Chapter 10 Monopolistic Competition, Oligopoly, and Game Theory

Which statement is the BEST example of a grim trigger rule? A) A price increase by one firm is not met by the other firms in the market. 13) A decision by one firm triggers government regulation of all firms in the industry. C) A negative decision triggers a tit-for-tat strategy. D) A decision by one player to defect is met by a permanent retaliatory decision.

A decision by one player to defect is met by a permanent retaliatory decision.

Prisoner's Dilemma

A non cooperative game in which players cannot communicate or collaborate in making their decisions, which results in inferior outcomes for both players. Many oligopoly decisions can be framed as a prisoner's dilemma.

tit-for-tat strategies

A trigger strategy that rewards cooperation and punishes defections. If your opponent lowers its price, you do the same. If your opponent returns to a cooperative strategy, you do the same.

Which of the following statements about cartels is TRUE? A) Cartels are stable because they split their joint economic profits. B) Cartels are illegal throughout the world. C) An individual member of a cartel could increase its profits by dropping its price below the established price. D) Cartels maximize their profits where marginal revenue equals the price.

An individual member of a cartel could increase its profits by dropping its price below the established price.

Kinked Demand Curve

An oligopoly model that assumes that if a firm raises its price, competitors will not raise theirs; but if the firm lowers its price, all of its competitors will lower their price to match the reduction. This leads to a kink in the demand curve and relatively stable market prices.

Nash Equilibrium

An outcome that occurs when all players choose their optimal strategy in response to all other players' potential moves. At a Nash equilibrium, no player can be better off by unilaterally deviating from the non cooperative outcome.

Both monopolistic competitive and purely competitive firms: A) earn normal profits in the long run. B) are equally efficient. C) sell undifferentiated commodities. D) face downward-sloping demand curves.

earn normal profits in the long run

The Prisoner's Dilemma is an example of a: A) cooperative game. 13) multiplayer game. C) repeated game. D) noncooperative game.

noncooperative game

Trigger strategies

Action is taken contingent on your opponent's past decisions

Cartel

An agreement between firms (or countries) in an industry to formally collude on price and output, then agree on the distribution of the product.

Sequential-move games

Games in which players make moves one at a time, allowing players to view the progression of the same and to make decisions based on previous moves.

Dominant Strategy

Occurs when a player chooses the same strategy regardless of what his or her opponent chooses.

Game Theory

The study of how individuals and firms make strategic decisions to achieve their goals when other parties or factors can influence that outcome.

The market for air travel from Dallas to Chicago is: A) a monopoly. B) an oligopoly. C) monopolistically competitive. D) competitive.

an oligopoly

One of the similarities between monopolistic competition and oligopoly is that they both: A) have significant barriers to entry. B) earn excess profits in the long run. C) are examples of imperfect competition. D) set price equal to average total cost in the long run.

are examples of imperfect competition

All of the following are characteristics of monopolistic competition, EXCEPT: A) free entry and exit. B) barriers to entry. C) product differentiation. D) price maker.

barriers to entry

Game theory: A) involves only one player. B) cannot deal with sequential decision making. C) can involve multiplayer environments. D) cannot cope with asymmetric information.

can involve multiplayer environments

In a cartel: A) firms act independently from one another. B) members charge different prices. C) firms collude to maximize their joint profits. D) firms behave as competitive firms.

firms collude to maximize their joint profits.

If a player chooses not to forgive another player who cheats on an agreement, which of the following trigger strategies is MOST likely to be used? A) tit-for-tat strategy B) grim strategy C) dominant strategy D) trembling hand strategy

grim strategy

If a cartel member is considering cheating in order to earn profits, it should: A) increase the price of the goods it sells at quota. B) decrease the price of the goods it sells at quota. C) increase the quantity it sells at the quota price. D) decrease the quantity it sells at the quota price.

increase the quantity it sells at the quota price.

What are the two types of advertising? A) tit-for-tat and big hammer B) big hammer and informational C) informational and persuasive D) persuasive and tit-for-tat

informational and persuasive

The demand curve faced by a firm in monopolistic competition is: A) perfectly elastic. B) less elastic than the demand curve for a competitive firm. C) less elastic than the demand curve for a monopolist. D) perfectly inelastic.

less elastic than the demand curve for a competitive firm.

Focal point strategies are typically used when there is: A) no Nash equilibrium. B) more than one Nash equilibrium. C) one Nash equilibrium. D) a prisoner's dilemma.

more than one Nash equilibrium

Which of the following characteristics is NOT typical of monopolistic competition? A) easy entry into the market B) one seller C) product differentiation D) easy exit from the market

one seller

Product differentiation: A) adds product information without increasing product cost. B) contributes to production efficiency. C) reduces price elasticity of demand. D) reduces product price.

reduces price elasticity of demand

Monopolistic Competition

A market structure with a large number of firms producing differentiated products. This differentiation is either real or imagined by consumers and involves innovations, advertising, location, or other ways of making one firm's product different from that of its competitors.

Oligopoly

A market with just a firm firms dominating the industry, where (1) each firm recognizes that is must consider its competitors' reactions when making its own decisions (mutual interdependence) and (2) there are significant barriers to entry into the market.

Simultaneous-move games

Games in which players' actions occur at the same time, forcing players to make decisions without knowing how the other players will act. These games are analyzed using diagrams called game tables.

Product differentiation

One firm's product is distinguished from another's through advertising, innovation, location, and so on.

Mutual Interdependence

When only a few firms constitute an industry, each firm must consider the reactions of its competitors to its decisions.

Which is NOT part of a basic setup to a "game"? A) a judge B) players C) the outcome D) strategies

a judge

The "dilemma" in the Prisoner's Dilemma is that: A) one of the players cannot get to the best outcome. B) both players would be better off by cooperating, but not cooperating is a dominant strategy. C) both players would be better off by not cooperating, but cooperating is a dominant strategy. D) the player with first-mover advantage always gets the better outcome.

both players would be better off by cooperating, but not cooperating is a dominant strategy.

If everyone drives his or her car to work, taking the bus would be extremely slow, so you would also drive your car. And if everybody rides the bus to work, the roads would be empty so you would again drive your car. In this example, driving your car would be classified as a: A) prisoner's dilemma. B) dominant strategy. C) Nash equilibrium. D) focal point.

dominant strategy

In a Nash equilibrium: A) each player tries to maximize the welfare of the other players. B) each player tries to minimize the welfare of the other players. C) one player is made better off at the expense of some other player. D) each player selects the best possible strategy, given the other player's intended strategies.

each player selects the best possible strategy, given the other player's intended strategies.

In the long run, a monopolistically competitive firm charges a higher price than a perfectly competitive firm. The reason for this difference is that monopolistically competitive firms: A) act like monopolies and restrict output. B) have higher costs associated with adve1tising and product development. C) need to earn economic profits in the long run to justify their expenditures on product development. D) have no interest in consumer well-being.

have higher costs associated with advertising and product development.

Murphy's Gas Station constantly watches the price of unleaded gas at Johnson's Gas Station. If Johnson's lowers the price of gas, so will Murphy's. This is an example of: A) network effects. B) rent-seeking behavior. C) mutual interdependence. D) monopoly.

mutual interdependence

A game in which players do not negotiate and do not work together is a: A) noncooperative game. B) zero-sum game. C) cooperative game. D) negative-sum game.

noncooperative game