ECO 2023 Chapter 14

The "Discount Department Stores" industry is highly concentrated. What does this mean?

A few large stores account for a significant portion of industry sales.

Table 14-4 A:$30,000 profit A: $10,000 profit B:$30,000 profit B:$50,000 profit A:$50,000 profit A: $40,000 profit B:$10,000 profit B: $40,000 profit Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game.

Alistair should also increase its advertising spending.

Table 14-4 A:$30,000 profit A: $10,000 profit B:$30,000 profit B:$50,000 profit A:$50,000 profit A: $40,000 profit B:$10,000 profit B: $40,000 profit Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game. Refer to Table 14-4. What is the Nash equilibrium in this game?

Both Alistair and Baine increase their advertising budgets.

Table 14-8 P:$12m P:$16m B:$12m B:$4m P:$4m P:$8m B:$16m B:$8m Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. Refer to Table 14-8. If the firms cooperate, what prices will they select?

Both firms will select a high price.

Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry?

Concentration ratios assign weights to only the four largest firms in an industry.

What is the dominant strategy in the prisoner's dilemma?

Each prisoner confesses because this is the rational action to pursue.

Table 14-7 The payoff matrix shown above assumes that Perfect Plants and Florabunda Florist must decide whether to offer same-day delivery for their products. The matrix shows how much profit each firm will earn if it does or does not offer same-day delivery. The amount of profit for one firm depends on whether the other firm offers same-day delivery. Refer to Table 14-7. Which of the following statements is true?

Given that Perfect offers same-day delivery, Florabunda's best strategy is to offer same-day delivery.

Consider two oligopolistic industries selling the same product in different locations. In the first industry, firms always match price changes by any other firm in the industry. In the second industry, firms always ignore price changes by any other firm. which of the following statements is true about these two industries, holding everything else constant?

Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes.

Table 14-8 P:$12m P:$16m B:$12m B:$4m P:$4m P:$8m B:$16m B:$8m Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. Refer to Table 14-8. If Brawny Juice selects a high price, what is Power Fuel's best strategy and what will Power Fuel earn as a result of this strategy?

Power Fuel will select a low price and earn $16 million.

Table 14-8 P:$12m P:$16m B:$12m B:$4m P:$4m P:$8m B:$16m B:$8m Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. Refer to Table 14-8. Which of the following is true?

Power Fuel's dominant strategy is to select a low price.

Which of the following statements about the prisoner's dilemma is false?

The prisoner's dilemma game can never reach a Nash equilibrium as long as players do not cooperate.

Which of the following is not necessarily a consequence of occupational licensing laws?

They result in a higher quality of service.

Table 14-4 A:$30,000 profit A: $10,000 profit B:$30,000 profit B:$50,000 profit A:$50,000 profit A: $40,000 profit B:$10,000 profit B: $40,000 profit Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game. Refer to Table 14-4. How are the firms in this advertising game caught in a prisoner's dilemma?

They would be more profitable if they refrained from advertising but each fears that if it does not advertise, it will lose customers.

Table 14-4 A:$30,000 profit A: $10,000 profit B:$30,000 profit B:$50,000 profit A:$50,000 profit A: $40,000 profit B:$10,000 profit B: $40,000 profit Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game.

Yes, Alistair should increase its advertising budget.

Table 14-4 A:$30,000 profit A: $10,000 profit B:$30,000 profit B:$50,000 profit A:$50,000 profit A: $40,000 profit B:$10,000 profit B: $40,000 profit Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game. Refer to Table 14-4. Does Baine have a dominant strategy and if so, what is it?

Yes, Baine should increase its advertising budget.

Table 14-8 P:$12m P:$16m B:$12m B:$4m P:$4m P:$8m B:$16m B:$8m Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. Refer to Table 14-8. If the two firms collude, is there an incentive for either to cheat on the collusion agreement?

Yes, either firm can gain if it alone cheats.

A patent is an example of

a government-imposed barrier to entry.

Why does a prisoner's dilemma lead to a noncooperative equilibrium?

because each rational player has a dominant strategy to play a certain way regardless of what other players do

A market comprised of only two firms is called a

duopoly.

Of all barriers to entry, the most important are those that are due to

economies of scale.

Economists use game theory to analyze oligopolies because

game theory helps us to understand why interactions among firms are crucial in determining profitable business strategies.

All of the following are characteristics of game theory except

independence among players

Hewlett-Packard will not raise the prices of its personal computers without first considering how Dell might respond. This is evidence of

interdependence.

In an oligopoly market

one firm's pricing decision affects all the other firms.

For many years the Aluminum Company of America (Alcoa) controlled most of the world's supply of high quality bauxite, the ore needed to produce aluminum. What type of entry barrier was responsible for Alcoa's position in the aluminum industry?

ownership of a key input

All of the following are examples of oligopolistic markets except

seafood restaurant chains

A key part of Microsoft's business strategy in the video game console market has been

the innovation of new products which initially have little to no competition.

Which of the following is the best example of an oligopolistic industry?

the pharmaceutical industry

Collusion occurs when

there is an agreement among firms to charge the same price or otherwise not to compete.

Which of the following is not a reason why government officials are willing to impose entry barriers?

to promote an equitable distribution of income