Deck 10: The Dynamics of Pricing Rivalry

Question 1

What type of clause is a provision in a sales contract that promises a buyer that it will pay the lowest price the seller charges?

A)Low price clause
B)Price matching clause
C)Best price clause
D)Most favored customer clause
E)Competitive price clause

Answer 1

D

Question 2

What type of pricing involves a firm quoting a single delivered price for all buyers with the firm absorbing any freight charges itself?

A)Uniform delivered pricing
B)Uniform FOB pricing
C)Uniform customer pricing
D)Uniform favored pricing
E)Uniform competitive pricing

Answer 2

A

Question 3

What term refers to situations in which firms can sustain prices in excess of those that would arise in a non-cooperative single-shot price or quantity-setting game?

A)Dedicated pricing
B)Strategic pricing
C)Marginal pricing
D)Cost-plus pricing
E)Cooperative pricing

Answer 3

E

Question 4

Which of the following terms describes the situation created by a large dominant firm where smaller firms can find buyers as long as they sustain a lower price?

A)Price umbrella
B)Price leading
C)Predatory pricing
D)Premium pricing
E)Price lining

Question 5

What is a grim trigger strategy in a two firm repeated game?

A)A strategy where a firm will always aggress regardless of how the other firm acts
B)A strategy where a firm will always cooperate regardless of how the other firm acts
C)A strategy in which a firm is prepared to match whatever changes in strategy the competitor makes
D)A strategy in which a firm initially cooperates and then aggresses for the rest of the game as soon as the opponent aggresses
E)A strategy in which a firm is prepared to aggress when its opponent cooperates and cooperate when its opponent aggresses

Question 6

Which of the following market condition does not contribute to the low profitability of the heavy-duty truck engine industry?

A)Secrecy of sales terms
B)Significant threat of entry
C)Complexity of sales terms
D)Lumpiness of tuck engine orders
E)Fleet-buyers are price sensitive

Question 7

Which special case term describes the situation where for sufficiently low discount rates,any price between the monopoly price and marginal cost can be sustained as an equilibrium in the infinitely repeated prisoner's dilemma game?

A)Collusive agreement
B)Centipede Game
C)Folk Theorem
D)War of Attrition
E)Focal Point

Question 8

Why do price-sensitive buyers tend to harm cooperative pricing in a market?

A)They cause an increase in detection lags because competitor prices become more difficult to monitor
B)There is a resultant decrease in the frequency of interaction between competitors
C)There is an increase in the probability of misreads
D)The is an increase in temptation to cut price, even if competitors are expected to match
E)There is an increase in detection lags because prices of competitors are more difficult to monitor

Question 9

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

Question 10

In what situation are the Department of Justice and Federal Trade Commission most likely to challenge the merger between two competitors?

A)When the Herfindahl index is close to 0 and the number of firms is large
B)When targeted price discounts can be implemented by rival firms
C)When the merger threatens to substantially increase market concentration
D)When the merger threatens to substantially decrease market concentration
E)In a large industry with many competitors, each having a relatively equal market share

Question 11

In which of the following industries do more "public" sales transactions enhance the likelihood of sustained cooperative pricing?

A)Airframe manufacturing
B)Diesel locomotive production
C)Airline travel
D)Shipbuilding
E)Home construction

Question 12

In which of the following industries are competitive pricing interactions not affected by lumpy orders?

A)Office supply
B)Airframe Manufacturing
C)Shipbuilding
D)Supercomputing
E)Automobile seat manufacturing

Question 13

Which of the following practices can help firms facilitate cooperative pricing?

A)Price leadership
B)Advance announcement of price changes
C)Price following
D)Most favored customer clauses
E)Uniform delivered prices

Question 14

What term describes a policy in which a firm is prepared to match whatever change in strategy a competitor makes?

A)Response strategy
B)Always cooperate strategy
C)Always aggress strategy
D)Tit-for-tat strategy
E)Trigger strategy

Question 15

Which of the following is an example of a market where barometric price leadership occurs?

A)Breakfast cereal
B)Prime-rate loan
C)Tobacco
D)Steel until 1960s
E)Fast food hamburger

Question 16

Which of the following would not help facilitate coordination of pricing across firms in an industry?

A)Predatory pricing
B)Firms settling on round number price points and price increase increments
C)Using a single industry multiplier across firms to give discounts
D)Using a standard cycle for adjusting prices
E)Collusion

Question 17

What type of cooperation-inducing strategy is defined as one so compelling that that a firm would expect all other firms to adopt it?

A)Backward induction
B)Focal point
C)Always aggress
D)Coordination
E)Folk

Question 18

According to Dixit and Nalebuff,when misreads are possible,what kind of strategies in general are more desirable to use?

A)Strategies more provocable and less forgiving than tit-for-tat
B)Strategies less provocable and more forgiving than tit-for-tat
C)Strategies equally provocable and equally forgiving as tit-for-tat
D)Grim trigger strategies
E)Always aggress strategies

Question 19

Which set of advice below should a manager disregard when seeking pricing stability that is least likely to suffer from antitrust legislation?

A)All pricing decisions should be made unilaterally. Avoid direct contacts with competitors about price
B)Carefully handle public pricing communications
C)Always share analyses of probably competitive reactions
D)Monitor the content. Announce price changes; do not lecture competitors about the need to raise prices or consequences of reducing them
E)Clear your pricing tactics with an attorney well versed in antitrust law

Question 20

Why might a firm not be able to react quickly to competitors' pricing moves?

A)Lags in detecting competitors' prices
B)Infrequent interactions with competitors
C)Ambiguities in identifying which firm among a group of firms in a market is cutting price
D)Difficulties distinguishing drops in volume due to price cutting by rivals from drops in volume due to anticipated decreases in market demand
E)All of the above

Question 21

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?

Question 22

What term refers to the situation in the used car market where owners are more anxious to sell low-quality cars than high-quality cars?

A)Clunker market
B)Quality conundrum
C)Car scrapping market
D)Low-quality market
E)Lemons market

Question 23

Suppose Firm #1 dominates a market for widgets priced at $100/unit with a marginal cost of $60/unit.If Firm #2 enters the market and offers comparable widgets at a 3% discount,extending a price umbrella optimal as long as Firm #1 loses no more than what portion of its market share?

Question 24

In a six-firm market,if all firms charge the monopoly price,the profit equals $120,000.In that same six-firm market,if all firms instead charge the prevailing price,the profit is $60,000.If the pricing period is one-month long,what is the maximum monthly discount rate implied for each firm to still have an incentive to independently price at the monopoly level?

Question 25

How much revenue a firm brings in by improving the quality of a product such that more consumers want to buy it depends on which two factors?

A)The decrease in demand caused by the increase in quality and the incremental profit earned on each additional unit sold
B)The increase in demand caused by the increase in quality and the incremental profit earned on each additional unit sold
C)The increase in demand caused by the increase in quality and the incremental loss on each additional unit sold
D)The decrease in demand caused by the increase in quality and the incremental loss on each additional unit sold
E)The quality of changes to the original product and the decrease in demand cause by the changes in quality