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564 CHAPTER 13 MARKET STRUCTURE AND COMPETITION
• In a monopolistically competitive market, each firm • Under some conditions, the entry of more firms into
faces a downward-sloping demand curve. A short-run a monopolistically competitive market can result in a
equilibrium is attained when every firm chooses a profit- long-run equilibrium with a higher price than before the
maximizing price, given the prices of all other firms. In a new entry.
long-run equilibrium, free entry drives firms’ economic
profits to zero.

REVIEW QUESTIONS

1. Explain why, at a Cournot equilibrium with two increase in the size of the fringe result in a reduction in
firms, neither firm would have any regret about its output the dominant firm’s profit-maximizing price?
choice after it observes the output choice of its rival.
6. What is the difference between vertical product dif-
2. What is a reaction function? Why does the Cournot ferentiation and horizontal product differentiation?
equilibrium occur at the point at which the reaction
functions intersect? 7. Explain why, in the Bertrand model of oligopoly
with differentiated products, a greater degree of product
3. Why is the Cournot equilibrium price less than the differentiation is likely to increase the markup between
monopoly price? Why is the Cournot equilibrium price price and marginal cost.
greater than the perfectly competitive price?
8. What are the characteristics of a monopolistically
4. Explain the difference between the Bertrand model competitive industry? Provide an example of a monopo-
of oligopoly and the Cournot model of oligopoly. In a listically competitive industry.
homogeneous products oligopoly, what predictions do
these models make about the equilibrium price relative to 9. Why is it the case in a long-run monopolistically
marginal cost? competitive equilibrium that the firm’s demand curve is
tangent to its average cost curve? Why could it not be a
5. What is the role played by the competitive fringe in long-run equilibrium if the demand curve “cut through”
the dominant firm model of oligopoly? Why does an the average cost curve?

PROBLEMS

13.1. Beryllium oxide is a chemical compound used in and Pepsi, and three local competitors, Bright, Quite,
pharmaceutical applications. Beryllium oxide can only be and Zight. Consumers view these products as similar, but
made in one particular way, and all firms produce their not identical. The market shares of the five sellers are as
version of beryllium oxide to the exact same standards of follows:
purity and safety. The largest firms have market shares
given in the following table: Firm Market Share
Firm Market Share Coca-Cola 25%
Zight 24%
Mercury 80% Pepsi 23%
Mars 1% Bright 20%
Jupiter 1% Quite 8%
Saturn 1%
a) What is the four-firm (4CR) concentration ratio for a) What is the 4CR concentration ratio for this industry?
this industry? b) What is the HHI for this industry?
b) What is the Herfindahl-Hirschman Index (HHI) for c) Of the market structures described in Table 13.1, which
this industry? one best describes the cola industry in Inner Baldonia?
c) Of the market structures described in Table 13.1, 13.3. Outer Baldonia is a largely rural country with
which one best describes the beryllium oxide industry?
many small towns. Each town typically contains a retail
13.2. The cola industry in the country of Inner store selling livestock feed. In virtually all towns, there is
Baldonia consists of five sellers: two global brands, Coke only one such store. The farmers who purchase feed