RHODES UNIVERSITY DEPARTMENT OF ECONOMICS AND ECONOMIC HISTORY ECONOMICS 416 INDUSTRIAL ORGANISATION TEST 1 (29TH AUGUST 2006)

GENERAL INFORMATION

Examiner: Marks: Duration: Date: Venue:

Dr. Tsitsi Effie Mutambara 60 2 hours 29th August 2006 Eden Grove Seminar Room I

INSTRUCTIONS TO CANDIDATES Answer all the questions in Section A and 2 out of 4 questions in Section B

SECTION A (There are 20 questions. Answer all questions)

(1 mark for every correct answer, - of a mark for an incorrect answer) Question 1 The principle of total costs is a contribution to industrial organisation by A. Hall and Hitch B. Mason C. Coase D. Mason and Coase E. Bain Question 2 Which of the following is false about the principle of total costs? A. The firms main concern is to determine prices and not quantity B. P = VC av (1 + mark-up) C. If there is an increase in price, then the average costs are modified or there is a change in mark-up D. The kinked demand is used to explain why prices are stable in an oligopoly E. The rate/quota is added to the total costs and not the average variable costs Question 3 The active firm is a contribution to industrial organisation by A. Hall and Hitch B. Mason C. Coase D. Mason and Coase E. Bain Question 4 Which of the following is false about the contribution the active firm? A. It is the basis for the S-C-P Paradigm B. It focuses on oligopolistic firms and thus is able to explore diverse considerations which are not possible in the context of perfect competition C. The active firm is a contribution which has enabled the study of entrepreneurial strategies like expenditure in R&D, Marketing, and Product differentiation D. The contribution maintains that profit maximisation is the only objective of the firm E. The analytical methods used involved case studies so as to capture entrepreneurial strategies Question 5 The concept of the transaction costs and the firm is a contribution to industrial organisation made by A. Hall and Hitch B. Mason C. Coase D. Mason and Coase E. Bain

Question 6 Which of the following is not true concerning transaction costs? A. Transaction costs are costs of running the system B. Coordination contributes towards transaction costs through the need to determine prices and other details of the transaction C. Motivation contributes towards transaction costs through costs associated with completeness of information D. Motivation contributes towards transaction costs through costs associated with imperfect commitment E. The approachs fundamental argument that economic activities and organisations are arranged so as to minimise transaction costs gives rise to the limitations of the transaction costs approach Question 7 Market entry barriers is contribution made to industrial organisation by A. Hall and Hitch B. Mason C. Coase D. Mason and Coase E. Bain Question 8 Which of the following is a market entry barrier? A. Product differentiation B. Absolute cost advantages C. Economies of scale D. Imperfections in capital markets E. All of the above Question 9 Which of the following is correct about the concept seller concentration? A. A small number of firms account for a large proportion of economic activity B. A large percentage of a given product is purchased by relatively few buyers C. Seller concentration results in countervailing power D. High levels of seller concentration are less conducive to engaging in monopolistic practices E. Seller concentration cannot be used as one possible indicator of market power Question 10 A group of supplier firms has more bargaining power when A. The input is, in one way or another, important to the buyer B. The supplier industry is dominated by few large producers who enjoy reasonably secure market positions C. The buying firms are not important customers of the suppliers D. One or more suppliers pose a credible threat of forward integration E. All of the above

Question 11 Which of the following is correct about the concept buyer concentration? A. A small number of firms account for a small proportion of economic activity B. A large percentage of a given product is purchased by relatively many buyers C. Buyer concentration results in countervailing power D. Buyers do not have the power to influence prices E. None of the above Question 12 The bargaining power of customers tends to be relatively greater when . A. Customers are few in numbers and when they purchase in large quantities B. Customers purchases represent a sizable percentage of selling industrys total sales C. The supplying industry is comprised of large numbers of relatively small sellers D. Customers pose a credible threat of backward integration E. All of the above Question 13 Which of the following is correct about the competitive force of rivalry? A. Rivalry is usually stronger when demand for a product is growing slowly B. Rivalry increases in proportion to the size of the payoff from a successful strategic move C. Rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete D. Rivalry tends to intensify as the number of competitors increases and as they become more equal in size and capacity E. All of the above Question 14 Which of the following is not correct about the theory of contestable markets? A. The threat of potential entry is not enough to keep industry operating at or close to competitive price and output levels B. Even if there is one seller, the seller may be forced to act as if there were many other sellers C. There are no structural barriers to the entry of firms in the long run D. Market contestability requires that there are few sunk costs E. Hit-and-run competition plays a role in contestable markets Question 15 Which of the following is not a key element in the structure-conduct-performance paradigm? A. Market structure B. Conduct C. Performance D. The causal relationship between structure, conduct and performance E. Nash equilibrium

Question 16 Which of the following is not a criticism against the structure-conduct-performance paradigm? A. Empirical studies have been as a whole inconclusive, e.g. there is weak evidence of a link between market structure and performance B. Game theory establishes that conduct is not determined completely by structure C. Causation is not just one way D. Potential entrants can discipline incumbent firms E. Structure and performance do not change over time Question 17 Which of the following is not correct about Game theory? A. Game theory establishes that conduct is not determined completely by structure B. It is suited to the study of oligopolistic industries C. It directly analyses market conduct unlike the structure-conduct-performance paradigm D. The theory arose due to the need to come up with the best alternative strategy to adopt given the understanding that rivals will not respond to ones own strategies E. Nash equilibrium is regarded as a self-policing equilibrium Question 18 Which of the following is not correct about the behavioural theories of the firm? A. These are theories that attempt to predict the actions of firms by studying the behaviour of various groups of people within the firm and their interactions under conditions of potentially conflicting interests B. If target levels are not achieved, a search procedure will be started to find what went wrong and how to rectify it C. The targets to which managers aspire depend to a large extent on the success in achieving previous targets D. Managers can be conservative in their aspirations leading to organizational slack E. Satisficing firms are likely to be more responsive to changes in consumer demand and changes in costs than profit maximising firms, and thus are more efficient Question 19 Which of the following is not correct about the evolutionary theory? A. Firm behaviour and market outcomes are static B. The changing business environment influences the evolution of firms C. An individual firm is actively involved in its evolution D. Routines are regarded as the genetic material of the firm E. Firms have different routines, thus different strategies and abilities to profitably adapt to the changing environment Question 20 Which of the following is not correct about the development of industrial organisation? A. some of the Austrian schools ideas are found in the evolutionary theory B. the Chicago school made contributions in debates on antitrust legislation C. the S-C-P paradigm is a contribution by the Harvard school D. the behavioural theory of the firm is a contribution by R. Cyert and J. G. March E. developments in industrial organisation were from the neo-classical paradigm only

SECTION B
Answer only two questions from this section. Each question carries a total of 20 marks. Answer either Question 1 or 2 and not both Question 1 List and clearly explain/ or illustrate any five criticisms which have been leveled against the S-C-P Paradigm. (20 marks) Question 2 Using the S-C-P Paradigm, highlight the possible structure, conduct and performance activities that can result from the following (i) Absolute cost advantage (6 marks) (ii) Buyer concentration (7 marks) (iii) Perfect contestability (7 marks) NB: Use Table 1 attached at the back of the question paper to present your answer to this question. Limit the possible activities/outcomes for each to 6. For example, suggest only 2 possible market structure activities, 2 possible conduct activities, and 2 possible performance outcomes for each of the items raised in (i) (iii) above. Answer either Question 3 or 4 and not both Question 3 Use Figure 1 below to answer the questions which follow.
Figure 1: Profits (in million of Rands) for Nxabal Pvt Ltd and Cobaly Pvt Ltd at different output levels Nxabal Pvt Ltds output One-half () monopoly output One-half () monopoly output Cobaly Pvt Ltds output Threequarters () monopoly output A R10mn (Nxabal Pvt Ltd) R10mn (Cobaly Pvt Ltd) C R5.5mn (Nxabal Pvt Ltd) R12mn (Cobaly Pvt Ltd) Three-quarters () monopoly output B R12mn (Nxabal Pvt Ltd) R5.5mn (Cobaly Pvt Ltd) D R8.5mn (Nxabal Pvt Ltd) R8.5mn (Cobaly Pvt Ltd)

Notes: (a) Only two levels of output are considered, i.e. either producing one-half of the output a monopolist would produce or three-quarters of the output a monopolist would produce. (b) The corresponding payoffs for each firm are given in millions of South African Rands. 6

(i) Using Figure 1 above, which outcomes illustrate the following? (a) Nash equilibrium (b) The adoption of optimistic approaches (c) Collusive behaviour by the two firms (d) Maximin (e) Maximax

(1 mark) (1 mark) (1 mark) (1 mark) (1 mark)

(ii) Using Figure 1 above, calculate the joint output at the following outcomes (a) Nash equilibrium (1 mark) (b) When the two firms collude (1 mark) (c) When optimistic approaches are adopted (1 mark) (iii) In oligopoly theory, the Nash equilibrium is important in that it is the only type of self-policing equilibrium. With the aid of Figure 1 above, clearly explain and illustrate how the Nash equilibrium is self-policing to the two firms involved. (12 marks) Question 4 Clearly bringing out the key elements and discussions in each of the following theories. (i) The behavioural theory of the firm (10 marks) (ii) The evolutionary theory (10 marks)

RHODES UNIVERSITY DEPARTMENT OF ECONOMICS AND ECONOMIC HISTORY ECONOMICS 416 INDUSTRIAL ORGANISATION TEST 1 (29TH AUGUST 2006)

Answer sheet for Section B Question 2 Student number: Date: __________________________________ __________________________________

Table 1: The possible structure, conduct and performance activities (i) Absolute cost advantage Possible market activities 1. 1. Possible conduct activities 1. Possible performance outcomes/activities

2.

2.

2.

(ii) Buyer concentration Possible market activities 1. 1. Possible conduct activities 1. Possible performance outcomes/activities

2.

2.

2.

(iii) Perfect contestability Possible market activities 1. 1. Possible conduct activities 1. Possible performance outcomes/activities

2.

2.

2.