CEA Market Structures and Competition 4 — Questions and Answers
Question 1: Which antitrust standard evaluates a business practice by weighing its pro-competitive benefits against its anticompetitive harms?
- Per se rule
- Rule of reason (Correct answer)
- Herfindahl standard
- Essential facilities doctrine
Correct answer: Rule of reason
The rule of reason requires courts to balance competitive benefits and harms rather than automatically condemning certain practices as the per se rule does.
Question 2: A two-part tariff as a form of price discrimination involves:
- Charging different prices in two geographically separated markets
- Setting a fixed entry fee plus a per-unit usage price (Correct answer)
- Bundling two products at a single package price
- Offering volume discounts that decline with quantity purchased
Correct answer: Setting a fixed entry fee plus a per-unit usage price
A two-part tariff charges consumers a lump-sum fee for access and then a per-unit price, allowing the seller to capture some consumer surplus through the entry fee.
Question 3: When the four-firm concentration ratio (CR4) approaches 100%, the market is best described as:
- Perfectly competitive
- Highly concentrated with oligopolistic or monopolistic characteristics (Correct answer)
- Monopolistically competitive
- A contestable market with free entry
Correct answer: Highly concentrated with oligopolistic or monopolistic characteristics
A CR4 near 100% means the top four firms control virtually all market output, indicating a highly concentrated structure consistent with oligopoly or monopoly.
Question 4: Predatory pricing is considered anticompetitive when a dominant firm:
- Charges a price equal to average variable cost to maximize short-run profit
- Sets prices below cost to drive out rivals and later raise prices to earn monopoly profit (Correct answer)
- Cuts prices in response to a cost reduction from economies of scale
- Offers quantity discounts to loyal customers
Correct answer: Sets prices below cost to drive out rivals and later raise prices to earn monopoly profit
Predatory pricing involves deliberately pricing below cost to eliminate competition, with the intent to later recoup losses through supracompetitive prices.
Question 5: In a perfectly contestable market, even a monopolist will price:
- At the monopoly level because barriers deter entry
- At marginal cost because the threat of hit-and-run entry disciplines pricing (Correct answer)
- Above average cost to earn positive economic profit
- Where marginal cost equals average variable cost
Correct answer: At marginal cost because the threat of hit-and-run entry disciplines pricing
Contestability theory argues that if entry and exit are costless (no sunk costs), the threat of entry forces the incumbent to price at marginal cost despite being a monopolist.
Question 6: Excess capacity in monopolistic competition means that society incurs:
- A deadweight loss identical to that of pure monopoly
- Productive inefficiency because firms do not produce at minimum average cost (Correct answer)
- Allocative efficiency because price equals marginal cost
- Zero economic profit combined with efficient scale production
Correct answer: Productive inefficiency because firms do not produce at minimum average cost
Monopolistic competition leaves firms operating below minimum efficient scale, which is productive inefficiency, though they earn zero economic profit in long-run equilibrium.
Question 7: A dominant firm price leadership model predicts that:
- All firms simultaneously set identical prices in a Nash equilibrium
- The dominant firm sets price and smaller fringe firms take that price as given (Correct answer)
- The government regulates price to equal marginal cost
- Firms rotate in setting the industry price each period
Correct answer: The dominant firm sets price and smaller fringe firms take that price as given
In dominant-firm price leadership, the large firm maximizes profit accounting for the competitive fringe's supply response, while fringe firms act as price takers.
CEA Market Structures and Competition 4
Which antitrust standard evaluates a business practice by weighing its pro-competitive benefits against its anticompetitive harms?