ECN 212 - CH17 oligopolies

Duopoly

An oligopoly with only two firms

An oligopoly is a market structure in which many firms sell products that are similar but not identical.

F an oligopoly is where a few sellers offer similar or identical products.

Cooperation is easily maintained in an oligopoly because cooperation maximizes each individual firm's profits.

F cooperation maximizes the profits of the group and the individual firms if none of the oligopolists violates the agreement. However, once the agreement is made, an individual firm will increase its profits if it cheats and produces more.

When oligopolists collude and form a cartel, the outcome in the market is similar to that generated by a perfectly competitive market.

F it is the same as that generated by a monopoly.

When firms cooperate with one another, it is generally good for society as a whole.

F it raises prices above marginal cost and reduces output below the socially optimal level.

Predatory pricing occurs when a firm cuts prices with the intention of driving competitors out of the market so that the firm can become a monopolist and later raise prices.

T

Game Theory

The study of how people behave in strategic situations

As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more like Answer a monopoly. a duopoly. a competitive market. a collusion solution.

a competitive market.

The market for hand tools (such as hammers and screwdrivers) is dominated by Black & Decker, Stanley, and Craftsman. This market is best described as Answer competitive. a monopoly. an oligopoly. a duopoly.

an oligopoly.

Laws that make it illegal for firms to conspire to raise prices or reduce production are known as Answer pro-competition laws. antitrust laws. antimonopoly laws. anticollusion laws. all of the above.

antitrust laws.

Cartel

A group of firms acting in unison

Oligopoly

A market structure in which only a few sellers offer similar or identical products

Prisoners' dilemma

A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Nash Equilibrium

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Dominant Strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players

Collusion

An agreement among firms in a market about quantities to produce or prices to charge

If a prisoners' dilemma game is repeated, the participants are more likely to independently maximize their profits and reach a Nash equilibrium.

F repeated games are more likely to generate cooperation because a penalty for cheating can be enforced.

Antitrust laws require manufacturers to engage in resale price maintenance.

F sometimes courts view retail price maintenance as price fixing and declare it illegal.

The dominant strategy for an oligopolist is to cooperate with the group and maintain low production regardless of what the other oligopolists do.

F the dominant strategy is to increase production regardless of the choices of the other firms.

The greater the number of firms in the oligopoly, the more the outcome of the market looks like that generated by a monopoly.

F the greater the number of firms, the more the market approaches the competitive solution.

What is predatory pricing? Do economists think that predatory pricing is commonly employed as a profitable business strategy? Why or why not?

It is a cut in prices intended to drive competitors out of the market in order to establish a monopoly. No, because it tends to hurt the predatory pricer more than the firm being attacked.

Is it better for society as a whole if oligopolists cooperate? Explain. What measures do we take to try to prevent cooperation between oligopolists?

It is better if they do not cooperate because the Nash equilibrium is closer to the efficient competitive solution than the monopoly solution would have been. Antitrust laws make it illegal for firms to make agreements not to compete.

A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as a Answer collusion solution. cartel. Nash equilibrium. dominant strategy.

Nash equilibrium.

If oligopolists would be better off if they collude, why do they so often fail to cooperate?

Once an agreement to reduce production is made, it is always profitable for the individual firm to cheat and produce in excess of the agreement regardless of whether the others cheat or maintain the agreement. Cheating is a dominant strategy. This is the prisoners' dilemma.

The market for crude oil is an example of an oligopolistic market.

T

The price and quantity generated by a Nash equilibrium is closer to the competitive solution than the price and quantity generated by a cartel.

T

The prisoners' dilemma demonstrates why it is difficult to maintain cooperation even when cooperation is mutually beneficial.

T

The unique feature of an oligopoly market is that the actions of one seller have a significant impact on the profits of all of the other sellers in the market.

T

There is a constant tension in an oligopoly between cooperation and self-interest because, after an agreement to reduce production is reached, it is profitable for each individual firm to cheat and produce more.

T

When firms cooperate with one another, it is generally good for the cooperating firms.

T

What is the outcome in an oligopolistic market if the oligopolists collude and form a cartel? Explain.

The outcome is the same as if the market were served by a monopolist. Monopoly profits are divided among the firms, and production levels are limited by agreement to the level that a monopoly would produce.

Suppose a group of oligopolists does not collude but instead reaches a Nash equilibrium. What price and quantity will result in this oligopolist market when compared to the monopolistic or competitive result? Referring to question 2 above, what would happen to the price and quantity in the Nash equilibrium if an additional firm were to join the oligopoly? Why?

The price will be lower than monopoly but higher than competition. The quantity sold will be greater than monopoly but less than competition. The price would fall and the quantity sold would rise. This is because with the addition of another firm, the individual firm's impact on the price is reduced, which causes the output effect to exceed the price effect and the profit-maximizing output level of the group is increased. As members are added, the outcome approaches a competitive solution.

Collusion is difficult for an oligopoly to maintain Answer because antitrust laws make collusion illegal. because, in the case of oligopoly, self-interest is in conflict with cooperation. if additional firms enter of the oligopoly. for all of the above reasons.

for all of the above reasons.

Many economists argue that resale price maintenance Answer is price fixing and, therefore, is prohibited by law. enhances the market power of the producer. has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers. is both a and b.

has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers.

When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is Answer more than the price charged by a monopoly and less than the price charged by a competitive market. less than the price charged by a monopoly and more than the price charged by a competitive market. more than the price charged by either a monopoly or a competitive market. less than the price charged by either a monopoly or a competitive market.

less than the price charged by a monopoly and more than the price charged by a competitive market.

When an oligopolist individually chooses its level of production to maximize its profits, it produces an output that is Answer more than the level produced by a monopoly and less than the level produced by a competitive market. less than the level produced by a monopoly and more than the level produced by a competitive market. more than the level produced by either a monopoly or a competitive market. less than the level produced by either a monopoly or a competitive market.

more than the level produced by a monopoly and less than the level produced by a competitive market.

A market structure in which many firms sell products that are similar but not identical is known as Answer perfect competition. monopoly. oligopoly. none of the above.

none of the above.

Suppose an oligopolist individually maximizes its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist Answer has maximized profits. should produce more units. should produce fewer units. should exit the industry. is in a Nash equilibrium.

should produce more units.

As the number of sellers in an oligopoly increases, Answer collusion is more likely to occur because a larger number of firms can place pressure on any firm that defects. output in the market tends to fall because each firm must cut back on production. the price in the market moves further from marginal cost. the price in the market moves closer to marginal cost.

the price in the market moves closer to marginal cost.

If oligopolists engage in collusion and successfully form a cartel, the market outcome is Answer the same as if it were served by a monopoly. the same as if it were served by competitive firms. efficient because cooperation improves efficiency. known as a Nash equilibrium.

the same as if it were served by a monopoly.