RHODES UNIVERSITY DEPARTMENT OF ECONOMICS AND ECONOMIC HISTORY INDUSTRIAL ORGANISATION (ECO 416) END OF TERM 1 TEST (2007)

GENERAL INFORMATION

Examiner: Marks: Duration: Date: Venue:

Dr. Tsitsi Effie Mutambara 50 marks 1 hour 30 minutes (7:00 pm 8:30 pm) 22nd March 2007 Economics B

INSTRUCTIONS TO CANDIDATES Answer all the questions in Section A and 1 out of 3 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 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 3 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 4 Market entry barriers is a contribution made to industrial organisation by A. Hall and Hitch B. Mason C. Coase D. Mason and Coase E. Bain Use the following to answer questions 5 8 below (i) The product is, in one way or another, important to the buyer (ii) Customers are few in numbers and purchase in large quantities (iii) The threat to entry can be minimised by barriers to entry (iv) The industry is dominated by few large producers who enjoy reasonably secure market positions (v) Demand for a product is growing slowly (vi) The size of the payoff from a successful strategic move (vii) The buying firms are not important customers of the suppliers (viii) There is credible threat of forward integration (ix) It costs more to get out of a business than to stay in and compete (x) No credible threat of forward integration or backward integration (xi) Low switching costs 2

(xii) The number of competitors increases and as they become more equal in size and capacity (xiii) A credible threat of backward integration (xiv) High presence of substitute products (xv) Buyers propensity to substitute Question 5. A group of supplier firms has more bargaining power when A. (i) and (iv) B. (v) and (vii) C. (viii) and (xi) D. (ix) and (xiv) E. (xiii) and (xv) Question 6 The bargaining power of customers tends to be relatively greater when . A. (i) and (ii) B. (ii) and (iv) C. (xi) and (xiii) D. (xiv) and (viii) E. (ix) and (iii) Question 7 Which of the following is correct about the determining power of substitutes? A. (ii) and (v) B. (xi) and (xiv) C.(xiii) and (xv) D. (vi) and (xii) E. (ix) and (x) Question 8 Which of the following increases the threat of potential entrants? A. (iii) and (xi) B. (xiv) and (vii) C.(xi) and (i) D. (xii) and (v) E. (xv) and (iii) Question 9 Which of the following is correct about the competitive force of rivalry? A. Industry growth B. Product differences C. Switching costs D. Market barriers E. All of the above

Question 10. Which of the following best describes what the behavioural theories attempts to do? A. To lay down rules of how to achieve aims B. To examine aims, motivations underlying the aims, the conflicts that can arise and how these are resolved C. Set up a model to show how various objectives could be achieved in theory D. Predict the actions of firms by studying the behaviour and interactions of various groups of people within the firm under conditions of potentially mutual interest E. None of the above Question 11 In behavioural theory of the firm, which of the following is correct about targets? A. If in practice target levels have not been achieved, a search procedure will be started B. Targets cannot be adjusted down but up C. The achievements of competitors and the expectations of competitors future behaviour are not significant to managers in setting target levels of the firm D. If targets conflict, the conflict will be settled by a vote between managers E. None of the above Question 12 Which of the following best describes organisational slack? A. A set of similar conflicting targets may be resolved differently in different firms B. The outcome of the bargaining will depend on the power and ability of the individual managers concerned C. Managers may allow spare capacity to exist so as to enable them to respond more easily to changes in circumstances D. Managers would be lazy and not setting targets for the firm E. Because the bargaining process is time consuming and since managers prefer to avoid conflict, they will not adjust target levels Question 13 Which of the following is not correct about satisficing firms? A. Firms with multiple goals will be satisficers B. Satisficing firms are likely to be less responsive to changes in consumer demand and changes in costs than profit maximising firms C. Satisficing firms may be less efficient D. Just like other types of firms, satisficing firms also take into account the amount and type of competition they face E. Satisficing firms are quite eager to optimize by exploiting their economic power

Question 14 Which of the following is not an argument in line with contributions originating with Joseph Schumpeter? A. Giant corporations are significant sources of innovation and technical change B. Monopolies are engines of dynamic invention and technological growth in a capitalist economy C. Any one competitive firm has very small marginal private benefits from its own research and development. Therefore, individuals will not undertake much of this beneficial research D. Technical change can be a product of the innovation by small firms due to competition E. Technical development is and has always been a preserve a preserve of scientists and engineers in the large corporations Question 15. Which of the following is a criticism against the Schumpeterian hypothesis? A. Some of the firms with low market share have shown to have substantial and successful research and development programmes B. History has shown that some of the most important inventions have not come from the laboratories of large corporations C. Inappropriability of invention helps to explain why small firms are equally likely to undertake research and development as large firms D. All of the above E. A and B only Question 16 The following is a possible implication of inappropriability of rewards of invention? A. Private research and development is under funded B. Governments often subsidies a large fraction of basic research in some areas C. Large firms are much more likely to undertake research and development D. Patents will motivate firms to engage in research and development E. All of the above 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 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 Use the following to answer question 19 and 20 (i) Many years of government intervention and protection of some industries had created an uncompetitive industrial environment (ii) An efficient industrial environment had been created during apartheid (iii) There was a need for a policy that would allow for economic growth (iv) Stability and redistribution could not be effected through a competition policy (v) Identifying any impediments to competition and advocate the address of such impediments (vi) Addressing issues related to wealth concentration and restrictive trade practices (vii) Participation of small and medium sized enterprises within the economy is not jeopardized by anti-competitive market structures and conduct (viii) Concern with the development of the economy as a whole (ix) Improving efficiency by enforcing more competition but also pursuing a social developmental goal Question 19 Which of the following motivated establishing a competition policy in South Africa after 1994? A. (i) and (ii) B. (iii) and (iv) C. (v) and (vi) D. (vii) and (ii) E All of the above Question 20. In what ways does the competition policy in South Africa depart from the conventional competition policies? A. (ix) B. (v) C. (iv) D. All of the above E None of the above

SECTION B
(Answer only one question from this section). Question 1 Table 1: The non-alcoholic beverages industry Rank (in order of market share) Firm Soda Coolers Hometown brew Omni Cola Mega Cola Cola-Terrific Mega Cools Juice-Up Super Soda King Cools Frosty Grape King Caffeine Cola Coolers Lemon Juicy King of Colas Juice Kings Sales per month (R000) 110 90 460 125 80 130 350 225 100 75 190 80 120 200 165 Market share (as a percentage)

(a) With reference to Table 1 above: (i) Complete columns 1 and 4 (3 marks). (ii) Calculate the 4-firm concentration ratio (3 marks). (iii) Calculate the HHI (use information on all firms) (3 marks) (iv) Do the two concentration measures depict any significant differences in the nature of the industry? (3 marks) (b) Comment on the criticisms often levelled against sorely relying on concentration measures to label industries/ or markets (18 marks). Question 2 Critically examine how different policy makers could come up with different and conflicting proposals on a policy governing competition within a particular industry/ or market (30 marks). Question 3 Discuss Masons contribution to industrial organisation in the 1930s and how this brought a better understanding of firm behaviour (30 marks).

RHODES UNIVERSITY DEPARTMENT OF ECONOMICS AND ECONOMIC HISTORY ECON 416 (INDUSTRIAL ORGANISATION) TEST 1 (22nd March 2007) Answer sheet for Section A Student number: Date: __________________________________ __________________________________

Shade the correct answer or mark it with an X Question 1 A. B. Question 2 A. B. Question 3 A. B. Question 4 A. B. Question 5 A. B. Question 6 A. B. Question 7 A. B. Question 8 A. B. Question 9 A. B. C. C. C. C. C. C. C. C. C. D. D. D. D. D. D. D. D. D. D. E E E E E E E E E E Question 11 A. B. C. Question 12 A. B. C. Question 13 A. B. C. Question 14 A. B. C. Question 15 A. B. C. Question 16 A. B. C. Question 17 A. B. C. Question 18 A. B. C. Question 19 A. B. C. Question 20 A. B. C. D. D. D. D. D. D. D. D. D. D. E E E E E E E E E E

Question 10 A. B. C.