HW14: Homework - Ch. 14: Oligopoly

Iz, Lauren, Odd, and Ralph started a T‑shirt company. They can produce any number of T‑shirts at a cost of $2$2 per T‑shirt, both marginal and average. They are the only producers of T‑shirts. As monopolists, they charge $20$20 per T‑shirt and obtain total profits of $10,000$10,000. Now assume there are creative differences and they split the company in two. Lauren and Ralph join together and compete against Iz and Odd. If they compete on quantity, each company would produce 5050 T‑shirts and charge $12$12 a T‑shirt. For technical reasons, assume that the quantity demanded is greater than zero for all prices greater than $0. If, however, Ralph and Lauren compete directly against Iz and Odd in prices, the market price for T‑shirts will be And their profits will be In response to the price war, Iz and Odd decide to put an iguana on the chest of their T‑shirt. They convince the world that the iguana is necessary for coolness. This type of behavior is called What economic reason is likely to have caused Iz and Odd put an iguana on their T‑shirts?

$2 $0 product differentiation. increase profits

Suppose that Kim and Nene are both in the public eye. They get offers to sell secrets of the other to tabloids. If both keep the secrets, they are both better off than if they get exposed. If only one is exposed, the other person is better off than if no one was exposed. Their payoffs from each option are given in the payoff matrix. Suppose that Nene and Kim play the game over four television seasons, where each season is a new game. Consider the scenarios. Remember, a tit‑for‑tat strategy is one where the person starts by cooperating and then plays whatever strategy the other firm played last. KimExpose secretsKeep secretsNeneExposeSecrets$5$5$5$5$2$2$10$10KeepSecrets$10$10$2$2$8$8$8 Over four seasons, how much will Nene make if she and Kim both play tit‑for‑tat? Over four seasons, how much does Nene make if she always exposes and Kim plays tit‑for‑tat? Over four seasons, how much will Nene make if she plays a tit‑for‑tat strategy and Kim always exposes? Over four seasons, how much will Nene make if she and Kim both always expose? Does Nene have a dominant strategy when she and Kim play for four seasons?

$32 $25 $17 $20 No, there is no dominant strategy between tit‑for‑tat and always expose in this situation.

Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $5.00. Further, your marginal costs are $4.98. The previous cartel price was $10.00, when you and your competitor were price fixing. What price level do you now choose to maximize profits?

$4.99

The table shows the demand curve for monster trucks. There are two monster truck producers. For simplicity, assume that the cost of producing a monster truck is zero. (AC=0AC=0, FC=0FC=0) Q demandedPrice11$18$1822$16$1633$14$1444$12$1255$10$1066$9$977$7$788$6$699$5$5 Assume the two producers initially collude to maximize profits, splitting production and profits evenly. What price will they charge? $ _______________ What is the total quantity produced? _______________ monster trucks What are the profits for each firm? $ _______________ If one of the producers produces an extra unit to get higher profits, what is the new market price? $ _______________ What are the profits for this firm when it breaks the agreement? $ _______________ What are the other firm's profits after the agreement is broken? $ _______________

$9 6 monster trucks $27 $7 $28 $21

Kiviaq is a little known regional delicacy served during the winter time and at celebrations near the arctic circle. Although some people have found the taste (and smell) to be overpowering, a few exuberant companies have chosen to produce kiviaq for the masses so that the world may know its unique taste. The given table shows the market shares for kiviaq producers in Inuit territory. CompanyMarket shareSiorapaluk41%Ikuo22%Kivitoo17%Taloyoak12%Auk8% Use the data in the table to calculate the Herfindahl-Hirschman Index (HHI) for the market for kiviaq. HHI: ______________ Based on the HHI that you calculated, what kind of market does kiviaq have? Assume Siorapaluk and Ikuo propose a corporate merger because they think together they can make the best kiviaq the world will ever know. Calculate the new HHI if the merger were to occur. HHI: ______________ Assume Canadian parliament wants to review the merger. Upon scrutiny,

HHI = 41^2 + 22^2 + 17^2 + 12^2 + 8^2 = 2662. 2662.2 oligopolistic (41 + 22)^2 + 17^2 + 12^2 + 8^2 = 4466 this merger will likely not be allowed as the merger significantly reduces competition.

Which of the statements is true of the prisoner's dilemma?

In the prisoner's dilemma, firms could do better if they both did exactly the opposite of what they ultimately choose to do.

The table shows a hypothetical demand schedule for monosodium glutamate (MSG). Ajinomoto holds 5050% of the market, Jiali holds 3030% of the market, and Quingdao holds 2020% of the market. Suppose the three firms agree to form a cartel to fix production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across the firms. What quantity maximizes the cartel's profit? _______________ million pounds Price of MSG ($ per pound)Quantity of MSG demanded (millions of pounds)$8$800$7$72020$6$63030$5$54040$4$46060$3$39090$2$2110110$1$1180180$0$0300300 Suppose Ajinomoto's marginal cost remains equal to zero, but for Jiali and Quingdao, marginal costs rise above zero. How would this affect the incentive of Ajinimoto to act noncooperatively and change its output?

90 million pounds Ajinomoto will have an incentive to increase its output of MSG.

In game theory, a dominant strategy is

the best strategy to pick, no matter which moves are chosen by the other player.

Categorize each statement as true or false. True: False:

True: Price leadership occurs when one firm announces a price change and other firms match the announced price. Price leadership is a form of implicit (tacit) collusion. False: Price leadership is illegal. Price leadership prevents cooperation among competing firms.

Antel and IMD both produce similar computer chips, and the two companies dominate this market. The table shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations. Use this table to answer the four questions. IMD optionsKeep production constant(cooperate)Increaseproduction (act independently)Antel optionsKeepproductionconstant(cooperate)IMD profit is$200$200 millionAntel profitis $200$200 millionIMD profit is$300$300 millionAntel profitis $20$20 millionIncreaseproduction (actindependently)IMD profit is$20$20 millionAntel profitis $300$300 millionIMD profit is$100$100 millionAntel profitis $100$100 million a. Using what you know about the prisoner's dilemma, what would be the profit for Antel and IMD in millions? Antel profit: $ ___________ IMD profit: $ ___________ b. What would be the best collective option for both firms? The firms should c. Select all of the reasons Antel and IMD would make more profit at the original constant production level? The original production level is more profitable because

a. 100; 100 b. cooperate. c. it restricts the supply of computer chips. they can both charge more for the product at the given level of production.

Felix and Jen are arrested and charged with armed robbery. The police interview both suspects separately about their involvement in the crime. The table shows the sentences that Felix and Jen will receive given their choices. Use the table to answer the three questions. JenStay silentConfessFelixStaysilentJengets 10yearsFelixgets 10 yearsJengets 5yearsFelixgets 15 yearsConfessJengets 15yearsFelixgets 5 yearsJengets 12yearsFelixgets 12 years a. If Felix trusts Jen to remain silent, what should he do to minimize his sentence? Felix should b. If Felix thinks Jen will confess, what should he do to minimize his sentence? Felix should c. What will be the dominant strategy outcome for Felix and Jen? The dominant strategy outcome is

a. confess. b. confess. c. they both get 12 years.

Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding. a. A party planning school opens and the new graduates are ready to plan. This will __________ Nola's and Charles' efforts to collude. b. Charles and Nola both charge a fixed price per person for a party. This will __________ Nola's and Charles' efforts to collude. c. Charles develops a signature appetizer that becomes the must-have appetizer in Trident. This will __________ Nola's and Charles' efforts to collude. d. Nola lowers her price on national television. This will __________ Nola's and Charles' efforts to collude. e. Nola and Charles are regulars at the same coffee house. They talk regularly. This will __________ Nola's and Charles' efforts to collude. f. Nola's marginal cost is lower than Charles's. This will __________ Nola's and Charles' efforts to collude. g. Most of the parties are given by Trident's largest employer, a water bottling plant. This will __________ Nola's and Charles' efforts to collude.

a. impede b. aid c. impede d. impede e. aid f. impede g. impede

A group of sellers who agree to restrict their collective output in order to drive up prices above marginal costs is a

cartel

Coca‑Cola and Pepsi are both releasing a new soda at the same time. Each company is fairly well known, and they are both deciding between pursuing two advertising strategies. Each firm knows that its profits will be affected by its own decision and the decision of the competing firm. The payoff matrix contains the estimated profits for both companies for all possible strategies. Pepsi's profits are in the lower (green) triangle of each cell and Coca‑Cola's profits are in the upper (blue) triangle of each cell. Profits (payoffs) are in millions of dollars. Coca‑ColaStrategy 1Strategy 2PepsiStrategy 1A$150$150$150$150B$300$300$25$25Strategy 2C$25$25$300$300D$75$75$75 What is Coca‑Cola's dominant strategy? What is the Nash equilibrium in this game?

Strategy 2 D

Suppose that in the small town, Prairie, there are only two cable providers. What type of market structure does the local cable market have?

duopoly

Please label the scenarios with the term that best matches them. Bauer and CMM are duopolists in the hockey skate market. Suppose every year Bauerproduces one million pairs of skates. CMM produced one million skates the first year but has since chosen to produce 1.5 million pairs of skates each year. Unilever and Proctor & Gamble are fined 315 million euros for price‑fixing the washing detergent market in Europe. Zyrtec, Allegra, and Claritin, antihistamines used frequently for allergies, place ads on TV promoting the superiority of their drug. At the beginning of a new year, Canon displays the prices for its newest line of camera lenses. Nikon, Sigma, and Tamaron, other camera makers, follow with their prices soon after, set near Canon's prices. Sprint, AT&T, and T‑Mobile keep undercutting each other's prices in order to gain a larger customer base.

none of these terms antitrust policy non-price competition price leadership price war

Dumphy and Funke are rival tattoo artists in the small town of Feline. There are no other tattoo artists in town. It costs $30$30 to produce a Tweety Bird tattoo. Assume for simplicity that fixed costs are zero and that Dumphy and Funke perform identical work. For a while, there was too much demand for Funke and Dumphy to handle and they both charged $200$200 for a tattoo. But recently, demand has dropped significantly and there is not enough work for both to fill their days at any price. However, there is some demand at all prices. What type of competition would Funke and Dumphy likely engage in after the decrease in demand? What will be the equilibrium price that Dumphy and Funke will charge? What are the profits for Dumphy and Funke at the equilibrium price?

price $30 $0

What are antitrust laws? Identify the first antitrust law and its purpose.

Laws meant to eliminate collusion and promote competition among firms. The Sherman Act of 1890 prohibits price fixing, collusion, and monopolization.

The table shows sales information for the firms in three different markets. Use the Herfindahl‑Hirschman Index (HHI) to sort the markets from most concentrated to least concentrated. SalesMarket AMarket BMarket CLargest firm$541.00$541.00$10436.00$10436.00$1031.00$1031.002nd Largest firm$413.00$413.00$101.00$101.00$926.00$926.003rd Largest firm$313.00$313.00$17.00$17.00$0$04th Largest firm$275.00$275.00$0$0$0$0Total market sales$1542.00$1542.00$10554.00$10554.00$1957.00$1957.00 Most Concentrated - Least Concentrated

Market B Market C Market A