Chapter 26
Oligopoly and Strategic Behavior
26.1 Oligopoly
1) Which of the following does NOT help explain why oligopolies exist?
A) Economies of scale B) Mergers
C) Product homogeneity D) Barriers to entry
2) Which of the following is a characteristic of oligopoly?
A) Easy entry and exit B) Many firms
C) Strategic dependence D) None of the above
3) A merger between firms that are in the same industry is called a
A) conglomerate merger. B) horizontal merger.
C) vertical merger. D) none of the above.
4) A merger between firms in which one firm purchases an input from the other is called a
A) conglomerate merger. B) horizontal merger.
C) vertical merger. D) none of the above.
5) The measurement of industry concentration which calculates the percentage of all sales
contributed by a specific number of leading firms is called the
A) Herfindahl Hirschman Index. B) concentration ratio.
C) producer price index. D) P/E ratio.
6) Strategic behavior and game theory are features of which market structure?
A) Perfect competition B) Monopoly
C) Monopolistic competition D) Oligopoly
7) In oligopoly, any action by one firm to change price, output, or quality causes
A) a reaction by other firms. B) no reaction from the other firms.
C) a profit gain for the other firms. D) loss of market share by the acting firm.
8) Which of the following is NOT a characteristic of oligopoly firms?
A) Strategic dependence
B) Product differentiation
C) Non price competition, such as advertising and promotions
D) Perfectly elastic demand curves
9) Which one of the following industries could be classified as an oligopoly?
A) Tobacco production B) Retailing
C) Farming D) Fast food restaurants
10) Which of the following is most likely to be sold in an oligopoly market?
A) Pizza B) Cell phone service
C) Electricity D) Computer software
11) Which of the following is NOT a necessary condition for oligopoly?
A) Barriers to entry
B) Strategic dependence of firms
C) Differentiated products
D) Either a small number of firms or market dominance by a small number of firms
12) Managers in oligopoly firms must
A) eliminate any barriers to entry if they hope to make short run profits.
B) advertise heavily in order to differentiate their product.
C) anticipate the reaction of rival firms.
D) establish many varieties of their products to cover the spectrum of consumer tastes.
13) In an oligopolistic market, each firm
A) has a constant marginal cost.
B) faces a perfectly elastic demand function.
C) must consider the reaction of rival firms when making a pricing or output decision.
D) produces at minimum average cost in the long run.
14) An oligopoly is a market situation in which
A) there are many firms producing differentiated products.
B) there is a single firm producing several varieties of a product.
C) all the sellers act independently of the others.
D) there are very few sellers and they recognize their strategic dependence on one another.
15) Which of the following is NOT a common characteristic of oligopoly?
A) strategic dependence among firms in the industry
B) product differentiation
C)
b
arriers to entry
D) marginal cost pricing.
16) If a firm is an oligopolist, which is NOT true?
A) It must pay attention to other firms prices.
B) It is one of a relatively small number of firms dominating its industry.
C) It can sell all the units it wants at the going market price.
D) It is engaged in a strategic game.
17) The most common reason for the existence of oligopolies is
A) ease of entry. B) economies of scale.
C) diseconomies of scale. D) advertising.
18) Monopolies and oligopolies both erect barriers to entry through the use of
A) price cutting. B) patents. C) franchising. D) advertising.
19) Oligopolies can result from any of the following EXCEPT
A) economies of scale. B) vertical mergers.
C) government regulation. D) diseconomies of scale.
20) When U.S. Steel, a steel producer, bought control of iron ore companies at the beginning of the
20th century, the company was initiating
A) a horizontal merger. B) a vertical merger.
C) a cartel. D) an expropriation.
21) If Ford Motor Company and General Motors Corporation were to merge, this would represent
A) a vertical merger. B) a horizontal merger.
C) a cartel. D) an up and down merger.
22) Which of the following combinations would constitute a vertical merger?
A) General Motors and Bridgestone Tire Company
B) General Motors and Ford Motor Company
C) Philip Morris and RJ Reynolds
D) Philip Morris and Barnes & Nobles Booksellers
23) In general, horizontal mergers will
A) increase the number of firms in an industry.
B) decrease the number of firms in an industry.
C) increase competition in an industry.
D) reduce economic profits in an industry.
24) The combining of First Union National Bank and The National Bank of Memphis is an example
of
A) a vertical merger. B) a horizontal merger.
C) a downstream formation. D) a conglomerate merger.
25) The joining of firms that are producing or selling a similar product is
A) a conglomerate merger. B) a horizontal merger.
C) a vertical merger. D) always an illegal merger.
26) If the United States largest bakery buys an agricultural firm that specializes in growing wheat,
we would have an example of
A) a horizontal merger. B) a vertical merger.
C) a monopoly. D) excessive product differentiation.
27) A horizontal merger involves
A) the joining of two firms at different stages of the production process.
B) the separation of management from ownership.
C) the joining of two firms selling similar products.
D) the exchange of debt for stock.
28) How do economies of scale contribute to the development of an oligopoly?
A) Economies of scale make it legally difficult for new firms to enter.
B) Economies of scale make small scale producers inefficient.
C) Economies of scale are based on control of a key resource, without which other firms
cannot enter an industry.
D) Economies of scale are guaranteed when a patent is granted.
Four Firm Concentration Ratios
Industry Ratio (percent)
W 72
X 30
Y 84
Z 55
29) The most competitive industry of those presented in the above table is likely to be industry
A) W. B) X. C) Y. D) Z.
30) The most oligopolistic industry of those presented in the above table is likely to be industry
A) W. B) X. C) Y. D) Z.
31) Suppose an industry has total sales of $25 million per year. The two largest firms have sales of
$6 million each, the third largest firm has sales of $2 million, and the fourth largest firm has
sales of $1 million. The four firm concentration ratio for this industry is
A) 36 percent. B) 60 percent. C) 50 percent. D) 25 percent.
32) Suppose a ten firm industry has total sales of $35 million per year. The largest firm have sales of
$10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of
$2 million. If fifth through tenth largest firms combined have annual sales of $12 million, the
four firm concentration ratio for this industry is
A) 45.7 percent. B) 80 percent.
C) 65.7 percent. D) none fo the above.
33) Suppose a ten firm industry has total sales of $35 million per year. The largest firm have sales of
$10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of
$2 million. If the rest of the industry has annual sales of $12 million, the second largest firm has
sales of
A) $8 million. B) $7 million.
C) $4 million. D) none fo the above.
34) Suppose that an industry consists of 100 firms, and the top 4 firms have annual sales of $1
million, $1.5 million, $2 million, and $2.5 million, respectively. If the entire industry has annual
sales of $8.5 million, the four firm concentration ratio is approximately
A) 82 percent. B) 50 percent. C) 94 percent. D) 70 percent.
35) The industry concentration ratio measures the
A) value of the assets owned by the largest corporations in the market.
B) percentage of industry sales accounted for by the top four or eight firms.
C) difference between price and marginal cost for the largest firms in the industry.
D) degree of product differentiation in the market.
36) If industry sales are $2,000, and the top four firms have sales of $170, $140, $100, and $80,
respectively, what will be the four firm concentration ratio?
A) 49 percent B) 24.5 percent C) 490 percent D) 200/49
37) As the definition of products narrows (i.e., becomes more specific), the concentration ratio
A) is not valid.
B) tends to decrease.
C) tends to increase.
D) does not change in any predictable manner.
38) A concentration ratio gives
A) the average size of the firms in an industry.
B) the total sales of four or eight of the mid sized firms in the industry.
C) the percentage of all sales contributed by the four or eight largest firms in the industry.
D) the sales of the four largest firms in the industry divided by the sales of the eight largest
firms in the industry.
694 Miller Economics Today, 16th Edition
Firm Annual Sales Firm Annual Sales
A $1000 G $800
B 900 H 1200
C 120 I 1050
D 75 J 90
E 50 K 75
F 40 L 600
39) According to the above table, the four firm concentration ratio of this industry is
A) 69.2 percent. B) 35.1 percent. C) 66.7 percent. D) 67.5 percent.
40) According to the above table, if the fourth and fifth largest firms in the industry merge, the
four firm concentration ratio in the industry will be
A) 82.5 percent. B) 35.8 percent. C) 69.0 percent. D) 84.1 percent.
41) According to the above table, the eight firm concentration ratio of this industry is
A) 94.5 percent. B) 96.0 percent. C) 92.5 percent. D) 82.5 percent.
42) There are 30 firms in an industry. What happens to that industry s four firm concentration
when the third and fourth largest firms merge?
A) Nothing, because their shares are already included in the concentration calculation.
B) The industry s concentration ratio will fall.
C) The industry s concentration ratio will increase.
D) It is impossible to know without more information.
43) Over the past several decades, U.S. firms have faced more competition from overseas firms.
Does this have any impact on the market power of U.S. oligopoly firms?
A) No, because domestic firms in oligopoly markets are always so dominant that overseas
producers have little or no impact on those markets.
B) No, because the United States government has effectively blocked all imports that might
compete with domestic firms in oligopoly industries.
C) Yes, competition from overseas firms can substantially limit domestic firms market power.
D) There is no way to know.
44) Which of the following is a characteristic of oligopoly?
A) Mutual firm independence B) Zero economic profits in the short run
C) Marginal cost pricing D) Only a few firms in the industry
45) Oligopoly is a situation when there
A) is one firm in the industry that is fairly large.
B) are a few large firms in the industry.
C) are too many firms in the industry and there is excess capacity.
D) is one giant firm and many smaller firms forming a competitive fringe.
46) Which of the following is true of an oligopoly?
A) They engage in nonprice competition.
B) They do not react to actions of their competitors.
C) Each firm produces a small portion of the total output.
D) Firms do not care what their competitors do.
47) Which of the following is not true of an oligopoly?
A) They advertise their product.
B) The firms recognize their interdependence.
C) A few firm account for a large portion of the total output.
D) Firms are price takers.
48) When managers in oligopolistic firms make decisions that affect output or price, they must
A) also be sure they erect barriers to entry to prevent new entrants from affecting their plans.
B) anticipate the reactions of their rivals and plan accordingly.
C) register with the Antitrust Division of the Department of Justice.
D) inform the regulators of their industry about their plans.
49) A situation in which one firm s actions with respect to price, quality, advertising and related
changes may be strategically countered by the reactions of one or more other firms in the
industry is known as
A) strategic dependence. B) economies of scale.
C) the concentration ratio. D)
b
arriers to entry.
50) All of the following are reasons for an oligopoly to occur EXCEPT
A) economies to scale. B)
b
arriers to entry.
C) independence among firms. D) merger.
51) The existence of economies of scale is one reason oligopolies exist because
A) a firm is able to increase price leading to increased profits.
B) the marginal cost decreases as output increases.
C) of strategic dependence.
D) as output increases average total cost decreases leading to large scale firms.
52) Which of the following is NOTa reason why some industries are oligopolies?
A) Economies of scale B) Barriers to entry
C) Strategic independence D) Mergers
53) Horizontal merger occurs when
A) two firms merge where one had sold its output to the other as an input.
B) the merger moves the combined firm onto the horizontal portion of its long run average
cost curve.
C) two firms merge where each is about the same size.
D) two firms producing a similar product merge.
54) Vertical merger occurs when
A) two firms merge where one had sold its output to the other as an input.
B) the merger moves the combined firm onto the horizontal portion of its long run average
cost curve.
C) two firms merge where each is about the same size.
D) two firms producing a similar product merge.
55)
J
oe s hotdog stand merges with a company that supplies the condiments to Joe s. This is an
example of
A) conglomerate merger. B) concentration ratio.
C) vertical merger. D) horizontal merger.
56) Straight Cut beauty salon merges with Clean Cut beauty salon. This is an example of
A) conglomerate merger. B) concentration ratio.
C) vertical merger. D) horizontal merger.
57) Which of the following is an example of a vertical merger?
A) Northeastern Illinois University merging with McDonald s.
B) Northeastern Illinois University merging with a training academy for new professors.
C) Northeastern Illinois University merging with Roosevelt University.
D) Northeastern Illinois University going from a public to a private university.
58) Which of the following is an example of a horizontal merger?
A) Northeastern Illinois University merging with McDonald s.
B) Northeastern Illinois University merging with a training academy for new professors.
C) Northeastern Illinois University merging with Roosevelt University.
D) Northeastern Illinois University going from a public to a private university.
59) The joining of firms that are producing or selling a similar product is known as
A) a conglomerate merger. B) a horizontal merger.
C) a vertical merger. D) economies to scale.
60) The joining of a firm with another to which it sells an output or from which it buys an input is
known as
A) a conglomerate merger. B) a horizontal merger.
C) a vertical merger. D) economies to scale.
61) A concentration ratio measures
A) the average size of the firms in the industry.
B) the sales of the three largest firms in the industry minus the costs of these three largest
firms in the industry.
C) the share of industry sales accounted for by the largest firms in the industry.
D) the excess capacity found in a particular oligopolistic industry.
62) The percentage of all sales contributed by the leading four or leading eight firms in an industry
is known as
A) a horizontal merger. B) a vertical merger.
C) economies to scale. D) the concentration ratio.
63) Which of the following statements about concentration ratios is correct?
A) A high concentration ratio indicates that the industry is a monopoly.
B) A high concentration ratio indicates that the industry is monopolistically competitive.
C) A high concentration ratio suggests that the industry is characterized by strategic
independence.
D) A high concentration ratio suggests that the industry is characterized by strategic
dependence.
64) A concentration ratio is used to
A) determine whether a market structure is oligopoly.
B) determine the importance of labor in the production process.
C) determine the degree of homogeneity in the market.
D) see if a firm qualifies for federal assistance.
Firm Annual Sales Firm Annual Sales
A $1000 G $800
B 800 H 1500
C 220 I 1050
D 75 J 90
E 50 K 75
F 40 L 300
65) Refer to the above table. The four firm concentration ratio is
A) 85.8 percent. B) 75 percent. C) 72.5 percent. D) 59.2 percent.
66) Refer to the above table. The eight firm concentration ratio is
A) 100 percent. B) 96 percent. C) 94.5 percent. D) 87.2 percent.
67) In a 50 firm industry, two of the smallest firms merge. Yet the 4 firm concentration ratio and
the 8 firm concentration ratio did not change. All things considered, we can say that the
industry has
A) moved closer to pure competition because the number of firms decreased.
B) moved farther away from competition because the number of firms decreased.
C) experienced no change in competition even though the number of firms decreased.
D) to be identified first; otherwise there is no way to tell.
Annual Sales
Firm ($ million)
1 350
2 200
3 150
4 100
5 75
6 through 30 50
Total 925
68) Refer to the above table. The four firm concentration ratio is
A) 86.5 percent. B) 33.3 percent. C) 13.3 percent. D) 11.6 percent.
69) A market structure characterized by a small number of interdependent sellers is called a(n)
A) monopoly. B) monopolistic competition.
C) monopsony. D) oligopoly.
70) If a retail food chain merged with a meat packing company, this would be an example of a
A) horizontal merger. B) conglomerate merger.
C) vertical merger. D) diagonal merger.
71) The recent merger of Southwest Bell (SBC) and AT&T companies is an example of a
A) horizontal merger. B) vertical merger.
C) consolidation merger. D) cooperative merger.
72) Which of the following is NOT a cause for an oligopoly to exist?
A) economies of scale B) structural dependence
C)
b
arriers to entry D) horizontal mergers
73) Which of the following would best exemplify an oligopolistic industry?
A) agriculture B) large aircraft manufacturing
C) confections D) retail convenience stores
74) Which of the following would best exemplify an oligopolistic industry?
A) Local cable provider B) Movie studios
C) Hamburger restaurants D) Retail clothing stores
75) An oligopolistic industry is characterized by
A) a small number of firms. B) a large number of firms.
C) no interdependence. D) no barriers to entry.
76) There are fewer than half as many publishers of college textbooks in the United States now as a
generation ago. Three companies alone account for almost two thirds of the sale of new
textbooks. This market situation characterized by very few sellers is known as
A) an oligopoly. B) perfect competition.
C) pure monopoly. D) monopolistic competition.
77) Oligopoly is a market situation in which
A) there is no product differentiation. B) there are very few sellers.
C) firms seldom react to price changes. D) only homogeneous products are sold.
78) Between World War II and the 1970s, three firms General Motors, Chrysler, and Ford
produced and sold nearly all the output of the U.S. auto industry. These three firms had
A) an oligopoly. B) monopolistic competition.
C) colluded. D) a pure monopoly.
79) Which does NOT cause an industry that might otherwise be competitive to tend toward
oligopoly?
A) economies of scale B)
b
arriers to entry
C) mergers D) strategic independence
80) The joining of firms that are producing or selling a similar product is
A) competition by merger. B) a vertical merger.
C) a horizontal merger. D) a hostile takeover.
81) Based on the table below, the four firm concentration ratio equals what percentage of annual
sales?
Annual Sales
Firm ($ millions)
1 20
2 30
3 5
4 5
5 through 100 40
Total 100
A) 33 percent B) 40 percent C) 60 percent D) 100 percent
Annual Sales
Firm ($ millions)
1 70
2 30
3 28
4 22
5 10
6 through 25 40
Total 200
82) Use the above table. If firms 4 and 5 merge, the four firm concentration ratio will be
A) 80 percent. B) 75 percent. C) 64 percent. D) 50 percent.
83) If a company that drilled for and produced oil acquired a firm which refined oil into gasoline,
this would be referred to as a
A) horizontal merger. B) vertical merger.
C) conglomerate merger. D) reverse merger.
84) If Target were to merge with Wal Mart, this would be referred to as a(n)
A) horizontal merger. B) vertical merger.
C) conglomerate merger. D) anti competitive merger.
85) If an industry has 25 firms that collectively have $150 million in total sales and the top four firms
in this industry account for $90 million in sales, what is the concentration ratio of the top four
firms in this industry?
A) 42 percent B) 60 percent C) 70 percent D) 80 percent
86) If an industry has 25 firms that collectively have $150 million in total sales and the top three
firms in this industry account for $78 million in sales and the fifth through twenty fifth firms
account for $60 million in sales, what is the amount of sales for the fourth largest firm?
A) $12 million B) $6 million
C) $18 million D) none of the above.
87) Which of the following is likely among the most concentrated industries in the United States?
A) printing and publishing B) soft drinks
C) tobacco products D) household vacuum cleaners
88) Which of the following is likely among the most concentrated industries in the United States?
A) printing and publishing B)
b
reakfast cereals
C) primary aluminum D) computers
89) All of the following are characteristics of an oligopoly EXCEPT
A) diseconomies of scale over all ranges of output.
B) small number of firms.
C) high barriers to entry.
D) interdependence.
90) The situation of oligopoly suggests
A) many firms compete in an industry. B) mergers have not occurred.
C) interdependence among firms. D) no barriers to entry exist.
91) One of the strongest reasons that oligopolies exist is due to
A) the homogeneity of their products. B) marginal cost pricing.
C) lowest cost production. D) economies of scale.
92) Economies of scale means that
A) the average fixed cost curve slopes downward over its entire range.
B) the four firm concentration ratio is below 80.
C) the long run average total cost curve slopes downward over it entire range.
D) the long run total cost curve slopes downward over it entire range.
93) The higher the concentration ratio is in an industry, the more likely it is that
A) the industry is perfectly competitive.
B) the market share of the smallest four firms is larger.
C) the market share of the largest four firms is smaller.
D) the industry has an oligopoly.