Industrial Organization Exam Preparation
Guide
Course Introduction
Industrial Organization examines how firms and industries operate and interact within markets, with a focus on the structure, strategy, and performance of both competitive and monopolistic environments. The course analyzes factors that influence market outcomes, such as pricing, product differentiation, barriers to entry, and market power, and explores the role of government regulation and antitrust policies. Through theoretical frameworks and empirical studies, students gain insights into the dynamics of firm behavior, the implications for consumer welfare, and the overall functioning of diverse market systems.
Recommended Textbook
Economics of Strategy 7th Edition by David Dranove
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15 Chapters
505 Verified Questions
505 Flashcards
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Page 2
Chapter 1: The Power of Principles: A Historical Perspective
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35 Verified Questions
35 Flashcards
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Sample Questions
Q1) What was the major role of private banks in the early 1800s?
A)Serve as an institution for deposits
B)Issue credit
C)Reduce the risk of price fluctuation
D)Create futures markets
E)Sell stocks
Answer: B
Q2) By simultaneously halting air traffic and financial markets,what recent historical event highlighted the interdependence company infrastructure?
A)2000 Presidential Election
B)2004 Olympics
C)Fall of Enron
D)September 11,2001
E)Hurricane Katrina
Answer: D
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Chapter 2: The Horizontal Boundaries of the Firm
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34 Verified Questions
34 Flashcards
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Sample Questions
Q1) The minimum point on a U-shaped average cost curve is known as which of the following?
A)Efficient marginal cost (EMC)
B)Lowest price alternative (LPA)
C)Efficient production cost (EPc)
D)Minimum efficient scale of production (MES)
E)Minimum threshold cost (MTC)
Answer: D
Q2) Which of the following benefits of diversification explains the idea that combining unrelated businesses can allow firms to finance projects through cross-subsidization when they previously were unable to finance the same projects externally?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms
Answer: C
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Chapter 3: The Vertical Boundaries of the Firm
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34 Flashcards
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Sample Questions
Q1) What are influence costs?
A)Costs associated with slack effort and with the administrative controls to deter it
B)The cost of activities aimed at affecting the distribution of benefits in an organization
C)Costs related to the negotiation of external contracts
D)Costs of recruiting ("buying")outside employees with a particular skill set
E)The costs of advertising to customers
Answer: B
Q2) Which of the following is not a result of the holdup problem?
A)More difficult contract negotiations and more frequent renegotiations
B)Investments to improve ex post bargaining positions
C)Reduction in the transaction costs of arm's length market exchanges
D)Distrust
E)Reduced investment in relationship-specific investments
Answer: C
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Chapter 4: Integration and Its Alternatives
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Sample Questions
Q1) For what critical aspect of drug development has research (Azoulay & Henderson)shown that major drug houses have chosen tapered integration?
A)Clinical Research
B)Drug Development
C)Marketing
D)Sales
E)Manufacturing
Q2) What term describes when a firm is using the least-cost production process?
A)Agency efficiency
B)Matrix purchasing
C)Technical efficiency
D)Economizing
E)All of the above
Q3) What term describes when a firm is using the least-cost production process?
A)Agency efficiency
B)Technical efficiency
C)Lean compliant
D)Economizing
E)Six sigma compliant
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Page 6
Chapter 5: Competitors and Competition
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31 Flashcards
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Sample Questions
Q1) What empirical method generally is used to measure the degree to which products substitute for each other?
A)Cross-price elasticity
B)Price comparison
C)Relatedness factor
D)Standard Industrial Classification
E)SSNIP
Q2) Of the following industries listed,which one is generally thought of as having the highest search costs?
A)Consumer packaged goods
B)Electronics
C)Physician service
D)Automotive
E)Apparel
Q3) The Revenue Destruction Effect in oligopolies occurs when:
A)Firms individually reduce prices to gain more customers
B)Firms intentionally reduce output quantity to raise price
C)Firms independently maximize their own profits
D)Firms agree to all sell at the same price
E)Firms all agree to specific output quantities
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Chapter 6: Entry and Exit
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35 Flashcards
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Sample Questions
Q1) Which of the following is a potential risk of a brand umbrella?
A)The brand umbrella reduces the incumbents sunk cost of introducing a new product
B)The umbrella brand may help the incumbent navigate the vertical chain
C)The brand umbrella allows an incumbent offset uncertainty about the quality of a new product
D)A brand umbrella may make suppliers and distributors more willing to enter relationship specific investments in or sell credit to incumbents
E)If a new product under the umbrella fails,consumers may become disenchanted with the entire brand
Q2) When is reputation a most effective entry barrier?
A)When the incumbent has incurred them and the entrant has not
B)When incumbents have long-standing relationships with suppliers and customers
C)When channels are few and hard to replicate
D)When a firm has a reputation for toughness or competes in multiple markets
E)When marginal costs are low and flooding the market causes large price reductions
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Chapter 7: The Dynamics Competing Across Time
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Sample Questions
Q1) Which of the following statements is true about how the volatility of demand conditions affects the sustainability of cooperative pricing?
A)Price cutting is easier to detect when demand conditions are volatile
B)Pricing coordination becomes easier in a volatile demand condition because firms are chasing a moving target
C)Price cutting is harder to detect when demand conditions are stable
D)Demand volatility is an especially serious problem when the production involves substantial variable costs
E)Demand volatility is an especially serious problem when the production involves substantial fixed costs
Q2) Suppose that a firm offers secret discounts to 200 customers in a particular industry to attract those customers from a competitor firm.If there is a 2% probability that any one of those customers will disclose the pricing,what is the probability that the firms competitors will hear from one of those 200 customers? Suppose there are instead 20 buyers to which discounts are offered.What is the probability then that the competitors may find out about one of the discounts?
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Chapter 8: Industry Analysis
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Sample
Questions
Q1) Which of the following is not a barrier to entry in professional sports markets?
A)Each league has rules governing the addition of new franchises
B)Potential new owners must pay current owners hundreds of millions of dollars
C)Most potential owners must offer to build new stadiums
D)Incumbent teams have rights to veto franchises in their own geographic markets
E)Because the number of potential billionaire owners has risen dramatically,the purchase prices have dropped
Q2) Price competition is increased when which of the following occurs??
A)Many sellers in the market
B)Products are differentiated
C)Firms are producing at capacity
D)Buyers have high switching costs
E)Firms purchase raw materials from the same suppliers
Q3) Which of the following is true about hospital industry profits from 1980 to 2000 and a five forces analysis?
A)Virtually every factor caused profits to increase
B)Virtually every factor caused profits to decrease
C)Most factors are not applicable to the industry
D)The Value Net cannot be used to evaluate the industry
E)None of the above
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Chapter 9: Strategic Positioning for Competitive Advantage
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Sample Questions
Q1) What term describes the situation when a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market?
A)Industry effect
B)Competitive advantage
C)Business unit effect
D)Competitive position
E)Market profitability economics
Q2) Which of the following terms is a concept,developed by Michael Porter,which describes the activities within firms and across firms that add value along the way to the ultimate transacted good or service?
A)Five forces
B)Value creation
C)Value chain
D)Consumer surplus
E)Producer surplus
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11
Chapter 10: Information and Value Creation
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Sample Questions
Q1) Conflicts of interest in the certifier market often can lead to which of the following?
A)Higher priced goods and services
B)Lower competition between substitute goods
C)A reduction in the number of competitive sellers
D)Certification bias
E)Less product choice for the consumer
Q2) Products for which consumers cannot easily compare product characteristics and value information from others are called:
A)Experience goods
B)Search goods
C)Retail goods
D)Consumer goods
E)Credence Goods
Q3) Unraveling is an economic theory that describes which of the following?
A)Low quality products will be quickly discovered and abandoned by buyers
B)High seller concentration leads to the development of many substitute products
C)Few sellers improve product quality once they have scale in production
D)Even low quality sellers will disclose their product quality
E)Consumers ultimately switch products regardless of quality
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Page 12
Chapter 11: Sustaining Competitive Advantage
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Sample Questions
Q1) What term best describes a resource that cannot "sell itself" to the highest bidder?
A)Isolated
B)Value-creating
C)Scarce
D)Imperfectly mobile
E)Profit maximizing
Q2) What term describes a framework used in strategy based on resource heterogeneity which posits that for a competitive advantage to be sustainable,it must be underpinned by resource capabilities that are scarce and imperfectly mobile?
A)Persistence of profitability for the firm
B)Capability-based theory of the firm
C)Regression to the mean
D)Resource-based theory of the firm
E)Five-forces framework
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13
Chapter 12: Performance Measurement and Incentives
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Sample Questions
Q1) Which of the following is least likely a technique firms can use to mitigate the free-rider problem?
A)Firms can reduce the repeated interactions among team members so that actions depend less on what other members may have done in the past
B)Firms can keep teams small
C)Firms can allow employees to work together for long periods
D)Firms can structure teams so that their members can monitor one another's actions
E)Firms can use future periods of interaction and let natural team dynamics of peer pressure and social isolation take place as punishment for team members who have failed to contribute in the past
Q2) Which of the following terms describes a phenomenon whereby individuals ignore their own information about the best course of action and instead simply do what everyone else is doing?
A)Relative performance
B)Absolute performance
C)Herding
D)Risk sharing
E)Pay-for-performance
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14
Chapter 13: Strategy and Structure
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Sample Questions
Q1) Which of the following structures best describes a small group of people where the members of the work group are paid based on individual actions?
A)Complex hierarchy
B)Individual
C)Self-managed team
D)Hierarchy of authority
E)Divisional
Q2) What type of organizational structure is one in which employees are subject to two or more sets of managers at once?
A)Unitary functional structure
B)Multidivisional structure
C)Matrix structure
D)Network structure
E)Individual structure
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Chapter 14: Environment, Power, and Culture
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Sample Questions
Q1) Which of the following is not a way firms suffering from dependence relationships can take action to reduce their dependence on buyers or suppliers?
A)Vertical integration
B)Using a monopolist buyer/supplier
C)Long-term contracting
D)Joint ventures
E)Alliances
Q2) What term best describes exchanges of goods,services,or promises on terms that take place outside of traditional economic markets and are not enforceable in court?
A)Handshake agreement
B)Noncontractual exchange relationship
C)Internal context
D)External context
E)Exclusive dealing
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16
Chapter 15: Economics Primer
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Sample Questions
Q1) Which of the following best describes marginal revenue?
A)How sales revenue varies as a function of how much product is sold
B)The incremental sales from producing one more unit of output
C)Rate of change in total revenue that results from the sale of Q additional units of output
D)The total sales for a given product based on plant output
E)Percentage change in quantity divided by percentage change in price
Q2) Suppose a firm's plant produces Q units in any given year.The plant itself operates with annualized costs of $10M and other annual fixed expenses totaling $3M.In addition,the firm's variable costs depend on Q and are given by the formula 5Q²+3Q.What is the formula for the firm's Short-Run (i.e.one year)Average Costs?
Q3) What is a sunk cost?
A)A cost that can be avoided if certain choices are made
B)A cost that always varies with the output of a factory
C)The average cost of operating a plant
D)The "lower envelope" of short-run average cost functions
E)A cost incurred no matter what the decision is and cannot be avoided
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Page 17