ECON 295 - Chapter 7

Vocabulary flashcards covering topics on market structures, competition, firm boundaries, market concentration (HHI), and present value calculations from ECON 295.7.

Mergers and Acquisitions

The process of a firm buying its competition, which may make economic sense if the firm is operating with increasing returns to scale or if marginal profit increases as the quantity produced increases.

Make or Buy Decision

The strategic consideration of whether a firm should produce its inputs internally or purchase them in the market, and whether a firm and its supplier should operate as separate companies.

Vertical Integration

A business strategy where a firm purchases its supplier.

Hold-up Risk

A risk that increases between transacting parties when relationship-specific investments are made.

Market Structure

A classification describing how concentrated a market is, ranging from perfect competition to monopoly.

Perfect Competition

A market structure where all buyers are price takers, all sellers are price takers, the product is homogeneous, and there is free entry and exit.

Monopoly

A market structure where all buyers are price takers, a single seller sets the price, the product is homogeneous, and barriers to entry/exit exist.

Monosony

A market structure characterized by a single buyer setting the price, all sellers acting as price takers, a homogeneous product, and barriers to entry/exit.

Monopolistic Competition

A market structure where all buyers are price takers, all sellers are price setters, products are heterogeneous, and barriers to entry/exit exist.

Oligopoly

A market structure where all buyers are price takers, a small set of sellers are price setters, the product is homogeneous, and barriers to entry/exit exist.

Market Concentration

The quantification of how much market power exists within a market, indicating whether a firm has a large enough share to operate as a monopolist.

Herfindahl-Hirschman Index (HHI)

A measure of market concentration defined as $HHI = \sum_{i} s_i^2$, where $s_i = \frac{R_i}{\sum R_i}$ and $R_i = P_i \times Q_i$.

HHI Interpretation

A bounded index where $0 \le HHI \le 1$; values closer to $1$ signify a less competitive market, while values closer to $0$ indicate a more competitive market.

Present Value (PV)

The current value of expected future cash flows, calculated using the formula $PV = \frac{FV}{(1 + i)^t}$, where $FV$ is future value, $i$ is the interest rate, and $t$ is the duration of time.

Present Value of an Annuity

The present value of perpetual annual payments calculated as $PV = \frac{Y}{i}$, where $Y$ is the annual payment amount, $i$ is the interest rate, and the duration is forever.