c) Physician service
d) Automotive
e) Apparel

Ans: c

Learning Objective: Describe several approaches to identifying competitors

AASCB: Analytic
AICPA: Industry/Sector Perspective
IMA: Quantitative Methods

Heading: Market Structure and Competition – Monopolistic Competition

Level: Medium

17. What term describes existing firms in a monopolistically competitive market?

a) Anchors
b) Primaries
c) Base
d) Incumbents
e) Pioneers

Ans: d

Learning Objective: Describe several approaches to identifying competitors

AASCB: Reflective Thinking
AICPA: Communication
IMA: Business Economics

Heading: Market Structure and Competition – Monopolistic Competition

Level: Easy

18. In what type of market do the actions of individual firms materially affect the overall market?
a) Perfectly competitive
b) Monopolistically competitive
c) Oligopoly
d) Monopoly
e) Diversified

Ans: c

Learning Objective: Explain how to measure market structure using the Herfindahl index
AASCB: Reflective Thinking
AICPA: Interaction
IMA: Business Applications

Heading: Market Structure and Competition – Oligopoly

Level: Hard
19. What kind of competition is generally described as quantity competition?
a) Bertrand competition
b) Cournot competition
c) Perfect competition
d) Chamberlin competition
e) Monopolistic competition

Ans: b

Learning Objective: Compare the Cournot and Bertrand models of oligopoly

AASCB: Reflective Thinking
AICPA: Interaction
IMA: Business Economics

Heading: Market Structure and Competition – Oligopoly

Level: Easy

20. What kind of competition is generally described as price competition?

a) Bertrand competition
b) Cournot competition
c) Perfect competition
d) Chamberlin competition
e) Monopolistic competition

Ans: a

Learning Objective: Compare the Cournot and Bertrand models of oligopoly

AASCB: Reflective Thinking
AICPA: Interaction
IMA: Business Economics

Heading: Market Structure and Competition – Oligopoly

Level: Easy

21. The average PCM (percentage contribution margin) in a Cournot equilibrium is given by the formula
PCM=H/η, where H is the Herfindahl index and η is the price elasticity of market demand. Given this
equation, which of the following statements is true?
a) The more concentrated the industry, the smaller the PCMs in equilibrium
b) The industry concentration only raises the PCMs in equilibrium
c) The industry concentration has no bearing on PCM size in equilibrium
d) The less concentrated the industry, the larger the PCMs in equilibrium
e) The less concentrated the industry, the smaller the PCMs in equilibrium

Ans: e
Learning Objective: Explain how to measure market structure using the Herfindahl index
AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Market Structure and Competition – Oligopoly

Level: Hard

22. The Revenue Destruction Effect in oligopolies occurs when:

a) Firms individually reduce prices to gain more customers
b) Firms intentionally reduce output quantity to raise price
c) Firms independently maximize their own profits
d) Firms agree to all sell at the same price
e) Firms all agree to specific output quantities

Ans: c

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Reflective Thinking
AICPA: Industry/Sector Perspective
IMA: Strategic Planning

Heading: Market Structure and Competition – Oligopoly

Level: Medium

23. What term does Sutton use to describe the costs of establishing a credible brand?
a) Brand investment
b) Cost of brand establishment
c) Cost of advertising
d) Endogenous sunk cost
e) Market establishment cost

Ans: d

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Communication
AICPA: Communication
IMA: Business Economics

Heading: Where Does Market Structure Come From – Sutton Endogenous Sunk Costs
Level: Medium

24. Which of the following is a reason other than concentration that price-cost margins may vary across
industries?
a) Accounting practices
b) Regulation
c) Product differentiation
d) Nature of sales transactions
e) All of the above

Ans: e

Learning Objective: Discuss the effect on competition of perfect competition, monopoly, and
monopolistic competition
AASCB: Reflective Thinking
AICPA: Industry/Sector Perspective
IMA: Corporate Finance

Heading: Evidence on Market Structure and Performance – Price and Concentration

Level: Medium

25. Based on Bresnahan and Reiss’ study of the relationship between concentration and prices, how many
firms did they determine generally need to be in a market for price competition to be as intense as it
would likely get?
a) 1
b) 2
c) 3
d) 4
e) 5

Ans: c

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Evidence on Market Structure and Performance – Price and Concentration

Level: Medium

26. Recent studies have shown that increases in market concentration lead to which of the following?
a) Reduction in prices
b) No measurable change in prices
c) Increases in prices
d) More firms entering the market
e) More innovation

Ans: c

Learning Objective: Discuss the potential link between market structure and performace
Heading: Evidence on Market Structure and Performance – Price and Concentration
AASCB: Reflective Thinking
AICPA: Industry/Sector Perspective
IMA: Business Economics
Level: Easy

Short Answer

27. In a three firm market where the market share split is 50%, 30% & 20%, what is the Herfindahl
index?

Ans: .38

Learning Objective: Explain how to measure market structure using the Herfindahl index
AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Measuring Market Structure

Level: Easy

28. Suppose the demand for a product faces by a monopolist firm is given by Q=60-P/2. If the marginal
cost of producing the product is $20, what is the profit maximizing price the firm should charge for the
product? What are the firm’s profits?

Ans: $70; $1250

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Market Structure and Competition – Monopoly

Level: Medium
29. Suppose two hot dog stands, Al’s & Bob’s, position themselves at different ends of a 1000 yard
stretch of beach. Assume there are 100 beach goers evenly distributed along the stretch of beach and
travel costs are $.01 per yard. If Al charges $1 for his hot dogs and Bob charges $2 for his hot dogs, what
is the cost of purchasing a hot dog from each stand for a hungry beachgoer situated at a position D yards
from Al’s end of the beach? How many consumers will go to Al’s and how many will go to Bob’s?

Ans: Cost of Al’s=1+.01D; Cost of Bob’s=2+.01(1000-D); Costs are equal at D=550 yards which means
Al gets 55 customers and Bob gets 45 customers.

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods
Heading: Market Structure and Competition – Monopolistic Competition
Level: Hard

30. In a two firm market, let the marginal cost of producing a product be $20, the market demand be
given by the function Q=60-P/2 and the market quantity be equal to Q1+Q2. What is the Cournot
equilibrium quantity each firm would produce in this market?

Ans: 50/3 units or 16 2/3 units

Learning Objective: Discuss the potential link between market structure and performace
AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Market Structure and Competition – Oligopoly

Level: Hard

31. In a two firm market, let the marginal cost of producing a product be $20 and the market demand for
their products be given by Q1=12-P1+P2 and Q2=12-P2+P1. What is the Bertrand equilibrium price each
firm would produce in this market?

Ans: $32

Learning Objective: Compare the Cournot and Bertrand models of oligopoly

AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Market Structure and Competition – Oligopoly

Level: Hard

DISCUSSION QUESTIONS:

1) Are competitors always in the same market or industry? For example, are Netflix and dance
clubs competitors for consumer time and spending?
Learning Objective: Describe several approaches to identifying competitors.
Level: Medium

2) Why would a business choose to enter a perfectly competitive market where the sales price for its
production is set autonomously by the market?
Learning Objective: Explain how to measure market structure using the Herfindahl index.
Level: Medium

3) By definition, monopolies face no completion for their product – so why do monopolies

advertise?
Learning Objective: Discuss the effect on competition of perfect competition, monopoly, and monopolis-
tic competition.
Level: Medium

4) Is it possible for an oligopoly firm using quantity competition (Cournot) to over-produce and
drive market prices below marginal costs?
Learning Objective: Compare the Cournot and Bertrand models of oligopoly.
Level: Medium