Business Economics (BE) 301 Assessment 3-
KU Solved 100% Correct
economies of scale - ANSWER-your per unit cost goes down as you produce more
Market power - ANSWER-the ability to jack up the price and shaft the customer
Economies of scope - ANSWER-it is cheaper for one firm to produce two separate
products than it is for two separate firms to produce the same two products
Vertical boundaries of a firm - ANSWER-how much of the production process takes
place within the firm vs outside the firm
Transaction costs - ANSWER-costs of using the market
three categories of transaction costs - ANSWER-1. search and information costs
2. bargaining and contracting costs
3. policing and enforcement costs
Why would it be cheaper to use the market? (4 reasons) - ANSWER-1. economies
of scale
2. economies of scope
3. efficiency because of competition among suppliers
4. if transaction costs are low
asset specificity - ANSWER-the degree to which investments made for a particular
transaction cannot be used for other purposes
why would an asset be of value to one firm? - ANSWER-when you equipment has
asset specificity you want to make the input not buy it
Hold up - ANSWER-holding up the production process because supplier wants more
money; want them to all be apart of the same firm
4 types of asset specificity - ANSWER-1. geographic or site
2. physical asset
3. dedicated assets
4. human asset specificity
Geographic or site asset specificity - ANSWER-located side by side to economize on
transportation costs or inventory costs or take advantage of processing efficiencies
- the location gives it the value
Physical asset specificity - ANSWER-physical or engineering properties of the asset
, are specifically tailored to a transaction
Dedicated assets - ANSWER-investment made to satisfy a particular buyer
human asset specificity - ANSWER-accumulation of knowledge and expertise that
are specific to one trading partner
What are vertical boundaries affected by? - ANSWER-asset specificity and market
conditions
When does it make sense to vertically integrate? - ANSWER-when there is an
upstream monopoly
Market Power proper - ANSWER-the ability to charge a price higher than
competitors
market power is inversely related to... - ANSWER-elasticity because you have no
other choice if inelastic and elastic if the firm has no market power
the "harm" of market power - ANSWER-causes harm when the good is a necessity
because of price gouging
two types of mergers - ANSWER-horizontal and vertical
horizontal merger - ANSWER-two firms in the same market/industry competing
with each other
ex: Sprint and T-Mobile
vertical merger - ANSWER-two firms at different stages of the production process of
the good
ex: Comcast and NBC, Aetna and CVS
Who looks at mergers - ANSWER-The Department of Justice and the Federal Trade
Commission
Measures of Industry Concentration - ANSWER-1. Four firm industry concentration
ratio
2. Herfindal Index (HHL)
four-firm concentration ratio - ANSWER-- anything 70% or above concentrated to
be a concentrated market
- take # as a % of the total market
- the more concentrated a market the harder it is to get a merger approved
Herfindahl Index - ANSWER-- take the market share of each firm and square it
- then add them all up to get a #
KU Solved 100% Correct
economies of scale - ANSWER-your per unit cost goes down as you produce more
Market power - ANSWER-the ability to jack up the price and shaft the customer
Economies of scope - ANSWER-it is cheaper for one firm to produce two separate
products than it is for two separate firms to produce the same two products
Vertical boundaries of a firm - ANSWER-how much of the production process takes
place within the firm vs outside the firm
Transaction costs - ANSWER-costs of using the market
three categories of transaction costs - ANSWER-1. search and information costs
2. bargaining and contracting costs
3. policing and enforcement costs
Why would it be cheaper to use the market? (4 reasons) - ANSWER-1. economies
of scale
2. economies of scope
3. efficiency because of competition among suppliers
4. if transaction costs are low
asset specificity - ANSWER-the degree to which investments made for a particular
transaction cannot be used for other purposes
why would an asset be of value to one firm? - ANSWER-when you equipment has
asset specificity you want to make the input not buy it
Hold up - ANSWER-holding up the production process because supplier wants more
money; want them to all be apart of the same firm
4 types of asset specificity - ANSWER-1. geographic or site
2. physical asset
3. dedicated assets
4. human asset specificity
Geographic or site asset specificity - ANSWER-located side by side to economize on
transportation costs or inventory costs or take advantage of processing efficiencies
- the location gives it the value
Physical asset specificity - ANSWER-physical or engineering properties of the asset
, are specifically tailored to a transaction
Dedicated assets - ANSWER-investment made to satisfy a particular buyer
human asset specificity - ANSWER-accumulation of knowledge and expertise that
are specific to one trading partner
What are vertical boundaries affected by? - ANSWER-asset specificity and market
conditions
When does it make sense to vertically integrate? - ANSWER-when there is an
upstream monopoly
Market Power proper - ANSWER-the ability to charge a price higher than
competitors
market power is inversely related to... - ANSWER-elasticity because you have no
other choice if inelastic and elastic if the firm has no market power
the "harm" of market power - ANSWER-causes harm when the good is a necessity
because of price gouging
two types of mergers - ANSWER-horizontal and vertical
horizontal merger - ANSWER-two firms in the same market/industry competing
with each other
ex: Sprint and T-Mobile
vertical merger - ANSWER-two firms at different stages of the production process of
the good
ex: Comcast and NBC, Aetna and CVS
Who looks at mergers - ANSWER-The Department of Justice and the Federal Trade
Commission
Measures of Industry Concentration - ANSWER-1. Four firm industry concentration
ratio
2. Herfindal Index (HHL)
four-firm concentration ratio - ANSWER-- anything 70% or above concentrated to
be a concentrated market
- take # as a % of the total market
- the more concentrated a market the harder it is to get a merger approved
Herfindahl Index - ANSWER-- take the market share of each firm and square it
- then add them all up to get a #
