ECON 502 Week 4

For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in absolute value) than in market 2, the optimal price in market 1 will exceed the optimal price in market 2. a. True b. False

True

Firms should begin their pricing decisions by: a. Assessing the total marginal cost of the product b. Identifying the value drivers in each customer segment c. Researching the market price of competitors d. None of the above

a. Assessing the total marginal cost of the product

A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product. Product W Product S Retail #1 $170 $105 Retail #2 $95 $135 What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay? a. Bundle both products (W and S) and sell them at $230. b. Price product W at $170 and Product S at $135. c. Price product W at $170 and Product S at $170. d. Price product W at $95 and Product S at $105. e. Bundle both products (W and S) and sell them at $275.

a. Bundle both products (W and S) and sell them at $230.

The difference between cooperative and non-cooperative games is a. Cooperative games allow side payments to support collusion b. Non-cooperative games encourage communication of sensitive information between arms-length competitors c. Cooperative games involve randomized behavior d. Cooperative games necessitate an explicit order of play e. Inconsequential except when players have contractual relationships

a. Cooperative games allow side payments to support collusion

An efficient customer sorting rule is one in which a. Customers with high willingness to pay secure the discounted goods b. Customers are rationed randomly between the discounted and full price goods c. No customer purchase below her willingness to pay d. Customers with the lowest willingness to pay secure the discount goods e. Brand loyalty allows the incumbent to retain its regular customers

a. Customers with high willingness to pay secure the discounted goods

The largest problem faced in cartel pricing agreements such as OPEC is: a. Detecting violations of quota barriers by cartel participants b. Arriving at a profit maximizing price c. Attracting participants in the cartel d. None of the above

a. Detecting violations of quota barriers by cartel participants

Firms must prevent resale between segments using a variety of: ​ a. Fences b. Bridges c. Tunnels d. None of the above

a. Fences

In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is willing to pay for each unit purchased (provided that this price exceeds the marginal cost of production). a. First-degree b. Second-degree c. Third-degree d. a and b e. None of the above

a. First-degree

A cartel is a situation where firms in the industry a. Have an agreement to restrict output. b. Agree to produce identical products. c. Obey the rules of dominant firm price leadership. d. Experience the pain of a kinked demand curve. e. Have a barometric price leader

a. Have an agreement to restrict output.

In a game, a dominated strategy is one where: a. It is always the best strategy b. It is always the worst strategy c. It is the strategy that is the best among the group of worst possible strategies. d. Is sometimes the best and sometimes the worst strategy

a. It is always the best strategy

In ____ 2-person, nonzero-sum games there is no communication between the participants and no way to enforce agreements. a. Noncooperative b. Cooperative c. a and b d. None of the above

a. Noncooperative

When there is an Equilibrium (or a Nash Equilibrium), we expect that: a. Once the firms get there, no one will change their strategy. b. Firms will tend to select a randomized strategy. c. Neither firm will care what it does. d. This is always a dominated strategy.

a. Once the firms get there, no one will change their strategy.

Barometric price leadership exists when a. One firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry. b. One firm imposes its best price on the rest of the industry. c. All firms agree to change prices simultaneously. d. One company forms a price umbrella for all others. e. The firms are all colluding.

a. One firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.

In a kinked demand market, whenever one firm decides to lower its price, a. Other firms will automatically follow. b. None of the other firms will follow. c. One half of the firms follow and one half of the firms don't follow the price cut. d. Other firms all decide to exit the industry e. All of the other firms raise their prices.

a. Other firms will automatically follow.

[Appendix; Advanced Material] Restaurants try to buy just enough fish to match the expected walk-ins and reservations. If they buy a lot more fish, in the language of revenue management: a. Spoilage increases b. Spillage increases c. Overbooking increases

a. Spoilage increases

Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second degree price discrimination, is most profitable when: a. The preference rankings of vacationers traveling together are negatively correlated. b. A preference for cities is always higher than preferences for mountain vistas. c. Preference rankings of vacationers traveling together are positively correlated. d. Preference for the seaside is always higher than preferences for city excursions. e. No one wants to take a European vacation package to cities, mountains, and the seaside.

a. The preference rankings of vacationers travelling together are negatively correlated.

[Appendix: Advanced Material] Cross functional revenue management examines capacity, pricing, and customer account management in order to maximize revenue. If the MegaPlex Movie Theater finds that too often they have to turn customers away from their theaters at peak movie times for blockbusters creating too much slippage, cross functional revenue management suggests: a. They could consider increasing the capacity of each theater to be able to seat more customers. b. They could lower the price at peak times to reduce the problem of spoilage. c. They could stop showing blockbuster movies and select more critically acclaimed art films to decrease spoilage. d. They could stop showing movies at night.

a. They could consider increasing the capacity of each theater to be able to seat more customers

Barbers give a price discount to kids. According to price discrimination, if barbers use price discrimination, this implies demand for hair cuts by kids is more elastic. a. True b. False

a. True

Effective collusion generally is more difficult as the number of oligopolistic firms involved increases. a. True b. False

a. True

Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and received on a regular basis as compared with large orders that are received infrequently at irregular intervals. a. True b. False

a. True

In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions. a. True b. False

a. True

The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms. a. True b. False

a. True

The largest problem faced in cartel pricing agreements such as OPEC is: a. detecting violations of quota barriers by cartel participants b. arriving at a profit maximizing price c. attracting participants in the cartel d. none of the above

a. detecting violations of quota

A cartel is a situation where firms in the industry a. have an agreement to restrict output. b. agree to produce identical products. c. obey the rules of dominant firm price leadership. d. experience the pain of a kinked demand curve. e. have a barometric price leader

a. have an agreement to restrict output.

Barometric price leadership exists when a. one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry. b. one firm imposes its best price on the rest of the industry. c. all firms agree to change prices simultaneously. d. one company forms a price umbrella for all others. e. the firms are all colluding.

a. one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.

In a kinked demand market, whenever one firm decides to lower its price, a. other firms will automatically follow. b. none of the other firms will follow. c. one half of the firms follow and one half of the firms don't follow the price cut. d. other firms all decide to exit the industry e. all of the other firms raise their prices.

a. other firms will automatically follow.

Effective collusion generally is more difficult as the number of oligopolistic firms involved increases. a. true b. false

a. true

Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and received on a regular basis as compared with large orders that are received infrequently at irregular intervals. a. true b. false

a. true

The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms. a. true b. false

a. true

When there is no Equilibrium (or no Nash Equilibrium), we expect that: a. The firms end up in the cooperative strategy. b. A firm will follow a randomized strategy. c. A firm will not care what it does. d. A firm will very likely have a dominant strategy.

b. A firm will follow a randomized strategy.

Which of the following is an example of an oligopolistic market structure? a. Public utilities b. Air transport industry c. Liquor retailers d. Wheat farmers e. None of the above

b. Air transport industry

A key to analyzing subgame perfect equilibrium strategy in sequential games is a. Predictable behavior b. An explicit order of play for at least some participants c. Information sets that are known with certainty d. Credible threats clearly communicated e. Randomness

b. An explicit order of play for at least some participants

All of the following are sunk cost investments that precommit an incumbent to aggressively defend market share and the cash flow prior to threatened entry except a. Reputational investments in company logos (e.g., Beatrice) b. Automobile showrooms c. Retail displays which hold only L'eggs egg-shaped hosiery packages d. Neon signage for an independently owned Krispy Kreme store e. Excess capacity in a declining industry

b. Automobile showrooms

[Appendix; Advanced Material] If airlines found that the number of no-shows starts to increase, then its policy for optimal overbooking would tend to: a. Make them reduce the amount of overbooking. b. Cause them to increase the amount of overbooking. c. Let them keep the same amount of overbooking.

b. Cause them to increase the amount of overbooking.

In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level, assumes that the other firm's ____ will not change. a. Price b. Output c. Marketing strategy d. Inventory e. None of the above

b. Output

The kinked demand curve model helps to explain: a. Fluctuations of prices in pure competition b. Stabilities observed in prices in oligopolistic industries c. Fluctuations observed in prices in oligopolistic industries d. All of the above e. None of the above

b. Stabilities observed in prices in oligopolistic industries

Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful? a. The products are heterogeneous b. The orders are small and frequent c. The firms are all about the same size d. Costs differ across the firms e. Firms are geographically widely scattered

b. The orders are small and frequent

Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful? a. The products are heterogeneous b. The orders are small and frequent c. The firms are all about the same size d. Costs differ across the firms e. Firms are geographically widely scattered

b. The orders are small and frequent

Electricity pricing that varies in its billing expense throughout the day is called​ a. Marginal cost pricing b. Variable pricing c. Full cost price pricing d. Marginal pricing e. Dynamic pricing

b. Variable pricing

In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level, assumes that the other firm's ____ will not change. a. price b. output c. marketing strategy d. inventory e. none of the above

b. output

The kinked demand curve model helps to explain: a. fluctuations of prices in pure competition b. stabilities observed in prices in oligopolistic industries c. fluctuations observed in prices in oligopolistic industries d. all of the above e. none of the above

b. stabilities observed in prices in oligopolistic industries

Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a 2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a likely Cournot QUANTITY for the industry? a. 3,000 units b. 5,000 units c. 6,667 units d. 10,000 units e. 15,000 units

c. 6,667 units

To trust a potential cooperator until the first defection and then never cooperate thereafter is a. A dominant strategy b. An irrational strategy c. A grim trigger strategy d. A non-cooperative finite game strategy e. A subgame imperfect strategy

c. A grim trigger strategy

The following are possible examples of price discrimination, EXCEPT: a. Prices in export markets are lower than for identical products in the domestic market. b. Senior citizens pay lower fares on public transportation than younger people at the same time. c. A product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A. d. Subscription prices for a professional journal are higher when bought by a library than when bought by an individual.

c. A product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.

Consider the game known as the Prisoner's Dilemma. What's the dilemma? a. By both not confessing, both get to the cooperative solution and minimize time in prison. b. By both confessing, both get to the noncooperative solution and both serve significant time in prison. c. As a group, they are better off cooperating by not confessing, but each player has an incentive to be first to confess in a double cross. d. The problem is that the spies should never have been caught; they should move to Rio.

c. As a group, they are better off cooperating by not confessing, but each player has an incentive to be first to confess in a double cross.

Cooperation in repeated prisoner's dilemma situations seems to be enhanced by all of the following except a. Limited punishment schemes b. Clarity of conditional rewards c. Grim trigger strategy d. Provocability--i.e., credible threats of punishment e. Tit for tat strategy

c. Grim trigger strategy

A strategy game is a. Any pricing competition among firms b. A situation arising from independent decision making among economic participants c. Independent choice behavior by individuals or groups who share a common goal d. None of the above

c. Independent choice behavior by individuals or groups who share a common goal

Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued? a. Full-cost pricing policy b Target-pricing policy c. Marginal-pricing policy d. Market-share pricing policy e. Markup pricing policy

c. Marginal-pricing policy

Which of the statements about price discrimination is (are) false? a. It must be possible to segment the market. b. It must be difficult to transfer the seller's product from one market segment to another. c. Public utilities practice first-degree price discrimination. d. There must be differences in the elasticity of demand from one segment to another. e. c and d

c. Public utilities practice first-degree price discrimination.

____ is a new product pricing strategy which results in a high initial product price. This price is reduced over time as demand at the higher price is satisfied. a. Prestige pricing b. Price lining c. Skimming d. Incremental pricing e. None of the above

c. Skimming

In barometric price leadership, one firm announces a change in price a. And the other firms follow b. But the other firms refuse to follow c. That it hopes will be accepted by others d. Which is merely a test of the market e. None of the above.

c. That it hopes will be accepted by others

If one-time gains from defection are always less than the discounted present value of an infinite time stream of cooperative payoffs at some given discount rate, the decision-makers have escaped a. The Folk Theorem b. The law of large numbers c. The Prisoner's dilemma d. The paradox of large numbers e. The strategy of recusal

c. The Prisoner's dilemma

In a zero-sum game a. All players receive a $0 payoff b. All players can simultaneously win c. The gains to the winners equal the losses of the losers d. None of the above

c. The gains to the winners equal the losses of the losers

Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except when a. The promisor is better off fulfilling than ignoring his promise b. Neither party has a prior dominant strategy c. The hostage can be revoked for just causes d. The hostage is more valuable than any given exchange e. The hostage is difficult to replace

c. The hostage can be revoked for just causes

The Prisoner's Dilemma involves two spies who are held in separate soundproof rooms. But even if the two spies could communicate, what makes it difficult for them to achieve the cooperative solution (both not confessing)? a. The problem is their lack of information. b. The problem is that it is a nonzero sum game. c. The problem is that both spies have incentives to double cross each other. d. The problem is that all the outcomes are not particularly good for either player.

c. The problem is that both spies have incentives to double cross each other.

Third-degree price discrimination exists whenever: a. The seller knows exactly how much each potential customer is willing to pay and will charge accordingly. b. Different prices are charged by blocks of services. c. The seller can separate markets by geography, income, age, etc., and charge different prices to these different groups. d. The seller will bargain with buyers in each of the markets to obtain the best possible price.

c. The seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.

The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as: a. First-degree price discrimination b. Market penetration c. Third-degree price discrimination d. Second-degree price discrimination e. None of the above

c. Third-degree price discrimination

In barometric price leadership, one firm announces a change in price a. and the other firms follow b. but the other firms refuse to follow c. that it hopes will be accepted by others d. which is merely a test of the market e. none of the above

c. that it hopes will be accepted by others

If two firms operate in a market that is characterized as being a Prisoner's Dilemma, and the two strategies given them are to restrict output or expand output, which of the following strategy pairs would represent the cooperative solution in a duopoly for firm 1 and firm 2, and firm 1 given first in each pair? a. {expand output, restrict output} b. {restrict output, expand output} c. {restrict output, restrict output} d. {expand output, expand output}

c. {restrict output, restrict output}

The optimal mark-up is: m = -1/ (E+1). When the mark-up on cookware equals 50%, then demand elasticity (E) for cookware is: a. -1 b. -1.5 c. -2 d. -3

d. -3

Any dominant equilibrium implies: a. A sequential game b. Instability c. A price-taking equilibrium d. A Nash equilibrium

d. A Nash equilibrium

When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged in a. A single play game b. A sequential game c. An entry decision d. A simultaneous game e. An infinite repetition game

d. A simultaneous game

Credibility in threats and commitments in sequential games is based on a. Randomizing one's actions so they are unpredictable b. Explicit communications with competitors c. Effective scenario planning d. Analyzing best reply responses e. None of the above

d. Analyzing best reply responses

An inverse intensity customer sorting rule is one in which a. Customers with high willingness to pay secure the discounted goods b. Customers are rationed randomly between the discounted and full price goods c. No customers purchase below their willingness to pay d. Customers with the lowest willingness to pay secure the discounted goods e. Brand loyalty allows the incumbent to retain its regular customers

d. Customers with the lowest willingness to pay secure the discounted goods

Even ideal cartels tend to be unstable because a. Firms typically prefer competition to collusion as competition, because it leads to more profits. b. Collusion leads to lowest possible overall profits in the industry. c. Oligopolistic managers are extremely risk loving. d. Firms can benefit by secretly selling more than they promised the other firms e. All of the above

d. Firms can benefit by secretly selling more than they promised the other firms

In adopting mixed Nash equilibrium strategy, a player is attempting to a. Randomize his or her own behavior b. Make the opponent favor a course of action preferred by the first player c. Randomize the outcome of actions d. Make the opponent indifferent between one action and another e. None of the above

d. Make the opponent indifferent between one action and another

If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical. a. Average total cost b. Average profit c. Marginal profit d. Marginal cost e. Marginal revenue

d. Marginal cost

To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets. a. Ratio of price to marginal cost b. Ratio of marginal cost to marginal utility c. Ratio of price to elasticity d. Marginal revenue e. None of the above

d. Marginal revenue

In making promises that are not guaranteed by third parties and in imposing penalties that are not enforced by third parties, all of the following are credibility-enhancing mechanisms except a. Establishing a bond forfeited by violating the commitment b. Investing in a non-redeployable reputational asset tied to the promise or threat c. Interrupting the communication of negotiated compromises d. Offering a warranty e. Delivering a hostage (e.g., a patent license triggered by violating the promise)

d. Offering a warranty

A(n) ____ is characterized by a relatively small number of firms producing a product. a. Monopoly b. Syndicate c. Cooperative d. Oligopoly e. None of the above

d. Oligopoly

A dominant strategy differs from a Nash equilibrium strategy in that a. Nash equilibrium strategy does not assume best reply responses b. Dominant strategy assumes best reply responses c. Only Nash strategy applies to simultaneous games d. One dominant strategy is sufficient to predict behavior in a multi-person game e. Nash strategy is often unique

d. One dominant strategy is sufficient to predict behavior in a multi-person game

[Appendix; Advanced Material] If an airline company decides to buy smaller jets with fewer seats, then the problem of: a. Spillage and spoilage both increase. b. Spillage decreases, but spoilage increases. c. Spillage and spoilage both decrease. d. Spoilage decreases, but spillage increases.

d. Spoilage decreases, but spillage increases.

In deciding whether to invest in excess capacity in order to deter entry, incumbents should consider all of the following except a. The order of play in pricing and capacity choice decisions b. The customer sorting pattern c. The sunk cost required to achieve excess capacity d. The joint-profit-maximizing cartel output e. The potential entrant's projected profitability

d. The joint-profit-maximizing cartel output

Non-cooperative sequential games can incorporate all the following features except a. A single decision-maker in the endgame b. No communication c. Finite or infinite time periods d. Third-party enforceable agreements e. An explicit order of play

d. Third-party enforceable agreements

An illustration of a non-credible commitment is the promise a. To not increase capacity in a declining industry b. To match a new entrant's discount price c. To enter a profitable industry d. To restrain output to the quota assigned by a cartel e. To exit in the face of projected losses.

d. To restrain output to the quota assigned by a cartel

____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm. a. Incremental price b. Marginal price c. Full-cost price d. Transfer price e. None of the above

d. Transfer price

Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibiting a. Universal access price discrimination b. Declining block price discrimination. c. Mixed bundling price discrimination. d. Two-part price discrimination. e. Uniform pricing

d. Two-part price discrimination.

Even ideal cartels tend to be unstable because a. firms typically prefer competition to collusion as competition, because it leads to more profits. b. collusion leads to lowest possible overall profits in the industry. c. oligopolistic managers are extremely risk loving. d. firms can benefit by secretly selling more than they promised the other firms e. all of the above

d. firms can benefit by secretly selling more than they promised the other firms

A(n) ____ is characterized by a relatively small number of firms producing a product. a. monopoly b. syndicate c. cooperative d. oligopoly e. none of the above

d. oligopoly

Regarding price leadership, which of the following is NOT true? ​ a. One firm may establish itself as the dominant firm b. The dominant firm is frequently a larger size or has lower cost structure c. ​Price leadership is a model of price-output determination d. ​Once established, a barometric price leader will not change e. Price leadership is a pricing strategy followed in many oligopolistic industries

d. ​Once established, a barometric price leader will not change

Second-degree price discrimination: a. is also known as block rate setting b. is imperfect in the eyes of a monopolist c. is regularly practiced by public utilities d. is effective only in the case of services or products which are sold in easily metered units e. All of the above

e. All of the above

The chain store paradox of an incumbent who accommodates a finite stream of potential entrants threatening to enter sequentially numerous markets illustrates a. Backwards induction b. The unraveling problem c. Subgame perfect equilibrium d. Best reply responses e. All of the above

e. All of the above

All of the following are possible ways to avoid price wars EXCEPT: a. customer segmentation with revenue management b. growing the market c. reference prices and framing effects d. to not start one e. All of the ways are correct

e. All of the ways are correct

Essential components of a game include all of the following except: a. Players b. Payoffs c. Actions d. An information set e. Cooperation

e. Cooperation

The starting point of many methods for predicting equilibrium strategy in sequential games is a. Designing proactive reactions to rival actions b. Information sets c. Uncertain outcomes d. Backwards induction based on an explicit order of play e. Endgame analysis

e. Endgame analysis

The existence of a kinked demand curve under oligopoly conditions may result in a. Volatile prices b. Competitive pricing. c. Prices above the monopoly price. d. An increase in the coefficient of variation of prices. e. Stable prices

e. Stable prices

Exceptions to the prohibition against cartels exist for which of the following? a. Ocean shipping rates b. Various agricultural products such as milk and oranges c. Transoceanic airline routes d. Cardboard box manufacturers e. a through c f. ​a through d

e. a through c

Exceptions to the prohibition against cartels exist for which of the following? a. ocean shipping rates b. various agricultural products such as milk and oranges c. transoceanic airline routes d. cardboard box manufacturers e. a through c f. a through d

e. a through c

An oligopoly is characterized by: a. A relatively small number of firms b. Either differentiated or undifferentiated products c. Actions of any individual firm will affect sales of other firms in the industry d. a and b e. a, b, and c

e. a, b, and c

An oligopoly is characterized by: a. a relatively small number of firms b. either differentiated or undifferentiated products c. actions of any individual firm will affect sales of other firms in the industry d. a and b e. a, b, and c

e. a, b, and c

Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____. a. Number and size distribution of sellers b. Size and frequency of orders c. Product heterogeneity d. a and b only e. a, b, and c

e. a, b, and c

Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____. a. number and size distribution of sellers b. size and frequency of orders c. product heterogeneity d. a and b only e. a, b, and c

e. a, b, and c

The existence of a kinked demand curve under oligopoly conditions may result in a. volatile prices b. competitive pricing. c. prices above the monopoly price. d. an increase in the coefficient of variation of prices. e. stable prices

e. stable prices

The conditions that will always identify a Nash equilibrium include: ​ a. Subjectively getting into the mind of one's opponent b. A reflexive assessment of the best reply responses c. A prospective condition of improvement d. a through c e. ​b and c only

e. ​b and c only

All of the following are possible ways to avoid price wars EXCEPT: ​ a. Customer segmentation with revenue management b. Growing the market c. Reference prices and framing effects d. To not start one e. ​a through c f. ​a through d

f. ​a through d