ECONO 2202 CH 14 Key Terms/ Review ETC.

Barriers to entry

Anything that keeps new firms from entering an industry in which firms are earning economic profits. three most important barriers to entry in an oligopoly are economies of scale, ownership of a key input, and government barriers

Given the decision tree​ below, TruImage's profits are​ $1.5 million if the firm accepts​ Dell's contract offer of​ $20 per copy. Given the decision tree​ above, will Dell offer TruImage a contract of​ $20 per copy or a contract of​ $30 per​ copy?

$30

price leadership

A form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.

Prisoner's Dilemma

A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.

Cartel

A group of firms that collude by agreeing to restrict output to increase prices and profits. I.e. OPEC

Oligopoly

A market structure in which a small number of interdependent firms compete.

Nash Equilibrium

A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.

Business Strategy

Actions that a firm takes to achieve a goal, such as maximizing profits.

Actions of firms that are aimed at deterring entry include A. setting lower prices to keep profits at a level that makes entry less attractive. B. introducing new products to fill market niches. C. advertising to create product loyalty. D. All of the above.

All of the above.

Collusion

An agreement among firms to charge the same price or otherwise not to compete.

cooperative equilibrium

An equilibrium in a game in which players cooperate to increase their mutual payoff.

noncooperative equilibrium

An equilibrium in a game in which players do not cooperate but pursue their own self-interest.

A duopoly game

An oligopoly consisting of only two firms is a duopoly. Each firm is known as a duopolist.

Why is the basic prisoner's dilemma story not always applicable to the real world?

Because it assumes the game will only be played once. In the real world, we play games more than once. Most business situations are repeated over and over. This is called a repeated game.

Competition from Substitute Goods or Services

Firms are always vulnerable to competitors introducing a new product that fills a consumer need better than their current product does

What are some key questions firms consider when pricing a good/ service?

How will different prices affect the likelihood that competitors enter the market? What is the minimum rate of return they must earn? What is competitors do enter the market?

terminal node

In a sequential game presented in extensive form, a final outcome point (node) showing the payouts to each player if the game ends at that point. (rates of return)

Consider a Caribbean cruise route served by two cruise​ lines, Carnival and Royal Caribbean. Both lines must choose whether to charge a high price ​($280​) or a low price ​($270​) to vacationers. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. ​ Carnival's profits are in red and Royal​ Caribbean's are in blue. Suppose the cruise lines decide to collude. At which outcome are joint profits​ maximized? Joint profits are maximized when Carnival picks $280 and Royal Caribbean picks $280. Is this outcome a Nash​ equilibrium? The cooperative equilibrium A. is not a Nash equilibrium because the game does not have an equilibrium. B. is a Nash equilibrium because joint profits are maximized. C. is not a Nash equilibrium because Carnival can increase its profit by picking the low price. D. is not a Nash equilibrium because both cruise lines can increase profits by picking the low price. Your answer is correct. E. is not a Nash equilibrium because Royal Caribbean can increase its profit by picking the low price.

Joint profits are maximized when Carnival picks $280 and Royal Caribbean picks $280. is not a Nash equilibrium because both cruise lines can increase profits by picking the low price.

patent

The exclusive right to a product for a period of 20 years from the date the patent application is filed with the government.

How does collusionLOADING... make firms better​ off? A. The firms can act as a single​ entity, like a monopoly. Your answer is correct. B. The firms can charge lower prices and sell a smaller quantity and still increase profits. C. The firms can charge lower​ prices, but sell a greater quantity and thus earn higher revenues. D. Both A and B. E. Both A and C. Given the incentives to​ collude, why​ doesn't every industry become a cartel?LOADING... A. Collusion is illegal in the United States. B. Most firms that collude have an incentive to​ "cheat." C. High profits attract entry into the market. D. All of the above. Your answer is correct. E. Both A and C.

The firms can act as a single​ entity, like a monopoly. All of the above: Collusion is illegal in the United States, Most firms that collude have an incentive to​ "cheat.", High profits attract entry into the market.

economies of scale

The situation when a firm's long-run average costs fall as the firm increases output. This is the most important barrier to entry in an oligopoly

Under​ "early decision" college admission​ plans, students apply to a college in the fall​ and, if they are​ accepted, they must enroll in that college. Some critics of early decision​ plans, including some college​ presidents, argue that the plans put too much pressure on students to decide early in their senior year in high school which college to attend. Some college administrators have proposed abolishing early decision​ plans, but as a columnist in the New York Times​ noted, ​"It's more prevalent than​ ever, with some selective schools using it to fill upward of 40 percent of their incoming freshman​ class." ​Source: Frank​ Bruni, "The Plague of​ 'Early Decision,'" New York Times​, December​ 21, 2016. Can game theory help analyze this​ situation? Game theoryLOADING... can help us analyze this situation as an example of​ what? A. The​ prisoner's dilemma. Your answer is correct. B. A cartel. C. A cooperative equilibrium. D. Collusion.

The​ prisoner's dilemma.

Suppose Securitex is a small firm that has developed a new​ anti-theft device for automobiles. Securitex currently sells its device online and earns profit of ​$18 million per year. GM is considering installing​ Securitex's system on its automobiles. The two firms​ first, however, must bargain over what price GM will pay Securitex for its software. GM chooses how much to offer Securitex for its system and then Securitex chooses whether to accept the offer and install its system on​ GM's automobiles. The strategies and corresponding profits for GM​ (GM) and Securitex​ (SX) are depicted in the decision tree to the right. Profits are in​ millions, and​ GM's payoffs represent the additional profit it can earn on its automobiles with​ Securitex's anti-theft system. What is the​ subgame-perfect equilibrium? A. The​ subgame-perfect equilibrium is for GM to offer a low price and for Securitex to reject the offer. B. The​ subgame-perfect equilibrium is for GM to offer a high price and for Securitex to reject the offer. C. A​ subgame-perfect equilibrium does not exist for this game. D. The​ subgame-perfect equilibrium is for GM to offer a high price and for Securitex to accept the offer. E. The​ subgame-perfect equilibrium is for GM to offer a low price and for Securitex to accept the offer.

The​ subgame-perfect equilibrium is for GM to offer a low price and for Securitex to accept the offer.

What are sequential games used for?

To analyze 2 business strategies: deterring entry and bargaining between firms

Why do oligopolies​ exist? Oligopolies exist due to

barriers to entry

Part 3 of 3 Which of the terms below is defined as​ "anything that keeps new firms from entering an industry in which firms are earning economic​ profits"? A. economies of scale B. oligopoly C. barriers to entry Your answer is correct. D. game theory Economies of scale exist when a​ firm's ___________ average costs fall as it​ __________ output. A. ​long-run; increases Your answer is correct. B. ​short-run; decreases C. ​short-run; increases D. ​long-run; decreases Which of the following terms is a barrier to​ entry? A. economies of scale B. ownership of a key input C. patents D. All of the above.

barriers to entry ​long-run; increases all of the above: economies of scale, ownership of a key input, patents

why is it difficult to determine an oligopoly's demand and marginal revenue curves?

because of how oligopoly firms make decisions. the decisions oligopoly firms make depends on how other oligopolies make decisions -> strategic interdependence. So we use game theory instead.

Competition From Existing Firms

(1) Competition among firms in an industry can lower prices and profits. (2) Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs.

Why are the graphs used for analyzing perfect competition and monopolistic competition not helpful for analyzing oligopoly?

1) we need to use economic models that allow us to analyze more complex business strategies of large oligopoly firms i.e. more than just choosing the profit-maximizing price and output 2) We aren't able to draw the demand curves because we can't assume that price changes have no effect on the prices other firms in the industry charge. This is because firms in oligopolistic competition are large relative to their market

Five Competitive Forces Model

1. Competition from Substitute Goods or Services 2. Threat from Potential Entrants 3. Competition from existing firms 4. Bargaining power of suppliers 5. Bargaining power of buyers

three key characteristics for games

1. Rules that determine what actions are allowable In a business situation, rules are laws that a firm must obey and also factors outside of the firm's control (but only in the short run, i.e. production function.) 2. strategies that players employ to attain. their objectives in the game In a business situation, this is a business strategy i.e. maximizing profit 3. payoffs that are the results of the interactions among player's strategies In a business situation, the payoff is the profit a firm earns as a result of how its strategies interact with the strategies of other firms

The effect on​ McDonald's as White Castle and Taco Bell consider starting to sell breakfast food. The competitive force involved in this business development is A. the bargaining power of buyers. B. competition from substitute goods or services. Your answer is correct. C. the bargaining power of suppliers. The effect on cable television firms as Apple plans a Web TV service that will include programs from 25 to 30 cable networks. The competitive force involved in this business development is A. the bargaining power of buyers. B. the threat from potential entrants. Your answer is correct. C. the bargaining power of suppliers. The effect on the publishing firm Hachette when Amazon bargains to lower the prices of the books Hachette sells on​ Amazon's site. The competitive force involved in this business development is A. the bargaining power of buyers. Your answer is correct. B. competition from substitute goods or services. C. competition from existing firms. D. the bargaining power of suppliers. E. the threat from potential entrants. The effect on the AMC movie theater chain of IMAX increasing the fees it charges to theaters to use its technology. The competitive force involved in this business development is A. competition from substitute goods or services. B. the bargaining power of buyers. C. the bargaining power of suppliers. Your answer is correct. D. the threat from potential entrants. E. competition from existing firms.

1. competition from substitute goods or services. 2. the threat from potential entrants. 3. the bargaining power of buyers. 4. the bargaining power of suppliers.

flaws of concentration ratios

1. they do not include the goods and services foreign firms export to the U.S. 2. they are calculated for the national market, even though the competition in some industries, such as restaurants and college bookstores, is mainly local. 3. they do not account for competition that sometimes exists between firms in different industries. I.e. Walmart is included in the discount department store industry but also competes with firms in the supermarket and retail toy store industry

dominant strategy

A strategy that is the best for a firm, no matter what strategies other firms use.

payoff matrix

A table that shows the payoffs that each firm earns from every combination of strategies by the firms. This table is used to analyze oligopoly games

implicit collusion

A type of collusion in which multiple firms make the same pricing decisions even though they have not explicitly consulted with one another.

Suppose Best Buy is the only electronics store in a particular​ market, but RadioShack is thinking about entering the market. Best Buy chooses how much to produce first and then RadioShack chooses whether to enter the industry. The strategies and corresponding profits for Best Buy​ (BB) and RadioShack​ (RS) are depicted in the decision tree to the right. What will the firms​ do? A. Best Buy will choose the large quantity and RadioShack will enter. B. Best Buy will choose the small quantity and RadioShack will enter. C. Best Buy will choose the large quantity and RadioShack will not enter. Your answer is correct. D. Best Buy will choose the small quantity and RadioShack will not enter.

Best Buy will choose the large quantity and RadioShack will not enter.

Finding dominant strategiesLOADING... is often a very effective way of analyzing a game. Consider the following​ game: Microsoft and Apple are the two firms in the market for operating systems. Each firm has two​ strategies: charge a high price or charge a low price​ (payoffs: ​Microsoft, Apple​). What​ (if any) is the dominant strategy for each​ firm? A. Choosing low is a weakly dominant strategy for Apple. Your answer is correct. B. The dominant strategy is for Apple to choose low and Microsoft to choose high. C. Choosing low is a weakly dominant strategy for Microsoft. D. Choosing high is a weakly dominant strategy for Apple. Is there a Nash equilibrium?LOADING... A. No because Apple is indifferent between choosing high and low. B. Yes. Apple chooses low and Microsoft chooses high. Your answer is correct. C. Yes. Apple and Microsoft both choose high. D. Yes. Apple and Microsoft both choose low.

Choosing low is a weakly dominant strategy for Apple. Yes. Apple chooses low and Microsoft chooses high.

Suppose that Symantec is a small firm that has developed​ anti-virus computer software. Symantec currently earns ​$2 million per year in profits from selling its software. Dell informs Symantec that it is considering installing the software on every new computer it sells. Dell currently earns profits of​ $30 million but expects to sell more computers at a higher price if it can install​ Symantec's software. Dell first chooses whether to offer Symantec​ $30 or​ $20 for each copy of its​ software, and then Symantec responds by either accepting or rejecting the offer. The strategies and corresponding profits​ (in millions) for Dell​ (D) and Symantec​ (S) are depicted in the decision tree to the right. What is the Nash equilibrium of the​ game? A. Dell will offer​ $30 per copy of the software and Symantec will reject the offer. B. Dell will offer​ $20 per copy of the software and Symantec will reject the offer. C. Dell will offer​ $20 per copy of the software and Symantec will accept the offer. Your answer is correct. D. Dell will offer​ $30 per copy of the software and Symantec will accept the offer.

Dell will offer​ $20 per copy of the software and Symantec will accept the offer.

Nutco is a​ cashew-processing firm that operates in the developing country of Ecotopia. After procuring raw cashews from farms around the​ country, Nutco processes them using a​ labor-intensive method. The workers at Nutco recently demanded a 20 percent increase in their overtime wage rate. All members of​ Nutco's labor​ union, which was a substantial proportion of the​ company's labor​ force, went on an unannounced strike when the management only agreed to a 5 percent hike. During negotiations that​ followed, the management informed the union leader that this was a​ take-it-or-leave-it offer. The union leader was not convinced and declared that the workers would not come back to work unless their demands were fully met. Kurt​ Whitman, Nutco's human resources​ manager, however thinks that the strike will end soon because of the​ company's strong stand. Which of the​ following, if​ true, would suggest that the​ management's threat of not accepting the​ workers' demands is not​ credible? A. The production subsidies that Nutco receives as a part of the Ecotopian​ government's export promotion program were recently reduced. B. Due to the impact on production and the consequent delay in delivering export​ orders, several of​ Nutco's customers have indicated that they may cancel existing contracts. Your answer is correct. C. Nutco had accepted the labor​ union's demand for a higher number of sick leaves last year. D. ​Cashew-processing industries in other countries are relatively more​ capital-intensive. E. The demand for products like cashew wine and cashew brittle declined in spite of extensive promotion and advertising undertaken by the firms in this industry.

Due to the impact on production and the consequent delay in delivering export​ orders, several of​ Nutco's customers have indicated that they may cancel existing contracts.

Suppose Eckerd Pharmacy is the only pharmacy in a particular​ market, but Walgreens Pharmacy is thinking about entering the market. Absent​ entry, Eckerd Pharmacy can maximize profits by producing a small quantity. ​ However, by producing a large​ quantity, Eckerd Pharmacy can attempt to deter entry by reducing prices​ and, consequently, profits. Eckerd Pharmacy must choose how much to produce first and then Walgreens Pharmacy will choose whether to enter the industry. The strategies and corresponding profits for Eckerd ​ (E) and Walgreens Pharmacy ​(W​) are depicted in the decision tree to the right. What is the Nash equilibrium of the​ game? A. Eckerd Pharmacy will choose the large quantity and Walgreens Pharmacy will enter. B. Eckerd Pharmacy will choose the small quantity and Walgreens Pharmacy will not enter. C. Eckerd Pharmacy will choose the large quantity and Walgreens Pharmacy will not enter. Your answer is correct. D. Eckerd Pharmacy will choose the small quantity and Walgreens Pharmacy will enter.

Eckerd Pharmacy will choose the large quantity and Walgreens Pharmacy will not enter.

The late Thomas​ McCraw, while a professor at the Harvard Business​ School, wrote: ​"Throughout American​ history, entrepreneurs have​ tried, sometimes​ desperately, to create big businesses out of naturally​ small-scale operations. It has not​ worked." Entrepreneurs hope to increase profitability by creating​ "big businesses." Unless there are significant economies of scaleLOADING...​, they will not be successful. In the​ figure, firms producing at a level of output that is a small fraction of total industry​ sales, represented by LRAC1​, have the lowest average costs for most levels of output. If a firm tries to grow to a larger​ size, such as that represented by LRAC2​, its average costs will rise. ​Source: Thomas K.​ McCraw, ed., Creating Modern Capitalism​, ​Cambridge, MA: Harvard University​ Press, 1997, p. 323. If an entrepreneur is planning on producing 5,000 ​units, should he choose the smaller or larger​ operation? A. The larger operation. B. The smaller operation. C. Either the smaller or larger operation.

Either the smaller or larger operation.

Bradford is a small town that currently has no​ fast-food restaurants.​ McDonald's and Burger King are both considering entering this market. Burger King will wait until​ McDonald's has made its decision before deciding whether to enter. Use the decision tree below to determine the optimal strategy for each​ company, assuming that the minimum rate of return that owners of​ fast-food restaurants require on their investment is 20​%. a. What is the optimal strategy for Burger​ King? A. Enter the market if McDonald's builds a small store. Your answer is correct. B. Enter the market whether or not McDonald's builds a small store or a large store. C. Not enter the market. D. Enter the market if​ McDonald's builds a large store. b. What is the optimal strategy for​ McDonald's? A. Build a small store. B. Building either a small store or a large store would be optimal. C. Build a large store. Your answer is correct. D. Not build another store.

Enter the market if McDonald's builds a small store. Build a large store.

Bradford is a small town that currently has no​ fast-food restaurants.​ McDonald's and Burger King are both considering entering this market. Burger King will wait until​ McDonald's has made its decision before deciding whether to enter. Use the decision tree below to determine the optimal strategy for each​ company, assuming that the minimum rate of return that owners of​ fast-food restaurants require on their investment is 15​%. a. What is the optimal strategy for Burger​ King? A. Not enter the market. B. Enter the market whether or not McDonald's builds a small store or a large store. Your answer is correct. C. Enter the market if​ McDonald's builds a large store. D. Enter the market if McDonald's builds a small store. b. What is the optimal strategy for​ McDonald's? A. Not build another store. B. Build a small store. Your answer is correct. C. Building either a small store or a large store would be optimal. D. Build a large store.

Enter the market whether or not McDonald's builds a small store or a large store. Build a small store.

Eleanor Alback is an equity research analyst working on a report on the semiconductor industry in the country Sillikon. The price of semiconductor chips is quite low. Since it is an important input in the production of personal​ computers, she feels that firms could increase prices without drastically affecting sales.​ However, it appears that none of the firms are interested in hiking the price of their product despite high demand. Lan​ Shih, who works at a government​ think-tank, attributes the low prices to intense price wars between the firms. Which of the​ following, if​ true, would weaken​ Lan's claim that​ price-war is the cause of low​ prices? A. The boom in the semiconductor industry led to productivity gains in many industries that use semiconductors. B. Although many firms in this industry own patents on their​ products, similar products are almost always introduced by a rival firm for a lower price. C. The skilled engineers that the industry hires are very​ well-paid. D. Existing firms in the semiconductor industry consciously target different market segments that are mutually exclusive. Your answer is correct. E. Some commentators feel that the growth in this industry can only be sustained with continuous innovation.

Existing firms in the semiconductor industry consciously target different market segments that are mutually exclusive.

Threat from Potential Entrants

Firms face competition from companies that currently are not in the market but might enter Existing firms will act to deter entry. Some actions include advertising to create product loyalty, introducing new products to fill market niches, and setting lower prices to keep profits at a level that makes entry less attractive for potential new entrants

The figure to the right illustrates the average total cost curves for two automobile manufacturing​ firms: LittleAuto and BigAuto. Under which conditionsLOADING... would you expect to see the market composed of firms like LittleAuto and under which conditions would you expect to see the market dominated by firms like​ BigAuto? a. When the market demand curve intersects the quantity axis at less than​ 1,000 units. Firms like LittleAuto Your answer is correct. Firms like BigAuto b. When the market demand curve intersects the quantity axis at more than​ 1,000 units but less than​ 10,000 units. Firms like BigAuto Your answer is correct. Firms like LittleAuto c. When the market demand curve intersects the quantity axis at more than​ 10,000 units. Firms like LittleAuto Firms like BigAuto

Firms like LittleAuto Firms like BigAuto Firms like BigAuto

Deterring Entry & Bargaining Between Firms

Firms use Sequential Games to analyze these two Business Strategies:

Coca-Cola and Pepsi both advertise​ aggressively, but would they be better off if they​ didn't? Their commercials are usually not designed to convey new information about their products.​ Instead, they are designed to capture each​ other's customers. The payoff matrix to the right illustrates the following​ information: ≻If neither firm​ advertises, Coca-Cola and Pepsi both earn profits of​ $750 million per year. ≻ If both firms​ advertise, Coca-Cola and Pepsi both earn profits of​ $500 million per year. ≻If ​Coca-Cola advertises and Pepsi​ doesn't, Coca-Cola earns profits of​ $900 million and Pepsi earns profits of​ $400 million. ≻If Pepsi advertises and​ Coca-Cola doesn't, Pepsi earns profits of​ $900 million and​ Coca-Cola earns profits of​ $400 million. If​ Coca-Cola wants to maximize​ profit, they will advertise. If Pepsi wants to maximize​ profit, they will advertise. Is there a Nash​ equilibrium? A. There is a Nash equilibrium in which Pepsi advertises and​ Coca-Cola does not advertise. B. There is only a Nash equilibrium in which both firms advertise. Your answer is correct. C. There is only a Nash equilibrium in which both firms do not advertise. D. There is a Nash equilibrium in which both firms advertise and one in which both firms do not advertise.

If​ Coca-Cola wants to maximize​ profit, they will advertise. If Pepsi wants to maximize​ profit, they will advertise. There is only a Nash equilibrium in which both firms advertise.

decision node

In a strategic game that is presented in extensive form, a point (node) at which a player must make a decision. The decision leads to either another decision node or a terminal node.

Consider a market with two​ firms, Krispy Kreme Doughnuts​ (KK) and​ Dunkin' Donuts​ (DD), that produce donuts. Both firms must choose whether to charge a high price ​($1.50​) or a low price ​($0.85​) for their donuts. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. Krispy​ Kreme's profits are in red and​ Dunkin' Donuts' are in blue. Krispy​ Kreme's dominant strategy is to pick a price of $0.85​, and​ Dunkin' Donuts' dominant strategy is to pick a price of $0.85. What is the Nash equilibrium for this​ game? A. Krispy Kreme and​ Dunkin' Donuts will both choose a price of ​$1.50. B. The game has no Nash equilibrium. C. Krispy Kreme will choose a price of ​$1.50 and​ Dunkin' Donuts will choose a price of ​$0.85. D. Krispy Kreme will choose a price of ​$0.85 and​ Dunkin' Donuts will choose a price of ​$1.50. E. Krispy Kreme and​ Dunkin' Donuts will both choose a price of ​$0.85

Krispy​ Kreme's dominant strategy is to pick a price of $0.85 and​ Dunkin' Donuts' dominant strategy is to pick a price of $0.85 Krispy Kreme and​ Dunkin' Donuts will both choose a price of ​$0.85.

In June​ 2013, Microsoft announced that its new Xbox One video game console would have a price of​ $499. Sony then announced that its new PlayStation 4 video game console would have a price of​ $399. An article on the event where Microsoft introduced the new console noted that the Microsoft spokesman​ "started by showing off features like​ live-television technology and the ability to​ video-chat through its Skype​ service." The article goes on to say that not until nearly half way through the presentation did the Microsoft spokesman mention the new games the console could play. ​Source: Ian Sherr and Daisuke​ Wakabayashi, "Xbox One to Launch at​ $499, PlayStation 4 at​ $399," Wall Street Journal​, June​ 10, 2013. ​Why, in announcing a new video game​ console, would Microsoft focus its presentation on features of the console other than its ability to play​ games? A. Micrsoft wanted to use the new Xbox as a platform for Windows 8. B. Microsoft was hoping to differentiate its game console from competitors. Your answer is correct. C. Microsoft believes that gaming is a shrinking market. D. Microsoft was signaling to the market that its game console could interface with Windows. Was it an advantage to Sony that Microsoft announced the price of the Xbox One before Sony announced the price of the PlayStation​ 4? A. ​No, because Microsoft​ 'stole the​ thunder" from Sony. B. ​Yes, because Sony could charge more than Microsoft for the game system. C. ​No, because they both produce a similar product. D. ​Yes, because Sony could adjust its price to better compete.

Microsoft was hoping to differentiate its game console from competitors. ​Yes, because Sony could adjust its price to better compete.

Match the following definition with one of the terms​ below: "A situation where each firm chooses the best​ strategy, given the strategies chosen by other​ firms." A. Collusion B. Nash equilibrium Your answer is correct. C. Payoff matrix D. Dominant strategy Suppose that​ Wal-Mart and Target are selling Sony​ flat-screen computer monitors for a price of either​ $150 or​ $200 each. Based on the information in the payoff matrix to the​ right, what is the likeliest​ outcome? A. Both firms will charge​ $200. B. ​Wal-Mart will charge​ $150, and Target will charge​ $200. C. Both firms will charge​ $150. Your answer is correct. D. ​Wal-Mart will charge​ $200, and Target will charge​ $150.

Nash equilibrium Both firms will charge​ $150.

Michael Porter has argued that in many industries ​"strategiesLOADING... converge and competition becomes a series of races down identical paths that no one can​ win." ​Source: Michael E.​ Porter, "What Is​ Strategy?" Harvard Business Review​, ​November-December 1996, p. 64. Are firms in these industries likely to earn economic​ profits?

No

When Apple first launched Apple​ Music, singer Taylor Swift refused to allow her album​ 1989, which had been the best selling album of​ 2014, to be made available for the service because Apple did not intend to pay royalties on songs it streamed during an initial three month period when the service would be free to subscribers. In​ response, Apple changed its policy and agreed to pay royalties during those three months even though doing so reduced its profit. ​Source: Mike Ayers and Ethan​ Smith, "Taylor Swift Is Now Making​ '1989' Available on Apple​ Music," Wall Street Journal​, June​ 25, 2015. Do singers typically have substantial bargaining power with​ Apple, Spotify, and the other streaming​ services? A. Not unless they are top performers in the market. Your answer is correct. B. Only if they have a contract with the streaming services. C. Not unless they collude. D. Only if they get most of their revenue from the streaming services.

Not unless they are top performers in the market.

Erin Reinhardt and her friend Carol Newman have just arrived in the country Boloni for a summer holiday. While renting a car on their first day in Boloni they notice that the car rental rates are so much higher than rates back home. Carol says that in a matter of​ time, competition should drive prices down. Erin feels that the market for car rentals is probably competitive​ enough; it could just be high cost of operations in Boloni that are responsible for the high prices. Which of the​ following, if​ true, would weaken​ Erin's argument that high costs are responsible for high​ prices? A. Only 3 firms account for almost 88 percent of the car rental market. Your answer is correct. B. The car rental industry in Boloni is valued at​ $50 million. C. Most of the growth in the car rental industry comes from the​ high-value rentals of luxury cars. D. Most households in Boloni own at least one car. E. After global oil prices​ increased, the government of Boloni decided to ration the quantity of gasoline sold

Only 3 firms account for almost 88 percent of the car rental market.

Getchecked Inc. is a leading medical devices manufacturer. A cosmetic​ surgeon, Dr. Matt Breen is discussing the prices of​ Getchecked's medical devices with his​ colleague, Dr. Ed Walter. Matt​ says, "Getchecked probably finds it difficult to make profits. The medical device market is highly​ crowded." Ed​ replies, "Well, they do have quite a few patented products so the profits must be flowing​ in." Meanwhile James​ Radford, a medical​ technician, agrees that Getchecked must be doing well. Given that​ Getchecked's products are widely used in the​ market, even an increase in prices would not affect sales or profits according to James. Which of the​ following, if​ true, would weaken​ Matt's argument that​ Getchecked's profits are most likely negligible due to​ competition? A. Product differentiation in terms of quality is common in this market because the buyers are very​ quality-conscious. Your answer is correct. B. Doctors choose the brand of medical devices that should be used in the hospital. C. ​Lifestyle-related diseases like diabetes and hypertension are on the rise in this country. D. Some firms in the market have started manufacturing medical devices that can be directly used by the final consumer. E. Getchecked recently hiked the​ per-unit commission paid to its salesmen.

Product differentiation in terms of quality is common in this market because the buyers are very​ quality-conscious.

Eleanor Alback is an equity research analyst working on a report on the semiconductor industry in the country Sillikon. The price of semiconductor chips is quite low. Since it is an important input in the production of personal​ computers, she feels that firms could increase prices without drastically affecting sales.​ However, it appears that none of the firms are interested in hiking the price of their product despite high demand. Lan​ Shih, who works at a government​ think-tank, attributes the low prices to intense price wars between the firms. Which of the​ following, if​ true, would explain why the prices are low despite the high​ demand? A. The demand for personal computers has been growing at a remarkable annual rate of 30 percent for the last five years. B. Although semiconductors are crucial to the production of personal​ computers, they form a small proportion of the total inputs used to produce personal computers. C. Since the semiconductor industry has high fixed​ costs, a low price charged by existing firms can keep new entrants out of the market. Your answer is correct. D. Investment in manufacturing facilities forms a substantial proportion of the fixed cost in this industry. E. With new advances in computing​ technology, the prices of personal computers have been falling in spite of high demand.

Since the semiconductor industry has high fixed​ costs, a low price charged by existing firms can keep new entrants out of the market.

Alfred​ Chandler, a professor at the Harvard Business​ School, has​ observed, ​"Imagine the diseconomies of scaleLOADING...—the great increase in unit costs—that would result from placing close to​ one-fourth of the​ world's production of​ shoes, or​ textiles, or lumber into three factories or​ mills!" The​ shoe, textiles, and lumber industries are very competitive with many firms producing each of these products. ​Source: Alfred D.​ Chandler, Jr.,​ "The Emergence of Managerial​ Capitalism," in Alfred D.​ Chandler, Jr. and Richard S.​ Tedlow, The Coming of Managerial Capitalism​, New​ York: Irwin,​ 1985, p. 406. What does​ Chandler's observation​ suggest? A. Larger firms can produce at a lower​ long-run average cost than smaller firms. B. The​ long-run average costs are the same for larger firms and smaller firms. C. Smaller firms can produce at a lower​ long-run average cost than larger firms.

Smaller firms can produce at a lower​ long-run average cost than larger firms.

Getchecked Inc. is a leading medical devices manufacturer. A cosmetic​ surgeon, Dr. Matt Breen is discussing the prices of​ Getchecked's medical devices with his​ colleague, Dr. Ed Walter. Matt​ says, "Getchecked probably finds it difficult to make profits. The medical device market is highly​ crowded." Ed​ replies, "Well, they do have quite a few patented products so the profits must be flowing​ in." Meanwhile James​ Radford, a medical​ technician, agrees that Getchecked must be doing well. Given that​ Getchecked's products are widely used in the​ market, even an increase in prices would not affect sales or profits according to James. Which of the​ following, if​ true, would weaken​ Ed's claim that​ Getchecked's patents would ensure profits in this​ market? A. Getchecked entered the pharmaceutical industry last year and recently acquired a pharma company that owns several patents. B. The market for healthcare and medical devices in developing countries is projected to grow by 15 percent in the next five years. C. The sale of used medical equipment in the country is not regulated by the government. D. The Medical Administrative Authority in the country has increased the annual registration fee that needs to be paid by firms that produce medical devices. E. Some of​ Getchecked's recently patented products are completely new to the market and the demand for them is uncertain.

Some of​ Getchecked's recently patented products are completely new to the market and the demand for them is uncertain.

Bargaining power of suppliers

Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services Suppliers have greater bargaining power when there are only a few or a single supplier of an input. Firms buying these inputs face high prices and their profitability is limited because there are little to no alternatives for this input. bargaining power of suppliers can change over time because of changes in technology and demand

Consider a market with two​ firms, Target and​ Wal-Mart, that sell CDs in their music department. Both stores must choose whether to charge a high price ​($20​) or a low price ​($15​) for the new Miley Cyrus CD. These price strategies with corresponding profits are depicted in the payoff matrix to the right.​ Target's profits are in red and​ Wal-Mart's are in blue. ​Target's dominant strategy is to pick a price of ​$15. ​Wal-Mart's dominant strategy is to pick a price of ​$15. What is the Nash equilibrium for this​ game? A. The Nash equilibrium is for Target to choose a price of ​$20 and​ Wal-Mart to choose a price of ​$15. B. The Nash equilibrium is for Target and​ Wal-Mart to both choose a price of ​$15. Your answer is correct. C. The Nash equilibrium is for Target to choose a price of ​$15 and​ Wal-Mart to choose a price of ​$20. D. The Nash equilibrium is for Target and​ Wal-Mart to both choose a price of ​$20. E. A Nash equilibrium does not exist for this game.

Target's dominant strategy is to pick a price of ​$15. ​Wal-Mart's dominant strategy is to pick a price of ​$15. The Nash equilibrium is for Target and​ Wal-Mart to both choose a price of ​$15.

A student​ argues, ​"The prisoner's dilemmaLOADING... game is unrealistic. Each​ player's strategy is based on the assumption that the other player​ won't cooperateLOADING.... But if each player assumes that the other player will​ cooperate, then the​ 'dilemma' disappears." Is this argument correct or​ incorrect? A. The argument is incorrect. The best strategy for each player is to not cooperate no matter what the other player does. Your answer is correct. B. The argument is correct. The best strategy for each player is to cooperate. C. The argument is incorrect. The best strategy for each player is to not cooperate knowing that the other will cooperate. D. The argument is incorrect. The best strategy for each player is to cooperate knowing that the other will not cooperate.

The argument is incorrect. The best strategy for each player is to not cooperate no matter what the other player does.

Consider a market with two​ firms, Kellogg and​ Post, that sell breakfast cereals. Both companies must choose whether to charge a high price ​($4.50​) or a low price ​($3.50​) for their cereals. These price​ strategies, with corresponding​ profits, are depicted in the payoff matrix to the right.​ Kellogg's profits are in red and​ Post's are in blue. What is the cooperative equilibrium for this​ game? A. The cooperative equilibrium is for Kellogg and Post to both choose a price of ​$3.50. B. The cooperative equilibrium is for Kellogg to choose a price of ​$4.50 and Post to choose a price of ​$3.50. C. A cooperative equilibrium does not exist for this game. D. The cooperative equilibrium is for Kellogg and Post to both choose a price of ​$4.50. Your answer is correct. E. The cooperative equilibrium is for Kellogg to choose a price of ​$3.50 and Post to choose a price of ​$4.50. Is the cooperative equilibrium likely to​ occur? The cooperative equilibrium A. is likely to occur because the game does not have a Nash equilibrium. B. is unlikely to occur because charging ​$4.50 is not a dominant strategy. Your answer is correct. C. is likely to occur because the companies do not have dominant strategies. D. is likely to occur because charging ​$4.50 is a dominant strategy. E. is unlikely to occur because the cooperative equilibrium is a Nash equilibrium.

The cooperative equilibrium is for Kellogg and Post to both choose a price of ​$4.50. is unlikely to occur because charging ​$4.50 is not a dominant strategy.

Nutco is a​ cashew-processing firm that operates in the developing country of Ecotopia. After procuring raw cashews from farms around the​ country, Nutco processes them using a​ labor-intensive method. The workers at Nutco recently demanded a 20 percent increase in their overtime wage rate. All members of​ Nutco's labor​ union, which was a substantial proportion of the​ company's labor​ force, went on an unannounced strike when the management only agreed to a 5 percent hike. During negotiations that​ followed, the management informed the union leader that this was a​ take-it-or-leave-it offer. The union leader was not convinced and declared that the workers would not come back to work unless their demands were fully met. Kurt​ Whitman, Nutco's human resources​ manager, however thinks that the strike will end soon because of the​ company's strong stand. Which of the​ following, if​ true, would suggest that the labor​ union's threat of not resuming work is​ credible? A. Due to the occupational hazards of​ cashew-processing, the Ministry of Labor closely monitors the working conditions in this industry. B. The yield of cashews this year was low due to unfavorable climatic conditions. C. Most of​ Nutco's employees are migrant female workers who are willing to work for slightly lower wages. D. Most firms cannot take advantage of economies of scale because the industry is highly fragmented. E. The demand for labor in this industry has increased due to an increase in the demand for Ecotopian cashews abroad.

The demand for labor in this industry has increased due to an increase in the demand for Ecotopian cashews abroad.

Airlines often find themselves in price wars. Consider the following​ game: Delta and United are the only two airlines flying the route from Houston to Omaha. Each firm has two​ strategies: charge a high price or charge a low price. What​ (if any) is the dominant strategyLOADING... for each​ firm? A. The dominant strategy for each firm is to set a high price. B. The dominant strategy for each firm is to set a low price. Your answer is correct. C. Only Delta has a dominant​ strategy, which is to bid low. D. Only United has a dominant​ strategy, which is to bid low. Is this game a prisoner's dilemma?LOADING... Yes How could repeated playing of the game change the strategy each firm​ uses? A. A player can set a high price unless the other player cheats. Then play the dominant strategy forever. B. A player can set a high price unless the other player cheats. Then play the dominant strategy until the other player sets a high price. C. Each airline could advertise that it will match the lowest price offered by the other airline. D. A player can set a high price half the time and a low price half the time. E. All of the above are possible strategies.

The dominant strategy for each firm is to set a low price. Yes All of the above are possible strategies: A player can set a high price unless the other player cheats. Then play the dominant strategy forever. A player can set a high price unless the other player cheats. Then play the dominant strategy until the other player sets a high price. Each airline could advertise that it will match the lowest price offered by the other airline. A player can set a high price half the time and a low price half the time.

Airlines often find themselves in price wars. Consider the following​ game: Delta and United are the only two airlines flying the route from Houston to Omaha. Each firm has two​ strategies: charge a high price or charge a low price. What​ (if any) is the dominant strategyLOADING... for each​ firm? A. Only United has a dominant​ strategy, which is to bid low. B. The dominant strategy for each firm is to set a high price. C. The dominant strategy for each firm is to set a low price. Your answer is correct. D. Only Delta has a dominant​ strategy, which is to bid low. Is this game a prisoner's dilemma?LOADING... Yes How could repeated playing of the game change the strategy each firm​ uses? A. Each airline could advertise that it will match the lowest price offered by the other airline. B. A player can set a high price unless the other player cheats. Then play the dominant strategy until the other player sets a high price. C. A player can set a high price half the time and a low price half the time. D. A player can set a high price unless the other player cheats. Then play the dominant strategy forever. E. All of the above are possible strategies.

The dominant strategy for each firm is to set a low price. yes All of the above are possible strategies.

How can the government impose barriers to​ entry? A. The government can reduce tariffs on imports. B. The government can remove quota limits on the quantity of a good that can be imported into a country. C. The government can repeal laws requiring occupational licensing to provide goods and services. D. The government can require patents to produce goods and services. Your answer is correct. E. None of the above.

The government can require patents to produce goods and services.

Until the late​ 1990s, airlines would post proposed changes in ticket prices on computer reservation systems several days before the new ticket prices went into effect. Then the federal government took action to end the practice. Now airlines can only post prices on their reservations systems for tickets that are immediately available for sale. ​Source: Scott​ McCartney, "Airfare Wars Show Why Deals Arrive and​ Depart," Wall Street Journal​, March​ 19, 2002. Why would the federal government object to the old system of posting prices before they went into​ effect? A. The old system provided a way for firms to implicitly collude because one firm could propose a price change and the other firms could respond before the change went into effect. B. Proposing prices before they go into effect gives some airlines an unfair competitive advantage. C. The old system provided a way for firms to explicitly collude because one firm could propose a price change and the other firms could respond before the change went into effect. Your answer is correct. D. Posting prices that are not actually being offered is a form of false advertising.

The old system provided a way for firms to explicitly collude because one firm could propose a price change and the other firms could respond before the change went into effect.

The late Thomas​ McCraw, while a professor at the Harvard Business​ School, wrote: ​"Throughout American​ history, entrepreneurs have​ tried, sometimes​ desperately, to create big businesses out of naturally​ small-scale operations. It has not​ worked." Entrepreneurs hope to increase profitability by creating​ "big businesses." Unless there are significant economies of scaleLOADING...​, they will not be successful. In the​ figure, firms producing at a level of output that is a small fraction of total industry​ sales, represented by LRAC1​, have the lowest average costs for most levels of output. If a firm tries to grow to a larger​ size, such as that represented by LRAC2​, its average costs will rise. ​Source: Thomas K.​ McCraw, ed., Creating Modern Capitalism​, ​Cambridge, MA: Harvard University​ Press, 1997, p. 323. If an entrepreneur is planning on producing 2,000 ​units, should he choose the smaller or larger​ operation? A. The smaller operation. Your answer is correct. B. Either the smaller or larger operation. C. The larger operation.

The smaller operation.

game theory

The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms.

Erin Reinhardt and her friend Carol Newman have just arrived in the country Boloni for a summer holiday. While renting a car on their first day in Boloni they notice that the car rental rates are so much higher than rates back home. Carol says that in a matter of​ time, competition should drive prices down. Erin feels that the market for car rentals is probably competitive​ enough; it could just be high cost of operations in Boloni that are responsible for the high prices. Which of the​ following, if​ true, would weaken​ Carol's argument that competition will drive prices​ down? A. The government of Boloni set aside a substantial amount of money this year for the construction of freeways. B. Compared to​ Carol's home​ country, people in Boloni have lower purchasing power. C. Information on car rental rates being easily​ available, it is almost impossible for firms to charge different consumers different prices. D. The car rental industry recently implemented​ no-show fees for customers who do not pick up their cars after making a reservation. E. To reduce​ emissions, the government has recently introduced tax per mile driven on automobiles.

To reduce​ emissions, the government has recently introduced tax per mile driven on automobiles.

Changes in demand and technology can make it possible for smaller competitors to succeed against much larger rivals. A. True Your answer is correct. B. False Smaller package delivery firms that concentrate on​ "last-mile shipping" tend to have​ ________ costs than their larger rivals and are therefore able to compete by charging​ ________ prices than those rivals. A. ​lower; higher B. ​higher; higher C. ​higher; lower D. ​lower; lower

True ​lower; lower

Why do firms become less successful over time?

We can expect firms to become less successful as they age because many successful strategies can be copied or improved on by competitors.

Michael Porter has​ argued, ​"The intensity of competition in an industry is neither a matter of coincidence nor bad luck.​ Rather, competition in an industry is rooted in its underlying economic​ structure." ​Source: Michael​ Porter, Competitive​ Strategy: Techniques for Analyzing Industries and Competitors​, New​ York: The Free​ Press, 1980, p. 3. Which of the following factors would not be included in​ Porter's concept of​ "economic structure"? A. Whether one or more firms own a key input or raw material. B. Whether there is the threat of substitute goods or services. C. Whether the market is monopolistic or competitive. Your answer is correct. D. Whether there are economies of scale in the industry. E. Whether there are​ government-imposed barriers to entry or competition.

Whether the market is monopolistic or competitive.

Bob and Tom are two criminals who have been arrested for burglary. The police put Tom and Bob in separate cells. They offer to let Bob go free if he confesses to the crime and testifies against Tom. Bob also is told that he will serve a​ 15-year sentence if he remains silent while Tom confesses. If he confesses and Tom also​ confesses, they will each serve a​ 10-year sentence.​ Separately, the police make the same offer to Tom. Assume that if Bob and Tom both remain​ silent, the police only have enough evidence to convict them of a lesser crime and they will serve​ 3-year sentences. a. Use this information to complete the matrix below. b. Does Bob have a dominant strategy?LOADING... If​ so, what is​ it? A. ​No, there is no dominant strategy for Bob. B. ​Yes, the dominant strategy for Bob is to confess. Your answer is correct. C. ​Yes, the dominant strategy for Bob is to remain silent. c. Does Tom have a dominant​ strategy? If​ so, what is​ it? A. ​No, there is no dominant strategy for Tom. B. ​Yes, the dominant strategy for Tom is to confess. Your answer is correct. C. ​Yes, the dominant strategy for Tom is to remain silent. d. What sentences do Bob and Tom​ serve? A. Bob will confess and Tom will refuse to confess.​ Thus, Bob will go free and Tom will serve 15 years. B. Tom will confess and Bob will refuse to confess.​ Thus, Tom will go free and Bob will serve 15 years. C. Both Bob and Tom will refuse to confess and serve​ 3-year sentences. D. Both Bob and Tom will confess and serve​ 10-year sentences.

Yes, the dominant strategy for Bob is to confess. Yes, the dominant strategy for Tom is to confess. Both Bob and Tom will confess and serve​ 10-year sentences.

Consider the entries in the row of the payoff matrixLOADING... that correspond to Saudi Arabia choosing​ "low ​ output." Suppose the numbers change so that​ Nigeria's profit is​ $15 million when Nigeria chooses​ "low output" and​ $10 million when it chooses​ "high output," reflected in the payoff matrix below​ (payoffs: Saudi​ Arabia, Nigeria​). Given the payoff matrix above and assuming that Saudi Arabia and Nigeria choose their output levels​ simultaneously, is there a Nash equilibriumLOADING... to this​ game? If​ so, what is​ it? A. No. There is no Nash equilibrium. B. Yes. Both Saudi Arabia and Nigeria choose low output. Your answer is correct. C. Yes. Both Saudi Arabia and Nigeria choose high output. D. Yes. Saudi Arabia chooses low output and Nigeria chooses high output.

Yes. Both Saudi Arabia and Nigeria choose low output.

Given the decision tree​ above, which assumes that Saudi Arabia and Nigeria make their decisions​ sequentially: First Saudi Arabia chooses its output​ level, and then Nigeria responds by choosing its output level. Is there a Nash equilibrium to this​ game? If​ so, what is​ it? A. Yes. Saudi Arabia chooses low output and Nigeria chooses high output. B. Yes. Both Saudi Arabia and Nigeria choose low output. Your answer is correct. C. No. There is no Nash equilibrium. D. Yes. Both Saudi Arabia and Nigeria choose high output. Are there any differences in the outcomes of these two games and if so​ why? A. No because Saudi Arabia chose first. B. Yes because Saudi Arabia had a first mover advantage. C. Yes because Saudi​ Arabia's dominant strategy is to choose low output. D. No because Saudi​ Arabia's dominant strategy is to choose low output.

Yes. Both Saudi Arabia and Nigeria choose low output. No because Saudi​ Arabia's dominant strategy is to choose low output.

subgame perfect equilibrium

a Nash equilibrium in which no player can make himself or herself better off by changing his or her decision at any decision node

A group of firms that colludes by agreeing to restrict output to increase prices and profits is called A. a duopoly. B. a conglomerate. C. an oligopoly. D. a cartel. Your answer is correct. If the individual countries that are members of OPEC exceed their production​ quotas, the amount of oil supplied to the world oil market​ _________, and the price of oil​ _________. A. ​decreases; decreases B. ​decreases; increases C. ​increases; decreases Your answer is correct. D. ​increases; increases

a cartel. ​increases; decreases

decision tree

a graph of decisions and their possible consequences; it is used to create a plan to reach a goal

The U.S. Department of Justice investigated whether the four major U.S. airlines were colluding. Some analysts believed the airlines were restraining increases in capacity by failing to buy more planes or fly additional routes in order to reduce pressure to cut ticket prices. An airline industry analyst commented on the​ investigation, ​"I don't sense that the executives talk to each other. They actually hate each​ other, truth be told. But with so few of them​ left, there's almost a natural​ oligopoly." ​Source: Christopher​ Drew, "Airlines Under Justice Dept. Investigation Over Possible​ Collusion," New York Times​, Jul​ 1, 2015. a. The​ analyst's reference to a​ "natural oligopoly" describes A. a market in which the number of firms that minimizes total industry cost is greater than​ one, but not so large as to make the market competitive. Your answer is correct. B. a market in which only a few firms are allowed to operate. C. a market in which the number of firms that minimizes total industry cost is so large as to make the market competitive. D. a market in which the firms do not cooperate. b. Would it be necessary for the airline executives to talk to each other to​ collude? A. ​Yes, because if they​ don't, it is not really collusion. B. ​No, because there are other mechanisms for parallel behavior such a price signaling and signal advertising. Your answer is correct. C. ​No, because they have other support staff that can do that. D. ​Yes, because otherwise they would not be able to set the terms.

a market in which the number of firms that minimizes total industry cost is greater than​ one, but not so large as to make the market competitive. No, because there are other mechanisms for parallel behavior such a price signaling and signal advertising.

Give brief definitions of the following​ concepts: Game​ theory, cooperative​ equilibrium, noncooperative​ equilibrium, dominant​ strategy, and Nash​ equilibrium, and price leadership. To do​ this, identify the definition for each term from the following list. 1 Actions taken by a firm to achieve a​ goal, such as maximizing profits. 2 The study of how people make decisions where attaining goals depends on interactions with others. 3 A table that shows the payoffs each firm earns from every combination of firm strategies. 4 An agreement among firms to charge the same price or otherwise not to compete. 5 A strategy that is the best for a​ firm, no matter what strategies other firms use. 6. A situation in which each firm chooses the best​ strategy, given the strategies chosen by other firms. 7. A game outcome in which players seek to increase their mutual payoff. 8. A game outcome in which players pursue their own​ self-interest. 9. A situation in which no player can make himself better off by changing his decision at any decision node. 10. A situation where one firm announces a price​ change, which is matched by other firms in the industry.

a. Game​ theory: 2. ​(Enter a numeric response corresponding to a definition listed above using an​ integer.) b. Cooperative​ equilibrium: 7. c. Noncooperative​ equilibrium: 8. d. Dominant​ strategy: 5. e. Nash​ equilibrium: 6. f. Price​ leadership: 10.

An economist argues that with respect to advertising in some​ industries, gains to firms that advertise​ "are matched by losses to​ competitors" in the industry. ​Source: Craig L.​ Garthwaite, "Demand​ Spillovers, Combative​ Advertising, and Celebrity​ Endorsements," American Economic​ Journal: Applied Economics​, Vol.​ 6, No.​ 2, April​ 2014, p. 76. The​ economist's reasoning assumes that A. advertising increases the size of the market. B. advertising does not increase the size of the market. Your answer is correct. C. competitors also advertise. D. consumers know that​ firm's products are essentially identical. ​However, it could also be the case that A. one firm controls the market and its advertising causes other firms to leave. B. the products are so different that advertising does not matter. C. one​ firm's advertising raises sales for all firms. Your answer is correct. D. regulations prevent competitive advertising.

advertising does not increase the size of the market. one​ firm's advertising raises sales for all firms.

Why do economists refer to the methodology for analyzing oligopolies as game​ theory? Economists refer to their methodology for analyzing oligopolies as game theory​ because, as in​ games, A. interactions among​ firms, which are​ players, are crucial in determining outcomes. B. firms employ strategies to attain their objectives. C. firms are governed by rules that determine what actions are allowable. D. firms seek​ profits, which are​ payoffs, that are the result of firm interaction. E. all of the above.

all of the above: interactions among​ firms, which are​ players, are crucial in determining outcomes, firms employ strategies to attain their objectives, firms are governed by rules that determine what actions are allowable, firms seek​ profits, which are​ payoffs, that are the result of firm interaction.

Economies of Scale Help Determine the Extent of Competition in an Industry

an industry will be competitive is the minimum point on the typical firms long-run average cost curve (LRAC1) occurs at a level of output that is a small fraction of total industry sales such as Q1 (perfect or monopolistic competition) The industry will be an oligopoly if the minimum point of the typical firms long-run average cost curve (LRAC2) comes at a level of output that is a large fraction of industry sales such as Q2.

Deterring Entry

any action taken by an existing business in a particular market that discourages potential entrants from entering into competition in that market Actions aimed at deterring entry include: A. setting lower prices to keep profits at a level that makes entry less attractive. B. introducing new products to fill market niches. C. advertising to create product loyalty.

Give an example of a​ government-imposed barrier to entry. An example of a​ government-imposed barrier to entry is A. a quota on imports. B. a patent. C. economies of scale. D. both a and b. Your answer is correct. E. all of the above. Why would the government be willing to erect barriers to entering an​ industry? The government would be willing to impose barriers to A. encourage firms to carry out research and development of new and better products. B. protect the public from incompetent practitioners. C. protect U.S. firms from international competition. D. both a and b. E. all of the above.

both a and b: a quota on imports, a patent all of the above: encourage firms to carry out research and development of new and better products, protect the public from incompetent practitioners, protect U.S. firms from international competition.

Under​ Armour, Inc., was founded in 1996 by Kevin​ Plank, a​ 23-year old former University of Maryland football player. The company specializes in manufacturing and selling athletic and casual apparel made from synthetic material that repels moisture. The company does not have patents on the fabric it uses or on its manufacturing process. ​Source: Katherine​ Ariline, "Porter's Five​ Forces: Analyzing the​ Competition," Business News Daily​, February​ 18, 2015. Michael​ Porter's five competitive forces​ are: (1) competition from existing​ firms, (2) the threat from potential​ entrants, (3) competition from substitute goods or​ services, (4) the bargaining power of​ buyers, and​ (5) the bargaining power of suppliers. Assume that there are many retail​ buyers, many suppliers in many countries provide the synthetic material for making Under​ Armour's athletic​ apparel, and strong demand is expected to continue for athletic apparel. Given this​ information, which of the choices below best describe the competition Under Armour faces in the athletic and casual apparel​ industry? A. competition from substitute goods or services and the bargaining power of suppliers B. competition from existing firms and the threat from potential entrants Your answer is correct. C. the threat from potential entrants D. competition from existing firms and the bargaining power of buyers E. the threat from potential entrants and the bargaining power of suppliers

competition from existing firms and the threat from potential entrants

List the competitive forces in the five competitive forces model. The five competitive forces are A. competition from existing​ firms, the threat of potential​ entrants, competition from​ substitutes, international competition​, and the bargaining power of suppliers. B. competition from existing​ firms, the threat of potential​ entrants, competition from​ substitutes, the bargaining power of​ buyers, and trade barriers. C. competition from existing​ firms, international competition​, competition from​ substitutes, the bargaining power of​ buyers, and the bargaining power of suppliers. D. competition from existing​ firms, the threat of potential​ entrants, legislation​, the bargaining power of​ buyers, and the bargaining power of suppliers. E. competition from existing​ firms, the threat of potential​ entrants, competition from​ substitutes, the bargaining power of​ buyers, and the bargaining power of suppliers.

competition from existing​ firms, the threat of potential​ entrants, competition from​ substitutes, the bargaining power of​ buyers, and the bargaining power of suppliers.

How are decision trees used to analyze sequential​ games? A decision tree A. is a model identifying five forces that determine the level of competition in an industry. B. contains strategy nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return. C. is a situation in which each firm chooses the best​ strategy, given the strategies chosen by other​ firms, and where no firm can make itself better off by changing its decision at any node. D. contains decision nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return. Your answer is correct. E. is a table that shows the payoff each firm earns from every combination of strategies by the firms.

contains decision nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return.

explicit collusion

cooperation involving direct communication between competing firms about setting prices

World War I began in August 1914 and on the Western Front quickly bogged down into trench warfare. In Belgium and northern​ France, British and French troops were dug into trenches facing German troops a few hundred yards away. The troops continued firing back and forth until a remarkable event​ occurred, which historians have labeled​ "The Christmas​ Truce." On Christmas​ Eve, along several sectors of the​ front, British and German troops stopped firing and eventually came out into the area between the trenches to sing Christmas carols and exchange small gifts. The truce lasted until Christmas night in most areas of the​ front, although it continued until New​ Year's Day in a few areas. Most of the​ troops' commanding officers were unhappy with the truce-they would have preferred the troops to keep fighting through Christmas-and in the future they often used a policy of rotating troops around the front so that the same British and German troops did not face each other for more than relatively brief periods. ​Source: Robert M.​ Sapolsky, "The Spirit of the 1914 Christmas​ Truce," Wall Street Journal​, December​ 19, 2014. According to game​ theory, the Christmas Truce occurred because the troops found a A. cooperative equilibrium where players pursue their own ​self-interest. B. cooperative equilibrium where players work together to increase their mutual payoff. Your answer is correct. C. Nash equilibrium where players pursue their own​ self-interest. D. dominant equilibrium where players cooperate to increase their mutual payoff. The commanding​ officers' strategy was successful in reducing future unauthorized truces because A. the location of the troops was not known. B. it lowered the familiarity of the troops and the likelihood of cooperation. Your answer is correct. C. troops were threatened with expulsion if they stopped fighting. D. officers were in charge of negotiating truces.

cooperative equilibrium where players work together to increase their mutual payoff. it lowered the familiarity of the troops and the likelihood of cooperation.

A game theory analysis of deterring entry concludes that A. deterring entry is always a bad idea. B. it is difficult to predict whether deterring entry is a good or a bad idea. C. deterring entry may be a good or a bad​ idea, depending on the circumstances. Your answer is correct. D. deterring entry is always a good idea. Given the decision tree above for an entry​ game, Wal-Mart will A. be indifferent between building a large store or a small store. B. build a small store. Your answer is correct. C. do whatever it takes to prevent Target from entering. D. build a large store.

deterring entry may be a good or a bad​ idea, depending on the circumstances. build a small store.

Does the strength of each of the five competitive forces remain constant over​ time? Briefly explain. The strength of the five competitive forces A. remains constant over time For​ example, the entry of new firms decreases​ profits, reducing the threat from additional potential entrants. B. remains constant over time. For​ example, existing firms may set lower prices to keep profits low to make entry less​ attractive, reducing the threat from additional potential entrants. C. does not remain constant over time. For​ example, existing firms may introduce slightly differentiated new products to make entry less​ attractive, reducing the threat from additional potential entrants. Your answer is correct. D. remains constant over time. For​ example, competitors rarely introduce new products to fill consumer needs better than current products. E. does not remain constant over time. For​ example, as new firms​ enter, it is easier to implicitly​ collude, increasing competition from existing firms.

does not remain constant over time. For​ example, existing firms may introduce slightly differentiated new products to make entry less​ attractive, reducing the threat from additional potential entrants.

The cost of operating a Web site raises the average cost of a pizza much more for Mom and Pop pizza restaurants than for large chains like​ Dominos, Papa​ John's, or Pizza Hut. The effect on a small pizza​ restaurant's costs of operating a Web site is an example of which barrier to​ entry? A. ownership of a key input B. economies of scale Your answer is correct. C. ​government-imposed barriers D. collusion

economies of scale

Established firms are rarely vulnerable to competitors introducing a new product that fills a consumer need better than their current product does. A. True B. False

false

Which of the following is not one of the competitive forces included in the competitive forces​ model? A. competition from existing firms B. competition from substitute goods or services C. the bargaining power of suppliers D. government taxation

government taxation

From​ 1979-2014, most commercial airline flights out of Dallas Love Field were restricted to destinations only within Texas and its four bordering states. This restriction illustrates which barrier to​ entry? A. ​government-imposed barriers Your answer is correct. B. ownership of a key input C. economies of scale D. collusion

government-imposed barriers

Price leadership is a form of​ ____________ in which one firm in an oligopoly announces a price change and the other firms in the industry match the change. A. implicit collusion Your answer is correct. B. auction strategy C. retaliation strategy D. explicit collusion How does the​ prisoner's dilemma compare to the outcome of a repeated​ game? A. There are no comparisons we can make between the two games. B. In a repeated​ game, firms are more likely to charge a low​ price, even though they would be better off if they charged a high price. C. The equilibrium in both games is identical. D. In a repeated​ game, firms are more likely to charge a high price and receive high profits.

implicit collusion In a repeated​ game, firms are more likely to charge a high price and receive high profits.

What effect might the government have on​ oligopolies? In​ oligopolies, the government might A. impose barriers to entry with occupational licensing, where a license is required to provide a good or service. Your answer is correct. B. promote competition by allowing large firms to lobby state legislators and members of Congress for favorable laws. C. impose barriers to entry with a​ copyright, which allows only the government to supply a good or service. D. impose barriers to entry with a​ free-trade agreement with another country to promote competition. E. promote competition with a patent, which grants exclusive rights to product a good.

impose barriers to entry with occupational licensing, where a license is required to provide a good or service.

sequential game

in game theory, a game in which the parties make their moves in turn, with one party making the first move, followed by the other party making the next move, and so on

repeated game

in game theory, a game that is played again sometime after the previous game ends Many business situations are repeated games. Because they are repeated games, firms may end up implicitly colluding to keep prices high

The North Carolina State Board of Dental Examiners had been requiring that only licensed dentists be allowed to sell​ teeth-whitening services. The board brought legal action against hair salons and spas that also offered these services arguing that only licensed dentists had the training to ensure that consumers​ weren't injured in the​ teeth-whitening process. In​ 2015, the U.S. Supreme Court ruled that a federal government agency had the authority to stop the board from preventing​ non-dentists from offering​ teeth-whitening services. According to a news​ report, the federal agency argued that​ "the dental board was motivated by financial​ self-interest, not health​ concerns." ​Source: Brent​ Kendall, "Supreme Court Affirms FTC Antitrust Authority Over Licensing​ Boards," Wall Street Journal​, February​ 25, 2015. Because of the Supreme Court​ decision, you can expect the quantity of​ teeth-whitening services in North Carolina to A. decrease and the price to rise. B. increase and the price to rise. C. increase and the price to fall. Your answer is correct. D. decrease and the price to fall. The​ well-being of consumers of​ teeth-whitening services in North Carolina A. will decrease because the service they receive from​ non-dentists will be less thorough compared to what they receive from dentists. B. will increase because prices fall and consumer surplus rises. C. may increase as a result of larger consumer​ surplus, but may decrease if there is injury as a result of​ non-dentists offering the services. Your answer is correct. D. cannot be determined because we​ don't know their preferences.

increase and the price to fall. may increase as a result of larger consumer​ surplus, but may decrease if there is injury as a result of​ non-dentists offering the services.

The North Carolina State Board of Dental Examiners had been requiring that only licensed dentists be allowed to sell​ teeth-whitening services. The board brought legal action against hair salons and spas that also offered these services arguing that only licensed dentists had the training to ensure that consumers​ weren't injured in the​ teeth-whitening process. In​ 2015, the U.S. Supreme Court ruled that a federal government agency had the authority to stop the board from preventing​ non-dentists from offering​ teeth-whitening services. According to a news​ report, the federal agency argued that​ "the dental board was motivated by financial​ self-interest, not health​ concerns." ​Source: Brent​ Kendall, "Supreme Court Affirms FTC Antitrust Authority Over Licensing​ Boards," Wall Street Journal​, February​ 25, 2015. Because of the Supreme Court​ decision, you can expect the quantity of​ teeth-whitening services in North Carolina to A. increase and the price to fall. Your answer is correct. B. increase and the price to rise. C. decrease and the price to rise. D. decrease and the price to fall. The​ well-being of consumers of​ teeth-whitening services in North Carolina A. may increase as a result of larger consumer​ surplus, but may decrease if there is injury as a result of​ non-dentists offering the services. Your answer is correct. B. will decrease because the service they receive from​ non-dentists will be less thorough compared to what they receive from dentists. C. cannot be determined because we​ don't know their preferences. D. will increase because prices fall and consumer surplus rises.

increase and the price to fall. may increase as a result of larger consumer​ surplus, but may decrease if there is injury as a result of​ non-dentists offering the services.

What​ "forces" does the five competitive forces model​ address? The competitive forces in the five competitive forces model does not include A. inefficiencies from market failure. Your answer is correct. B. the bargaining power of buyers. C. competition from existing firms. D. both a and b. E. none of the above.

inefficiencies from market failure.

What is the difference between explicit collusion and implicit​ collusion? Unlike explicit​ collusion, implicit collusion A. is where firms signal to each other without actually meeting and agreeing to charge the same price. Your answer is correct. B. is where firms meet to discuss charging the same price without actually reaching an agreement. C. is where firms meet and agree to charge the same price without appointing a price leader. D. is where firms meet and agree to not compete without employing retaliation strategies. E. is illegal. Give an example of each. An example of explicit collusion is A. price​ leadership, and an example of implicit collusion is firms advertising that they will match the lowest price offered by any competitor. B. firms advertising that they will match the lowest price offered by any​ competitor, and an example of implicit collusion is price leadership. C. price​ leadership, and an example of implicit collusion is firms forming a cartel. D. where firms meet and agree to charge the same price​, and an example of implicit collusion is price leadership. Your answer is correct. E. where firms meet and agree to not compete​, and an example of implicit collusion is firms forming a cartel.

is where firms signal to each other without actually meeting and agreeing to charge the same price. where firms meet and agree to charge the same price​, and an example of implicit collusion is price leadership.

For several​ years, a professor at Johns Hopkins University had been using the following grading scheme for his final​ exam: He would give an A to the student with the highest score. The grades of the remaining students were then based on what percentage their scores were of the top​ student's score. In the fall of​ 2012, the students in the class came up with the idea of boycotting the final exam. They stood in the hallway outside the classroom but did not enter the room to take the exam. After waiting for a​ time, the professor cancelled the exam​ and, applying his grading​ scale, gave everyone in the class an A on the exam. An article in the New York Times about this incident​ observes: "This is an amazing game theory​ outcome, and not one that economists would likely​ predict." ​Source: Catherine​ Rampell, "Gaming the​ System," New York Times​, February​ 14, 2013. Game theory indicates the​ students' strategy was unlikely to work because A. it is a violation of university policy to refuse to take an exam. B. it is difficult to get a group of people to agree and not defect. Your answer is correct. C. game theory predicts that there must be winners and losers. D. game theory is predicated on Nash equilibriums.

it is difficult to get a group of people to agree and not defect.

A newspaper article referred to problems OPEC was having in affecting the world price of oil. The article noted that a key problem was​ OPEC's "inability to enforce internal production​ targets." An executive at an oil company was quoted as​ saying: "Those​ [OPEC countries] crying about too much oil on the​ market, they could cut it off if they wanted​ to." ​Source: James​ Herron, "OPEC Hamstrung by Events Beyond Its​ Control," Wall Street Journal​, June​ 17, 2012. OPEC tries to affect the world price of oil by A. limiting the supply of oil. Your answer is correct. B. fomenting sectarian wars in the Middle East. C. limiting the demand for oil. D. negotiating price agreements with countries that purchase oil. OPEC uses ​ "internal production​ targets" to A. ensure OPEC members have the same cost. B. provide good management information. C. ensure OPEC members have the same quality of oil. D. set the supply quantity associated with the desired price. Your answer is correct. The quote by the oil executive means that members of OPEC could A. negotiate with Saudi​ Arabia, Iraq, and Iran to lower production. B. agree to higher prices which would cause consumption to fall. C. agree to lower their targeted production levels to increase price. Your answer is correct. D. find new sources of oil such as through fracking shale deposits. An individual country might not agree to lower oil output to increase prices because A. it would be afraid to anger oil producing nations. B. it does not understand the economics of oil. C. it would be afraid to anger oil consuming nations. D. it would lose near term revenue and market share to another producer.

limiting the supply of oil. set the supply quantity associated with the desired price. agree to lower their targeted production levels to increase price. . it would lose near term revenue and market share to another producer.

Anheuser-Busch InBev is the​ foreign-owned company that producers​ Budweiser, which has a large market share in the U.S. beer industry. According to an article in the New York Times​: ​"Anheuser-Busch (InBev) signals to its competitors that if they lower​ prices, it will start a vicious retail​ war." ​Source: Adam​ Davidson, "Are We in Danger of a Beer​ Monopoly?" New York Times​, February​ 26, 2013. When the article refers to a​ "retail war," it means​ Anheuser-Busch will A. reduce output to raise prices. B. lower prices to increase profits. C. lower prices to gain market share. Your answer is correct. D. reduce output to lower prices. ​Anheuser-Busch would threaten to start a retail war in order to A. enforce pricing discipline among sellers. Your answer is correct. B. make sure competitors raise prices. C. make sure competitors lower prices. D. encourage new firms to enter.

lower prices to gain market share. enforce pricing discipline among sellers.

​Anheuser-Busch InBev is the​ foreign-owned company that producers​ Budweiser, which has a large market share in the U.S. beer industry. According to an article in the New York Times​: ​"Anheuser-Busch (InBev) signals to its competitors that if they lower​ prices, it will start a vicious retail​ war." ​Source: Adam​ Davidson, "Are We in Danger of a Beer​ Monopoly?" New York Times​, February​ 26, 2013. When the article refers to a​ "retail war," it means​ Anheuser-Busch will A. reduce output to raise prices. B. reduce output to lower prices. C. lower prices to increase profits. D. lower prices to gain market share. Your answer is correct. ​Anheuser-Busch would threaten to start a retail war in order to A. encourage new firms to enter. B. make sure competitors lower prices. C. enforce pricing discipline among sellers. Your answer is correct. D. make sure competitors raise prices.

lower prices to gain market share. enforce pricing discipline among sellers.

In the preface to the 2004 reprint of In Search of Excellence​, Thomas Peters and Robert Waterman​ wrote: "Our main detractors point to the decline of some of the companies we featured. They miss the point. . . .We​ weren't writing Forever Excellent​, just as it would be absurd to expect any great athlete not to​ age." ​Source: Thomas Peters and Robert​ H.Waterman, Jr.,​ "Authors' Note: Excellence​ 2003," in In Search of​ Excellence: Lessons from​ America's Best-Run Companies​, New​ York: Collins, 2004​ (original edition ​1982). The authors make an analogy between great firms and great athletes. We can expect​ firms, like​ athletes, to become less successful as they age because A. as firms age they find it more difficult to keep costs under control. B. product demand often falls when a product loses its​ "fad appeal." C. many successful strategies can be copied or improved on by competitors. Your answer is correct. D. a business firm becomes less efficient over time.

many successful strategies can be copied or improved on by competitors.

In his review of a​ book, business writer Nick Schultz cited the following passage that refers to the market for​ high-speed Internet​ access: "There are two enormous monopoly submarkets—one for wireless and one for wired transmission. Both are dominated by two or three large​ companies." ​Source: Nick​ Schultz, "The Joys of​ Oligopoly," Wall Street Journal​, January​ 10, 2013. Schultz commented on this passage​ that, "The claim is by definition​ nonsense," because A. monopoly​ is, by​ defnition, a market with one firm. Your answer is correct. B. wireless and wired transmissions are not separate markets. C. these markets have more than two or three large companies. D. the monopoly submarkets are not huge.

monopoly​ is, by​ defnition, a market with one firm.

What do barriers to entry have to do with the extent of​ competition, or lack​ thereof, in an​ industry? Without barriers to​ entry, A. new firms will enter industries where firms are earning accounting profits. B. existing firms will experience price leadership. C. existing firms will agree to form a cartel and collude. D. new firms will enter industries where firms are earning economic profits. Your answer is correct. E. new firms will enter industries exhibiting economies of scale. What are the most important barriers to​ entry? The most important barriers to entry are A. economies of​ scale, lack of quotas​, and ownership of a key input. B. ownership of a key​ input, lack of tariffs​, and economies of scale. C. economies of​ scale, ownership of a key​ input, and government imposed barriers. Your answer is correct. D. economies of​ scale, lack of network​ externalities, and patents. E. ownership of a key​ input, occupational licensing​, and diseconomies of scale.

new firms will enter industries where firms are earning economic profits. economies of​ scale, ownership of a key​ input, and government imposed barriers.

Suppose there are four dominant manufacturers of toilet tissue. The largest of these manufacturers announces that it will raise its prices by 15 percent due to higher paper costs. Within three​ days, the other three dominant toilet tissue manufacturers announce similar price hikes. The decision among the four companies to raise prices would A. be evidence of explicit collusion since they all acted similarly. B. be evidence of explicit collusion because they are all large companies. C. not be explicit collusion unless there was clear evidence of an agreement among the manufacturers. Your answer is correct. D. not be explicit collusion unless there was a written agreement among the manufacturers.

not be explicit collusion unless there was clear evidence of an agreement among the manufacturers.

An article in the Wall Street Journal noted that Google was planning on entering the market to provide wireless data services. According to the​ article, "Google has said it​ isn't looking to supplant the big​ carriers, and​ Verizon's and​ AT&T's enormous scale means they​ can't easily be​ dislodged." ​Source: Drew​ Fitzgerald, "Google Wants to Make Wireless Airwaves Less​ Exclusive, Cheaper," Wall Street Journal​, March​ 3, 2015. When Google says that it was not trying to​ "supplant" the big wireless​ carriers, it means that it was A. expecting to collaborate with a wireless company. B. looking for an opportunity to merge with a wireless company. C. not trying to locate where these companies are located. D. not trying to offer the same products or services. Your answer is correct. The scale of Verizon and​ AT&T's operations make it difficult for​ Google, or another​ entrant, to supplant them because A. the markets are so volatile and difficult to predict. B. to enter the market at such a large size could be financially prohibitive and it would be difficult to gain market share. Your answer is correct. C. firms the size of Google cannot compete with firms in other markets. D. regulations prevent new entrants from gaining any market share.

not trying to offer the same products or services. to enter the market at such a large size could be financially prohibitive and it would be difficult to gain market share.

Economist Michael Porter argues that factors other than the number of firms affect industry competition and profits. What is an example of a factor that would limit​ profits? According to​ Porter's model, industry profits will be reduced if A. inputs are not specialized. B. buyers have less bargaining power. C. fewer close substitutes are available. D. other firms provide longer warranties. Your answer is correct. E. barriers prevent new firms from entering.

other firms provide longer warranties.

What are examples of government barriers to entry?

patents, licensing (occupational licensing, etc.), barriers to international trade (quotes, tariffs, etc.)

How is the​ prisoner's dilemma result changed in a repeated​ game? In a repeated​ game, A. players experience reduced losses from noncooperation. B. players can explicitly collude. C. players can employ retaliation strategies. Your answer is correct. D. players can implicitly collude. E. players can appoint a​ first-mover.

players can employ retaliation strategies.

in an oligopoly, barriers to entry...

prevent -or at least slow down- entry, which allows firms to earn an economic profit over a longer period than they would with monopolistic competition. All firms would like to charge a price well above average cost, but earning an economic attracts new firms to enter an industry. Eventually, the increased competition forces price (P) down to average total cost (ATC), and firms just break even.

Bargaining

seeking an agreement to a conflict through direct negotiation between parties

In​ 2014, Walmart decided that it would begin a new policy in which its stores would match prices being charged by large Web retailers such as Amazon. For​ example, if it was selling a 4K television for​ $899 and Amazon was selling it for​ $799, Walmart would match​ Amazon's price. An economist comments that this new policy was more likely to end up raising the prices Walmart and Amazon charged than lowering them. ​Source: Shelly​ Banjo, "Wal-Mart Weighs Matching Online​ Prices," Wall Street Journal​, October​ 30, 2014. The​ economist's reasoning is based on the concept of A. competitive advertising. B. signaling intent which is a form of implicit collusion. Your answer is correct. C. signaling intent which is a form of explicit collusion. D. monopolistic competition.

signaling intent which is a form of implicit collusion.

A Nash equilibrium in which no player can make himself better off by changing his decision at any decision node is called a A. ​prisoner's dilemma B. noncooperative equilibrium. C. ​subgame-perfect equilibrium. Your answer is correct. D. dominant strategy.

subgame-perfect equilibrium.

What are patents?

the exclusive right to a product for a period of 20 years from the date the patent application is filed with the government

concentration ratio

the percentage of the market's total output supplied by its four largest firms

diseconomies of scale

the situation in which a firm's long-run average costs rise as the firm increases output

Bargaining power of buyers

the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other Some retailers have significant buying power over their suppliers (i.e. walmart) even though they're a supplier themselves Buyers can insist on lower prices, higher-quality products, or additional services which can lower the price of goods/ services and limit the profitability of suppliers

Move studios split ticket revenues with the owners of the movie theaters that show their films. An article in the Wall Street Journal in 2015 discussed how the Disney studio was attempting to negotiate a larger share of the ticket revenue because it had a string of movies about to open that appeared likely to be very​ successful, including Avengers​: Age of Ultron and Star ​Wars: The Force Awakens. ​Source: Erich Schwartzel and Ben​ Fritz, "Disney, Theater Operators Battle Over New​ 'Avengers,'" Wall Street Journal​, May​ 4, 2015. ​Typically, would you expect that the profits of movie studios are more at risk from the bargaining power of​ theaters, or are the profits of theaters more at risk from the bargaining power of movie​ studios? The profits of A. neither group is at risk because they are in different segments of the​ market, making bargaining power unimportant. B. both groups are equally at risk because movies are sometimes successful and sometimes​ unsuccessful, causing bargaining power to shift from one group to the other. C. theaters are more at risk because there are more of​ them, making it is more difficult for them to collude and exercise bargaining power. Your answer is correct. D. movie studios are more at risk because their movies are usually​ uninspired, making it difficult for them to exercise bargaining power.

theaters are more at risk because there are more of​ them, making it is more difficult for them to collude and exercise bargaining power.

If automobile companies have significant bargaining power when buying​ tires, you would expect that A. tire prices will be low. Your answer is correct. B. tire prices will be high. C. tire suppliers also have significant bargaining power. D. the profitability of tire manufacturers is unlimited.

tire prices will be low.

What is an​ oligopoly? An oligopoly is a market structure A. where many sellers compete by selling an identical product. B. where only one firm supplies the entire market. C. where a small number of interdependent firms compete. Your answer is correct. D. where many sellers compete by selling differentiated products. E. where only one firm buys an input in a factor market. Three examples of oligopolies in the United States are industries that produce or sell A. wheat​, pharmaceutical​ drugs, and beer. B. computers​, athletic​ footware, and cigarettes. Your answer is correct. C. restaurant food​, college​ textbooks, and breakfast cereal. D. tap water​, dog and cat​ food, and pharmaceutical drugs. E. clothing​, ​toys, and aircraft.

where a small number of interdependent firms compete. computers​, athletic​ footware, and cigarettes.

What is a sequential​ game? A sequential game is a game A. without a​ subgame-perfect equilibrium. B. where all firms act simultaneously. C. with a cooperative equilibrium. D. without entry of new firms. E. where one firm acts first and then the other firms respond.

where one firm acts first and then the other firms respond.

​[Related to Solved Problem​ #2] UPS and FedEx both struggle to deliver the surge of packages they receive during the​ end-of-year holiday season. According to an article in the Wall Street Journal​, in​ 2014, both firms considered charging firms such as Amazon rates that would be 10 percent higher for packages delivered during the week before Christmas. Such higher rates would likely have increased the profits of both firms. In​ fact, though, neither company raised rates during the holiday season of 2014. Use the payoff matrix to the right to answer the following questions and shed light on why the firms may have chosen not to raise rates. ​Sources: Laura Stevens and Ben Fox​ Rubin, "UPS Cuts Earnings​ View, Citing Holiday​ Challenges," Wall Street Journal​, January​ 17, 2014; and Laura​ Stevens, "UPS, FedEx Got Back On Time This​ Holiday," Wall Street Journal​, December​ 29, 2014. Does UPS have a dominantLOADING... ​strategy? A. ​No, there is no dominant strategy for UPS. B. ​Yes, the dominant strategy for UPS is not to raise rates. Your answer is correct. C. ​Yes, the dominant strategy for UPS is to raise rates. Does FedEx have a dominantLOADING... ​strategy? A. ​Yes, the dominant strategy for FedEx is not to raise rates. Your answer is correct. B. ​Yes, the dominant strategy for FedEx is to raise rates. C. ​No, there is no dominant strategy for FedEx.

​Yes, the dominant strategy for UPS is not to raise rates. Yes, the dominant strategy for FedEx is not to raise rates.

If an input is specialized and only a few firms can provide​ it, the profits of the firms that supply that input will be​ ______, and the firms will have​ ______ bargaining power with buyers. A. ​low; more B. ​high; more Your answer is correct. C. ​high; less D. ​low; less

​high; more

A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off is called a A. noncooperative equilibrium. B. dominant strategy. C. ​prisoner's dilemma. Your answer is correct. D. cooperative equilibrium.

​prisoner's dilemma.