ECON 1001: Chapter 14 (Oligopoly and Strategic Behavior)

What are three models used to study pricing and output by oligopolies? a) Kinked-demand curve model b) Collusive pricing model c) Kinked-supply curve model d) Cost leadership model e) Price leadership model

a) Kinked-demand curve model b) Collusive pricing model e) Price leadership model

Which of the following is a model used to examine oligopolistic pricing? a) The kinked-demand curve model b) The Herfindahl model c) The supply curve model d) The advertising model

a) The kinked-demand curve model

Which statement is true about oligopolies? a) They may produce homogeneous or differentiated products. b) They produce only heterogeneous products. c) They may produce either standardized products or homogeneous products. d) They produce only differentiated products.

a) They may produce homogeneous or differentiated products.

Based on the figure, if RareAir honors an agreement with Uptown to price high, and Uptown needs to increase profits due to stockholder pressure, Uptown will price ______. a) low to receive a payout of $15 b) high to receive a payout of $15 c) high to receive a payout of $12 d) ow to receive a payout of $12 e) low to receive a payout of $8

a) low to receive a payout of $15 always one step ahead. they will make more pricing low than if they both price high.

Oligopolies are not a desirable market structure because they achieve ______. a) productive efficiency but not allocative efficiency b) neither productive efficiency nor allocative efficiency c) allocative efficiency but not productive efficiency d) both productive efficiency and allocative efficiency

b) neither productive efficiency nor allocative efficiency

Oligopolies are comprised of ______. a) one large producer b) thousands of large producers c) hundreds of large producers d) a few large producers

d) a few large producers

If a firm assumes that its rivals will match all price changes, but the firm's rivals actually charge a lower price what are the potential consequences? *The firm is failing to produce at the profit-maximizing output. *The firm's profits will be lower. *The firm's demand curve will shift further to the left. *The firm's demand curve will shift further to the right. *The firm's profits will be higher.

*The firm is failing to produce at the profit-maximizing output. *The firm's profits will be lower. *The firm's demand curve will shift further to the left.

Based on the payoff matrix, if the two firms agreed to both follow national strategies there is an incentive for them to cheat. If one of the firms cheats on this agreement, what will happen? *The game would eventually end in the Nash equilibrium (cell A). *The game would temporarily move to either cell B or cell C. *The game would eventually end in either cell B or cell C. *The game would eventually end in the Nash equilibrium (cell B or C).

*The game would eventually end in the Nash equilibrium (cell A). *The game would temporarily move to either cell B or cell C.

Which are reasons that that firms merge? *To decrease monopoly power *To increase market share *To increase control over the product's price *To obtain lower input prices *To increase economies of scale

*To increase market share *To increase control over the product's price *To obtain lower input prices *To increase economies of scale

Which of the following represent shortcomings of the four-firm concentration ratio? *price elasticity of demand *dominant firms *interindustry competition *world trade *mutual interdependence *localized markets

*dominant firms *interindustry competition *world trade *localized markets

Advertising can reduce efficiency by ______. *speeding up technological progress *providing misleading information *increasing sales and output *manipulating consumer preferences *increasing economies of scale

*providing misleading information *manipulating consumer preferences

True or false: Firms in an oligopoly always produce a homogeneous product.

False.

What is it called when firms reach a verbal or tacit agreement with rivals about price in a social setting like the golf course?

Gentleman's agreements.

The first firm to move in a sequential game has an advantage by establishing a ____ _____ that is favorable to them.

Nash equilibrium

What kind of game is it when firms choose their optimal pricing strategy today without worrying about possible interactions in the future?

One-time game.

Oligopolies have ______. a) fewer firms than monopolistic competition b) the same number of firms as perfect competition c) more firms than perfect competition d) fewer firms than monopolies e) the same number of firms as monopolistic competition

a) fewer firms than monopolistic competition

For an industry to be considered an oligopoly the four-firm concentration ratio must be ______. a) greater than or equal to 40% b) greater than or equal to 50% c) less than or equal to 40% d) greater than or equal to 60%

a) greater than or equal to 40%

Companies often merge to ______ monopoly power. a) increase b) decrease c) avoid the perception of d) eliminate

a) increase

For a particular industry there may be a low four-firm concentration ratio since it is measured on a nationwide scale, but there can still be a local oligopoly. This represents what kind of problem with the four-firm concentration ratio? a) localized markets b) interindustry competition c) dominant firms d) import competition

a) localized markets

Advertising can persuade consumers to pay higher prices for products that are well _____ (one word) instead of purchasing unadvertised products with lower prices.

advertised

The four-firm concentration ratio understates the competition in the aluminum industry because aluminum competes with copper in many applications. What kind of problem does this represent with the four-firm concentration ratio? a) Import competition b) Interindustry competition c) Dominant firms d) Localized markets

b) Interindustry competition

What term means "cooperation with rivals?" a) payoff b) collusion c) competition d) cheat

b) collusion

What does a demand curve look like for an oligopolistic firm? a) It could be downward or upward sloping. b) It will always be downward sloping because it is a price maker. c) It will always be kinked because it is a price maker. d) It will always be U-shaped. e) It could be downward sloping or kinked.

e) It could be downward sloping or kinked.

Suppose the rivals of an oligopolistic firm ignore both a price increase and decrease. If so, then the firm's demand curve will be ______. a) L-shaped b) upward-sloping c) kinked d) vertical e) straight

e) straight The demand curve will look kinked to reflect the fact that rivals will match price *decreases* but ignore price *increases*.

The study of how people behave in strategic situations is called _____ theory.

game

Collusion becomes more difficult as the number of firms ____.

increases.

Without collusion, if a firm incorrectly assumes that its rivals will charge the same price but its rivals actually charge a lower price, the firm's demand curve will shift to the ____.

left

A(n) _______ (Enter one word) is a market dominated by a few large producers of a homogeneous or differentiated product.

oligopoly

In a(n) _____ game one firm moves first, committing to a strategy and then the rival firm responds.

sequential

Based on the figure, if one firm cheats on the collusive agreement it can increase its payoff by $1. $4. $15. $3. $6.

$15 - $12 = $3

What are the positive effects of large oligopolists advertising? *It lowers search costs of information for consumers. *It enhances competition and reduces monopoly power. *It eliminates competition among firms. *It helps reduce demand for material products.

*It lowers search costs of information for consumers. *It enhances competition and reduces monopoly power.

Which are barriers to entry in both monopolies and oligopolies?*Preemptive pricing *Diseconomies of scale *Large capital investment *Ownership and control of raw materials *Patents

*Preemptive pricing *Large capital investment *Ownership and control of raw materials *Patents

What are oligopolists able to do by controlling price through collusion? *Cause price wars during business recessions *Reduce inputs used in production *Reduce uncertainty *Increase profits *Prohibit the entry of new rivals

*Reduce uncertainty *Increase profits *Prohibit the entry of new rivals

True or false: A cartel abides by a formally written agreement that specifies the output and price of each member firm and is a form of overt collusion.

True.

True or false: A one-time game occurs when firms will choose their pricing strategy for today without concern about future interactions with their rivals.

True.

Oligopolistic firms do which of the following when they change their pricing strategies? a) Affect profits and influence the profits of rival firms b) Affect profits without influencing the profits of rival firms c) Affect costs and influence the supply of rival firms d) Affect costs and influence the products of rival firms

a) Affect profits and influence the profits of rival firms

What is it called when a group of producers creates a formal written agreement stating the level of output by each firm and the prices that must be charged? a) Cartel b) OPEC c) Price war d) Mutual interdependence

a) Cartel

Which of the following is not a characteristic of oligopoly? a) Firms have no control over their price. b) Firms may sell a homogeneous product. c) Firms' advertising decisions are interdependent. d) The market contains a few large producers. e) Firms may sell a differentiated product.

a) Firms have no control over their price.

The fact that industry concentration may be overstated because the four-firm concentration ratio only accounts for production within the United States represents what kind of shortcoming with the four-firm concentration ratio? a) Import competition b) Interindustry competition c) Localized markets d) Dominant firms

a) Import competition

Why is collusion desirable to oligopolistic firms? a) The possibility of price wars diminishes and profits are maximized. b) The possibility of price wars diminishes, but profits might be lower. c) The possibility of price wars increases, but profits are maximized.

a) The possibility of price wars diminishes and profits are maximized.

When members of an oligopoly meet to set prices to maximize profits it demonstrates the ______ and/or the ______ model. a) collusion; cartel b) price leadership; collusion c) price leadership; cartel d) price leadership; kinked-demand

a) collusion; cartel

The shape of the demand curve for an oligopolistic firm ______. a) depends on the actions of rivals to price changes b) depends on the firm's cost structure c) is always downward sloping d) is always kinked e) is always upward sloping

a) depends on the actions of rivals to price changes

By controlling ______ through collusion, oligopolists may be able to reduce ______, ______ profits and block the entry of new rivals. a) prices; uncertainty; increase b) demand; losses; increase c) costs; uncertainty; increase c) losses; prices; increase

a) prices; uncertainty; increase

Oligopolists often compete through product development and advertising instead of price because ______. a) price changes occur slowly b) product development and advertising are relatively difficult to copy c) product development and advertising are relatively inexpensive d) price changes are often difficult to match e) price changes are typically expensive

b) product development and advertising are relatively difficult to copy

Barriers to entry into an oligopoly most resemble those of a ______. a) purely competitive market b) pure monopoly c) regulated monopoly d) monopolistically competitive market

b) pure monopoly

What is the four-firm concentration ratio? a) The number of average-sized firms in an industry needed to produce sales equivalent to the four largest firms b) The number of employees in an industry who ever have or are currently working for one of the four largest firms c) The percentage of total industry sales accounted for by the four largest firms d) The percentage of industries that are dominated by a group of four or fewer firms

c) The percentage of total industry sales accounted for by the four largest firms

What happens to oligopolistic firms when a recession occurs? a) They move downward and to the right to a lower operating point on the average-total-cost curve. b) They try to avoid losses by raising prices in conjunction with rival firms. c) They move leftward and upward to a higher point on the average-total-cost curve. c) They lose most of their excess-production capability.

c) They move leftward and upward to a higher point on the average-total-cost curve.

Advertising benefits society by ______. a) increasing firm profits b) increasing monopoly power c) conveying information to consumers d) lowering the cost of production e) increasing search time

c) conveying information to consumers

The study of how one firm reacts to the actions taken by another firm or individual when implementing a strategy is called _____. a) pricing theory b) demand theory c) game theory d) strategic theory

c) game theory

Compared to monopolies, oligopolies ______. a) are always more efficient b) are always less efficient c) give the appearance of increased competition d) achieve greater allocative efficiency but lesser productive efficiency

c) give the appearance of increased competition bc it's similar to monopoly but has the difference of having more firms lol

When the number of firms in an oligopolistic industry increases from 3 to 10, it is ______ to collude. a) necessary b) legal c) harder d) easier

c) harder

In the _______ model of oligopoly, firms react to price decreases but ignore price increases by other firms. a) price leadership b) collusion model c) kinked-demand d) cost leadership

c) kinked-demand

Compared to pure monopolies, oligopolies ______. a) are less efficient due to competition b) are less efficient because they are often regulated by the government c) may be less desirable because they are not regulated by government to protect consumers d) are more efficient because cartels and collusion is always successful e) may be no more efficient due to a lack of firm interdependence

c) may be less desirable because they are not regulated by government to protect consumers

A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as ______. a) gentleman's agreement b) kinked demand c) price leadership d) game theory

c) price leadership

Barriers to entry into an oligopoly most resemble those of a ______. a) regulated monopoly b) purely competitive market c) pure monopoly d) monopolistically competitive market

c) pure monopoly

The four-firm concentration ratio is based on the ___. a) major firms in an industry ranked by employment b) potential for mergers and acquisitions c) sales of the largest firms in an industry d) percentage of industries that are oligopolies

c) sales of the largest firms in an industry

Over a long time period, cheating ______ collusive oligopolies a) is needed in b) strengthens c) threatens d) does not influence

c) threatens

To reduce uncertainty or increase profits, oligopolists may change their prices ______. a) often b) competitively c) through collusion d) independently

c) through collusion

Oligopolistic behavior implies that oligopolists prefer competition ______. a) over collusion b) through pricing c) through product development d) through advertising e) through cartels

c) through product development d) through advertising

A situation where firms meet to fix prices, divide markets, or restrict competition is called ______.

collusion

Which scenario describes a simultaneous game? a) The outcomes for all firms are negative. b) Strategies are chosen for a single time period. c) The outcomes for all firms are positive. d) Firms choose strategies at the same time.

d) Firms choose strategies at the same time.

Which of the following is true about the oligopolist if rivals match a price cut but ignore a price increase? a) Demand is highly elastic below the going price b) Its demand curve is downward-sloping c) All oligopolists' or imperfect competitors' demand curves are down-sloping because they are price makers. d) Its marginal revenue curve would consist of two segments e) Its marginal cost curve is made up of two segments

d) Its marginal revenue curve would consist of two segments

Which of the following is true about the oligopolist if rivals match a price cut but ignore a price increase? a) Its demand curve is downward-sloping b) Demand is highly elastic below the going price c) Its marginal cost curve is made up of two segments d) Its marginal revenue curve would consist of two segments

d) Its marginal revenue curve would consist of two segments the breakkkk

From society's standpoint, what are the effects of collusion in an oligopolistic industry? a) The same as monopolistic competition b) Lower prices, but greater output c) A more efficient industry d) The same as a monopoly

d) The same as a monopoly

Which statement is true about oligopolies? a) They do not achieve allocative efficiency because their average total cost exceeds price. b) They achieve productive efficiency because their marginal revenue equals marginal cost. c) They achieve allocative efficiency because they produce at minimum average total cost. d) They do not achieve allocative efficiency because their price exceeds marginal cost.

d) They do not achieve allocative efficiency because their price exceeds marginal cost. from chapter 12 ^-^

A firm in an oligopolistic market ______. a) has to charge a price equal to the lowest average total cost (ATC) b) cannot change its price c) has its price set by the government d) can set its price and output to maximize profits

d) can set its price and output to maximize profits

In the graph, the price elasticity of demand is highly ______ above the price of P0. a) inelastic b) flexible c) inflexible d) elastic

d) elastic

An oligopoly firm's demand curve will be kinked if ______. a) its rivals collude b) its rivals match price increases and price decreases c) its rivals ignore price increases and price decreases d) its rivals match price decreases but ignore price increases

d) its rivals match price decreases but ignore price increases

Suppose the rivals of an oligopolistic firm match either a price increase or decrease. If this occurs, then the firm's demand curve will look ______. a) kinked and steep b) u-shaped c) horizontal or perfectly elastic d) straight and steep e) undefined

d) straight and steep

Firms have a desire to cheat on a collusive agreement because ______. a) their prices will be unchanged b) it will lower the firm's costs c) it will prevent a price war d) their profits and sales will rise

d) their profits and sales will rise price changes, not production costs, so it can't be b.

Gentleman's agreements are a type of covert collusion, occurring in social settings where a product's _____ is agreed upon and market shares are determined by _____ competition. (Enter one word for each blank.)

price, nonprice

Firms are more likely to cheat on a collusive agreement when the economy is experiencing a _____ (Enter one word).

recession

A game that is played more than once between rivals is a ____ (Enter one word) game.

repeated

What kind of game is it if the firms must choose their pricing strategies at the same time?

Simultaneous game.

When members of an oligopoly react to price changes by a ____ _____ dominant firm, the model is most applicable. (Enter one word per blank.)

price leadership

Firms in oligopolistic industries are "price makers" because such firms ______. a) are monopolies b) are few in number c) have no rivals d) have interdependent pricing

b) are few in number While it is true that strategic behavior and mutual interdependence characterize oligopolies, this is not the reason why they are price makers. Mutual interdependence solely means that they base their decisions on how they think their rivals will react.

An oligopolistic firm's marginal revenue curve is made up of two segments if ______. a) its rivals do not respond to either a price cut or price increase b) its rivals match a price cut but ignore a price increase c) its rivals match a price increase but ignore a price cut d) its rivals match both a price cut and price increase

b) its rivals match a price cut but ignore a price increase

What is the Nash equilibrium? a) An outcome in the payoff matrix from which one firm wants to deviate since the current strategy is not optimal given the rival's strategic choice. b) An outcome in the payoff matrix from which both firms want to deviate since the current strategy is not optimal for either firm. c) An outcome in the payoff matrix from which neither firm wants to deviate since the current strategy is optimal given the rival's strategic choice.

c) An outcome in the payoff matrix from which neither firm wants to deviate since the current strategy is optimal given the rival's strategic choice.

How can oligopolistic firms influence their profits and the profits of their rivals? a) By decreasing total suppliers b) By increasing recruiting expenses c) By changing pricing strategies d) By updating manufacturing equipment

c) By changing pricing strategies

Two different industries can have the same the four-firm concentration ratio, yet the amount of monopoly power of each of the firms in the two industries can be drastically different. Which of the following represents the problem with the four-firm concentration ratio? a) Import competition b) Localized markets c) Dominant firms d) Interindustry competition

c) Dominant firms

What is the only stable outcome in a payoff matrix? a) Dominant strategy b) Mutual interdependence c) Nash equilibrium d) Oligopolistic collusion

c) Nash equilibrium

In the graph, the price elasticity of demand is ______ below the price of P0.

less elastic

Demand and cost differences, the number of firms in the industry, and the potential for cheating all represent _____ (one word) to collusion.

obstacles

A market is considered to be a(n) ______ when the largest four firms in an industry control more than 40% or more of the market.

oligopoly