Quiz 12: Oligopoly and Strategic Behavior

Oligopoly is a market: A)with one firm and many different products. B)with many firms and a homogeneous product. C)with a few firms and the actions of one firm have a large impact on the others. D)with a few firms and the actions of one firm have a small impact on the others.

Which of the following is the best example of an oligopolistic industry? A)cleaning services B)airline services C)local water utility D)designer shoes

The market structure in which the behavior of any given firm depends on the behavior of the other firms in the industry is: A)perfect competition. B)monopoly. C)monopolistic competition. D)oligopoly.

Which of the following is a characteristic of an oligopoly market? A)control over price B)diseconomies of scale in production C)firms act independently without regard to each other D)all of the above

An oligopoly could occur for the following reasons: A)advertising campaigns. B)economics of scale in production. C)government barriers to entry. D)all of the above

Table 12.1 -Refer to Table 12.1.The four-firm concentration ratio of the cigarette industry is equal to: A)48%. B)54%. C)71%. D)81%.

Table 12.1 -Refer to Table 12.1.If Firms L and M were to merge,the four-firm concentration ratio would: A)rise to 71%. B)fall to 82%. C)fall to 40%. D)rise to 82%.

If the five-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal share of the market,the Herfindahl-Hirschman Index is: A)10,000. B)2,000. C)2,500. D)400.

Assume six firms comprising an industry have market shares of 30,30,10,10,10,and 10 percent.The Herfindahl-Hirschman Index for this industry is ________. A)80 B)2,200 C)1,600 D)2000

An arrangement in which firms conspire to fix prices is called: A)a cartel. B)price-ceiling. C)price-fixing. D)a duopoly.

A cartel is: A)a group of firms that coordinate their pricing and quantity decisions. B)a type of oligopoly in which the demand curve is "kinked." C)a duopoly market where firms have the exact product. D)a group of firms that all produce the same level of output.

-Refer to Figure 12.1.Six firms that produce chewing gum have formed a cartel.The cartel faces the market demand curve given by D.To maximize profits,the cartel should produce ________ packs of chewing gum and the price should be ________. A)12,000;$.25 B)12,000;$.40 C)14,000;$.30 D)$16,000;$.35

-Refer to Figure 12.1.Assume the firms have formed a cartel.If the cartel is maximizing profits,the cartel's profits are: A)$0. B)$1,080. C)$1,800. D)indeterminate from this information.

Suppose four firms in the airline industry have gotten together and formed a cartel.Which of the following is true? A)The firms will set a price that is equal to minimum average total cost. B)The firms will produce where the marginal cost curve intersects the average total cost curve. C)The firms will produce where marginal cost is equal to marginal revenue. D)The firms will set a price equal to marginal revenue.

Assume that firms in an oligopoly are currently colluding to set price and output to maximize total industry profit.If the oligopolies are forced to stop colluding,the price charged by the oligopolies would ________ and the total output produced will ________. A)increase;increase B)increase;decrease C)decrease;increase D)decrease;decrease

Firms in an oligopoly can increase profit by: A)jointly acting to reduce output and increase prices. B)independently acting to increase price. C)acting alone and refusing to join the group. D)none of the above.

Consider four types of markets: monopoly,perfect competition,oligopoly,and monopolistic competition.If they were ranked from the lowest number of firms to the largest number of firms the ranking would be: A)monopoly,oligopoly,monopolistic competition,perfect competition. B)oligopoly,monopoly,monopolistic competition,perfect competition. C)monopoly,monopolistic competition,oligopoly,perfect competition. D)perfect competition,oligopoly,monopoly,monopolistic competition.

In game theory,a strategy that represents the best choice for a firm no matter what the other firm does is termed: A)a dominant strategy. B)a Nash equilibrium. C)a prisoners' dilemma. D)a duopolists' dilemma.

-Figure 12.2 shows the decision tree for setting price for the only two firms in a market.How many dominant strategies are there for firm A? A)0 B)1 C)2 D)It cannot be determined without knowing what firm B does.

-Figure 12.2 shows the decision tree for setting price for the only two firms in a market.If both firms follow their dominant strategies: A)both firms will set price high. B)both firms will set price low. C)only one firm will set price low. D)The firms' dominant strategies cannot be determined without more information.

-Figure 12.2 shows the decision tree for setting price for the only two firms in a market.One way for both firms to charge a high price is for both firms to: A)play their dominant strategies. B)collude. C)expand output. D)any of the above

-Figure 12.2 shows the decision tree for setting price for the only two firms in a market.The dominant strategy for firm A: A)is to set price low. B)is to set price high. C)depends on what B does. D)is to do the opposite of whatever B does.

-Refer to Figure 12.2.If A adopts a strategy of price fixing then the best choice for A is to choose the ________ price and the best choice for B is to choose the ________ price. A)high;high B)high;low C)low;high D)low;low

-A duopolists' dilemma occurs when two firms in a market would be better off if: A)both choose the high price but instead each chooses the low price. B)both firms act jointly as a cartel and chooses the best price. C)one firm refuses to participate in the cartel. D)both firms adopt price matching.

-Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game the dominant strategy for A is to: A)cheat. B)stand by the agreement. C)cheat only if B cheats. D)maximize the maximum losses.

-Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game the dominant strategy for B is to: A)cheat. B)stand by the agreement. C)cheat only if A cheats. D)maximize the maximum losses.

-Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.If both firms follow their dominant strategies,Firm B's profits will be: A)-$2 million. B)$ 2 million. C)$5 million. D)$ 8 million.

The Nash equilibrium is an outcome of a game: A)when each player is doing the best he or she can,given the actions of the other players. B)each player has a competitive advantage over the other players. C)in which there are no winners only losers. D)when all the possibilities are revealed to the players.

Recall the application about the failure of the salt cartel,why did the salt cartels around the 19th century fail to get established,even though they paid new firms not to produce salt for a year? A)Individual firms cheated on the cartel by selling outside the cartel. B)Artificially high price also caused new firms to enter the market. C)Salt consumers found substitutes and brought the price of salt down. D)A and B are correct.

The small number of firms is what differentiates oligopoly markets from the other three market structure types (perfect competition,monopoly,and monopolistic competition).

According to one rule of thumb,a four-firm concentration ratio of greater than 40 percent for the industry is considered to be an oligopoly.

The cigarette industry is not an example of an oligopolistic industry.

The beer industry is an example of a oligopolistic industry.

Oligopoly is a market structure where many firms are competing by selling an identical product.

An oligopolistic industry has barriers to entry.

Many cartels exist in the U.S.because cartels and price-fixing are legal under United States law.

If one duopolist chooses the highest price it will maximize its profit.

If firms in an oligopoly form a cartel,the outcome is the same as it would be under monopolistic competition.

A dominant strategy exists when a firm's choice is the best regardless of other firms' decisions.

Game tree is a graphical representation of the consequences of different actions in a strategic setting.

A dominant strategy is one that is the best choice regardless of other firms' decisions.

The type of product sold is what differentiates oligopoly markets from the other three market structure types (perfect competition,monopoly,and monopolistic competition).

The house slipper industry is an example of an oligopolistic industry.

The cereal industry is an example of a oligopolistic industry.

In an oligopolistic market,the government may limit the number of firms in a market by issuing patents.

In an oligopoly,the behavior of any one firm depends on the reaction it expects of all the others in the industry.

An oligopolistic industry has no barriers to entry.

What is a cartel?

Under what conditions does an oligopoly market result in the same outcome as monopoly? What does this imply for the oligopoly's long-run profits?

Assuming that firms do not collude,compare the market outcome under oligopoly with the outcome under monopoly.

-Consider the decision tree depicted in Figure 12.4 concerning a collusive agreement between firms owned by Bob and Donna.Each participant has the option of following the terms of the agreement or cheating on the terms of the agreement,but neither knows what the other will do.What is the dominant strategy for Bob? For Donna? Which strategy should player,Bob and Donna,choose to maximize the potential gain? What do you think the outcome of this game will be? Carefully explain your answers.

What does it mean when a firm has a dominant strategy?

What is one way that firms can overcome the duopolists' dilemma and promote cartel pricing? A)One firm can guarantee it will match a lower price of a competitor. B)Firms can come to an agreement to be at Nash equilibrium. C)Firms create a cartel to control prices. D)none of the above

In a two-person,repeated game,a tit-for-tat strategy starts with: A)non-cooperation and then each player follows his or her own self-interest. B)non-cooperation and then each player cooperates only if the other player cooperates. C)cooperation and then each player follows his or her own self-interest. D)cooperation and then each player repeats the other player's previous move.

In a two-person,repeated game,a grim-trigger strategy results in: A)each firm following its own self-interest choice. B)each firm earning economic profits. C)one firm choosing a price so low that no firm earns an economic profit. D)one firm earning economic profits while the other does not.

A duopoly pricing strategy results in a(n)________ profitable outcome than cartel pricing. A)less B)more C)equally D)indeterminate

Low-price guarantees in a duopoly: A)lead to higher prices. B)lead to lower prices. C)make cartel pricing possible. D)A and C are correct.

Which of the following industries was NOT charged with price fixing? A)industrial diamonds B)electric generators C)music distribution D)none of the above

Recall the application about low-price guarantee with tire prices in Florida,what happen to the prices of the tires after the low-price guarantee advertising was included in the newspaper ad? A)The prices soar. B)The prices decrease C)The prices stayed the same. D)Some tire companies exit the market.

Explicit price fixing was outlawed by the ________ Act. A)Fair Labor Standards B)Alien and Sedition C)Sherman Antitrust D)Freedom of Information

Under price leadership,when firm A suddenly drops its price what could its competitors interpret by the drop in price? A)Firm A is breaking an explicit pricing agreement. B)Firm A is forming a cartel. C)Firm A is not cooperating with the price fixing. D)Firm A observed a change in demand or production.

Suppose that Sun beach only has three movie theaters.One movie theater decreases its movie ticket price and later that same day,the other two do the same.Which of the following is true? A)This is illegal because the movie theater are colluding. B)This is an example of explicit price fixing. C)The first movie theater to lower price is probably the implicit price leader. D)All of the above are true.

Additional Application Late in the day on August 7,2006 numerous U.S.airlines cut their fares on leisure travelers.These included American Airlines,Delta,Continental,and Southwest.This fare cut,which was approximately 4 to 8 percent,occurred during a period of rising fuel costs and a record number of seats being filled.If costs are up and demand is strong,why did these airlines reduce their prices on this class of passengers? The explanation is that they were following the lead of United.United Airlines is the implicit price leader in this industry and many other carriers watch closely what the leader does and base their decisions on the leader's actions.Such behavior is not uncommon in an industry dominated by a few large firms. "United Airlines sparks fare war," August 9,2006,retrieved November 3,2006 from http://money.cnn.com/2006/08/09/news/companies/airfares/index.htm. -What market structure does the airline industry most likely resemble? A)monopoly B)oligopoly C)monopolistic competition D)perfect competition

In this article on airlines,when the firms experienced an increase in cost of production,their price ________. A)increased B)decreased C)did not change D)change was ambiguous

In this article on airlines,when the firms experienced an increase in demand,their price ________. A)increased B)decreased C)did not change D)change was ambiguous

In the U.S. ,price leadership,as in the article above,is ________. A)illegal B)unprofitable C)seldom used D)legal

-Refer to Figure 12.5.The model of oligopoly in this diagram is the: A)price leadership model. B)kinked demand curve model. C)cartel model. D)competitive oligopoly.

-Refer to Figure 12.5.Section of the demand curve assumes that competing firms will: A)raise their price in response to this firm's price increase. B)decrease their price in response to this firm's price increase. C)not change their price in response to this firm's price increase. D)raise their price in response to this firm's price decrease.

-Refer to Figure 12.5.Section of the demand curve assumes that competing firms will: A)lower their price in response to this firm's price reduction. B)increase their price in response to this firm's price reduction. C)not change their price in response to this firm's price reduction. D)raise their price in response to this firm's price increase.

-Refer to Figure 12.6.The segment of the demand curve from $9 to $12 is: A)relatively inelastic. B)positively sloped. C)relatively elastic. D)not realistic.

-Refer to Figure 12.6.Assume the firm represented is selling its product at $12.It could increase its revenue by: A)raising its price. B)by lowering its price. C)by producing more. D)None of these are correct.

AACSB: Reflective Thinking Skills Learning Outcome: Micro-16 -Low-price guarantees mean lower prices for consumers.

Low-price guarantees is a way to insure that other firms will choose a high price.

Low-price guarantees worsen the duopolists' dilemma.

The low-price guarantee results in an outcome equivalent to perfect competition.

If a firm uses a grim trigger retaliation strategy,all firms could end up with zero economic profit.

Under tit-for-tat retaliation,a firm will mimic the other firm's choice from the preceding period.

Firms participating in implicit price leadership openly discuss their pricing strategies with one another.

Explain the underlying assumptions of the price leadership model.What conclusions can be made about the price charged and the output produced in an industry that has an implicit price leader?

-Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If both firms choose a high-price strategy: A)Omega will earn $300 daily profit and Zeta will earn $100 daily profit. B)Omega will earn $100 daily profit and Zeta will earn $300 daily profit. C)Both will earn $200 daily profit. D)Both will earn $150 daily profit.

-Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If Zeta commits to charging a high price Omega can earn the largest profit by: A)also charging a high price. B)charging a low price. C)convincing Zeta to charge a low price and then matching it. D)doing none of the above.

-Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If both firms follow their individual dominant strategy: A)Omega will earn $300 daily profit and Zeta will earn $100 daily profit. B)Omega will earn $100 daily profit and Zeta will earn $300 daily profit. C)Both will earn $200 daily profit. D)Both will earn $150 daily profit.

-Refer to Figure 12.7 The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.In the Nash equilibrium: A)both firms would a high price. B)both firms would charge a low price. C)only Zeta would charge a low price. D)only Omega would charge a low price.

Table 12.2 -Refer to Table 12.2.Jeri and Tom are arrested for having committed a crime.They are being interrogated individually and need to decide if they should confess or not confess.The police have enough information to put them in jail for 5 years.They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge.The first number in each cell refers to the number of years of prison time Jeri will receive if she confesses or does not confess and the second number in each cell refers to the number of years of prison time Tom will receive if he confesses or does not confess.The dominant strategy for Jeri is to ________ and the dominant strategy for Tom is to ________. A)confess;confess B)not confess;not confess C)confess;not confess D)not confess;confess

Table 12.2 -Refer to Table 12.2.Jeri and Tom are arrested for having committed a crime.They are being interrogated individually and need to decide if they should confess or not confess.The police have enough information to put them in jail for 5 years.They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge.The first number in each cell refers to the number of years of prison time Jeri will receive if she takes that action and the second number in each cell refers to the number of years of prison time Tom will receive if he takes that action.If Jeri and Tom can decide jointly then the best strategy is for Jeri to ________ and Tom to ________. A)confess;confess B)not confess;not confess C)not confess;confess D)confess;not confess

Recall the application about cheating on the final exam,three students were caught cheating on their final exam.Did the three students confess when the professor put them through the prisoners' dilemma? A)one student confessed. B)two students confessed. C)three students confessed. D)none of the students confessed.

A payoff matrix shows each possible outcome of a game and the consequences for each player.

If firm A and B do not have dominant strategies,the payoff matrix can be used to predict the Nash equilibrium between firms A and B.

The prisoners' dilemma is a simultaneous decision-making game.

The prisoners' dilemma shows that the players' dominant strategies often lead them to less than optimal outcomes.Explain the Nash equilibrium and why both prisoners confessing is the Nash equilibrium.

An insecure monopolist can: A)always deter entry by lowering the price of output. B)deter entry in the short run but not the long run. C)deter entry in the long run but not the short run. D)deter entry if the minimum entry quantity is relatively large.

Consider a college that has only ever had one on-campus bookstore.Over the last two years you have observed that book prices are 20% lower.You conclude that: A)the cost of producing books must have fallen. B)the college ordered the bookstore to lower prices. C)competition from online stores has encouraged the bookstore to behave as an insecure monopolist. D)fewer students are opting to buy books and supply has decreased.

If an insecure monopolist needs to determine what strategy will be best to prevent a second firm from entering the market,what could be the key variable to use when determining the best strategy? A)minimum entry quantity B)minimum exit quantity C)maximum entry quantity D)maximum exit quantity

When a company increases output and accepts a lower price to keep new companies from entering the market,it is engaging in: A)cartel team up. B)limit pricing. C)collusion. D)price ceiling.

A single firm selling its output in a contestable market will: A)establish a monopoly. B)be able to maintain high prices indefinitely. C)be able to earn high economic profits indefinitely. D)be threatened constantly by the entry of new firms.

A single firm selling its output in a contestable market can raise its prices and: A)insure higher profits. B)guarantee monopoly profits. C)give other firms the incentive to enter that market. D)keep other firms out of the industry with its market power.

In perfectly contestable markets,large oligopolistic firms end up pricing like: A)monopolistically competitive firms. B)a monopoly. C)competitive firms. D)a cartel.

Recall the application about Microsoft having a virtual monopoly in the market for personal-computer operating systems and business software.Which of the following best represents the way Microsoft keeps other firms from entering the market? A)Microsoft buys out small firms that have the potential to make a similar product. B)Microsoft uses limit pricing to deter entry. C)Microsoft has a patent that prohibits any firm from producing a similar product. D)Microsoft is a pure monopoly where it is impossible for other firms to enter the market.

The limit price is just low enough to deter entry.

Entry into a market can be deterred by practicing limit pricing.

Not practicing limit pricing and allowing entry can hurt an incumbent firm's profits.

Deterring entry into an industry will be more profitable than sharing the market with another firm.

Limit pricing is the strategy of raising the price to deter entry.

A contestable market has low entry and high exist costs.

Explain what a "perfectly contestable" market means.Explain why the outcome in a perfectly contestable market is that firms produce efficiently.

How do we know when a market is contestable?

Do firms in a perfectly contestable market earn positive economic profit in the long run? Explain.

Which of the following best defines the advertisers' dilemma? A)Firms A and B will be better off spending money on advertising,however each firm decides not to advertise. B)Firms A and B will be better off not spending money on advertising,however each firm decides to advertise. C)Firm A advertises,but firm B does not advertise. D)Firm B advertises,but firm A does not advertise.

Which of the following strategic behaviors do firms in an oligopoly market usually engage? A)price fixing B)entry deterrence C)advertising D)all of the above

Which of the following firms will find it most useful to engage in advertising? A)perfectly competitive firms B)monopolistically competitive firms C)monopolies D)members of a cartel

A profit-maximizing firm will choose the level of advertisements such that: A)the marginal cost of advertising is equal to the marginal benefit from advertising. B)the marginal benefit from advertising exceeds the marginal cost of advertising. C)the marginal cost of advertising exceeds the marginal benefit from advertising. D)the firm receives the greatest marginal benefit from advertising.

Because of the advertisers' dilemma,an industry,as a whole would,if legal have an incentive to ________ advertising to ________ competition among sellers. A)restrict;increase B)encourage;increase C)restrict;reduce D)encourage;reduce

If a firm in a monopolistically competitive market uses advertising to lower the price elasticity of demand for its product: A)it will likely increase its price. B)it will likely lead to a monopoly,as other firms exit the market. C)it will increase the level of competition in the market. D)none of the above

-Refer to Figure 12.8.If both firms follow their dominant strategies,Firm A will earn profits equal to: A)$500. B)$700. C)$200. D)$100.

-Refer to Figure 12.8.If both firms follow their dominant strategies,Firm B will earn profits equal to: A)$500. B)$700. C)$200. D)$100.

-Refer to Figure 12.8.Which of the following would be a Nash equilibrium? A)Both A and B advertise. B)Both A and B do not advertise. C)A advertises and B does not. D)B advertises and A does not.

-Refer to Figure 12.9.If both firms follow their dominant strategies,Firm X will earn profits equal to: A)$300. B)$400. C)$200. D)$600.

-Refer to Figure 12.9.If both firms follow their dominant strategies,Firm Y will earn profits equal to: A)$400. B)$600. C)$200. D)$300.

-Refer to Figure 12.10.The data in the boxes are the annual profits for each company whether they choose to advertise or not.If Big Box follows its dominant strategy it will: A)earn$ 6 million. B)earn $4 million. C)earn $10 million. D)earn $5 million.

-Refer to Figure 12.10.The data in the boxes are the annual profits for each company whether they choose to advertise or not.If Lil Box follows its dominant strategy it will: A)earn$ 6 million. B)earn $4 million. C)earn $10 million. D)earn $5 million.

-Refer to Figure 12.10.The data in the boxes are the annual profits for each company whether they choose to advertise or not.If Lil Box decides not to advertise: A)Big Box should not advertise. B)Big Box should advertise. C)Lil Box will make $6 million. D)Lil Box will make $10 million.

The advertisers' dilemma suggests that firms would be worse off if they did not advertise,even though advertising only raises total output in an industry by only a small amount.

Recall the application about the Got Milk? advertising.the generic,non-brand advertising campaign is benefits all the milk firms so they share the cost and the benefits of the Got Milk? campaign.

What is the advertisers' dilemma?

-Refer to Figure 12.11.What is Firm A's dominant strategy? What is Firm B's dominant strategy? Explain.