Ch. 14: Oligopoly & Strategic Behavior

What does a demand curve look like for an oligopolist?

c) It could be a straight line or a kinked line.

Oligopolies are not desirable because they

c) achieve neither productive efficiency nor allocative efficiency

Entry into monopolistically competitive industries is

c) easy compared to industries in an oligopoly.

Companies often merge to ______ monopoly power.

increase

Suppose an industry has 10 firms and each has a 10% share of the market. This industry's Herfindahl index is _______.

1000

Based on the figure, if one firm cheats on the collusive agreement it can increase its payoff by

$3. Reason: 15 - 12 = 3

Which are reasons that that firms merge?

- To increase control over the product's price - To obtain lower input prices - To increase economies of scale - To increase market share Reason: Mergers reduce the number of firms (competitors) in the market and move it towards oligopoly or monopoly.

Advertising can reduce efficiency by ______.

-providing misleading info -manipulating consumer preferences

Suppose RareAir honors an agreement to price high with Uptown. Based on the figure, if Uptown cheats and prices low instead of high, then Uptown can increase its payout by $______ million.

3 Reason: The question asks, "by how much can Uptown increase its payout". If it would receive $12 million from pricing high and $15 million from pricing low, then it can increase its payout by the difference of $3 million.

Based on the payoff matrix, collusion between Chicpo and Dramco would result in policies represented by cell .

Blank 1: D

Oligopolistic firms do which of the following when they change their pricing strategies?

Affect profits and influence the profits of rival firms

What is the Nash equilibrium?

An outcome in the payoff matrix from which neither firm wants to deviate since the current strategy is optimal given the rival's strategic choice.

Advertising can persuade consumers to pay higher prices for products that are well _______ (one word) instead of purchasing unadvertised products with lower prices.

Blank 1: advertised, advertise, advertized, advertize, marketed, or acclaimed

Oligopolists can often benefit from __ , which means cooperation with rivals.

Blank 1: collusion or colluding

The study of how people behave in strategic situations is called _______ theory.

Blank 1: game

Collusion becomes more difficult as the number of firms _______.

Blank 1: increases, rises, goes up, or grows

Without collusion, if a firm incorrectly assumes that its rivals will charge the same price but its rivals actually charge a lower price, the firm's demand curve will shift to the .

Blank 1: left, inward, in, or inside

Demand and cost differences, the number of firms in the industry, and the potential for cheating all represent _____ (one word) to collusion.

Blank 1: obstacles, obstacle, barriers, barrier, impediments, challenge, or challenges

A market is considered to be a(n) ______ when the largest four firms in an industry control more than 40% or more of the market.

Blank 1: oligopoly

Gentleman's agreements are a type of covert collusion, occurring in social settings where a product's ________ is agreed upon and market shares are determined by __________ competition. (Enter one word for each blank.)

Blank 1: price or prices Blank 2: nonprice or non-price

The greater the difference in demand and costs between firms, the more difficult it is for firms to agree on _________.

Blank 1: price, prices, or pricing

A game that is played more than once between rivals is a ________ (Enter one word) game.

Blank 1: repeated or repeat

In a(n) ____________ game one firm moves first, committing to a strategy and then the rival firm responds.

Blank 1: sequential, prisoners dilemma, or repeated

How can oligopolistic firms influence their profits and the profits of their rivals?

By changing pricing strategies

What is it called when a group of producers creates a formal written agreement stating the level of output by each firm and the prices that must be charged?

Cartel

_________ means illegal cooperation with rivals.

Collusion

True or false: Firms in an oligopoly always produce a homogeneous product.

False Reason: An oligopoly may be either a homogeneous oligopoly or a differentiated oligopoly, depending on whether the firms that comprise the oligopoly produce standardized or varied products.

Which of the following is not a characteristic of oligopoly?

Firms have no control over their price.

What is it called when firms reach a verbal or tacit agreement with rivals about price in a social setting like the golf course?

Gentleman's agreements

What does a demand curve look like for an oligopolistic firm?

It could be downward sloping or kinked.

What are the positive effects of large oligopolists advertising?

It lowers search costs of information for consumers. It enhances competition and reduces monopoly power.

What are three models used to study pricing and output by oligopolies? Select all that apply

Kinked-demand curve model Price leadership model Collusive pricing model

__________ __________ is a market characterized by having many sellers, differentiated products, and with ease of entry and exit from an industry.

Monopolistic competition

What is the only stable outcome in a payoff matrix?

Nash equilibrium

If the firms, Chipco and Dramco, represented by the payoff matrix decided to collude to reach a common strategy, which strategy would they jointly pursue?

National strategies, cell D

Which are barriers to entry in both monopolies and oligopolies? Select all that apply

Ownership and control of raw materials Patents Preemptive pricing Large capital investment

What are oligopolists able to do by controlling price through collusion?

Prohibit the entry of new rivals Reduce uncertainty Increase profits

In what kind of game does one firm move first and commit to a specific strategy and then the rival responds?

Sequential game

If a firm assumes that its rivals will match all price changes, but the firm's rivals actually charge a lower price what are the potential consequences?

The firm's demand curve will shift further to the left. The firm's profits will be lower. The firm is failing to produce at the profit-maximizing output.

Which of the following is a model used to examine oligopolistic pricing?

The kinked-demand curve model

Why is collusion desirable to oligopolistic firms?

The possibility of price wars diminishes and profits are maximized.

From society's standpoint, what are the effects of collusion in an oligopolistic industry?

The same as a monopoly

Which statement is true about oligopolies?

They do not achieve allocative efficiency because their price exceeds marginal cost.

Which statement is true about oligopolies?

They may produce homogeneous or differentiated products.

True or false: A cartel abides by a formally written agreement that specifies the output and price of each member firm and is a form of overt collusion.

True Reason: Since member firms are working together to divide the market the cartel is a form of collusion that occurs out in the open with a written agreement.

Oligopolies are comprised of ______.

a few large producers

The benefits to oligopolists from collusion are:

a) It reduces price uncertainty c) It increases profits d) It possibly prohibits the entry of new rivals

Which of the following are typical characteristics of monopolistic competition?

a) Small market share b) Independent e) No collusion

Which of the following helps differentiate one product from another product?

a) Varying degrees of customer service. c) Different physical characteristics. d) More or less convenient locations.

Entry of new firms into monopolistically competitive industries is relatively easy because

a) capital requirements are low

When plant and equipment are underused because firms are producing less than minimum-ATC output, this is known as having _________ _________ .

a) productive inefficiency c) excess capacity

Three models used to study pricing and output by oligopolies are

a) the kinked-demand curve model d) price leadership model e) collusive pricing model

Oligopolistic behavior implies that oligopolists prefer competition

a) through product development b) through advertising

Firms in oligopolistic industries are "price makers" because

are few in number Reason: While it is true that strategic behavior and mutual interdependence characterize oligopolies, this is not the reason why they are price makers. Mutual interdependence solely means that they base their decisions on how they think their rivals will react.

In a non-collusive oligopolistic industry, prices are generally stable for the following?

b) Cost reasons d) Demand reasons

Which of the following are shortcoming of the kinked-demand analysis of oligopoly?

b) During macroeconomic instability, oligopoly prices are not as rigid as the kinked-demand theory implies e) The kinked-demand curve explains price inflexibility

Multiple models are used to study oligopolies because oligopolies

b) cannot estimate both their demand marginal revenue curves due to rivals' reactions. c) encompass a greater range and diversity of market situations.

Barriers to entry exist for monopolies as well as oligopolies in the form of all the following, except:

b) diseconomies of scale.

In order to achieve greater _________ and market share, firms in the same industry may consider the merger of two or more companies.

b) economies of scale

A monopolistically competitive firm's demand curve is

b) highly but not perfectly elastic

Advertising may decrease economic efficiency if it:

b) increases monopoly power.

Price leaders make price adjustments

b) infrequently, due to the uncertainty in rivals' response to these price changes. c) by communicating impending price adjustments to the industry. e) by establishing a price that discourages new entrants into the industry.

Two types of market models that closely approximate many markets in the real world are

b) monopolistic competition and oligopoly

Advertising can reduce efficiency by

b) providing misleading information e) manipulating consumer preferences

The Herfindahl index equals:

b) the sum of the squared percentage market shares of all firms in an industry

What are the negative effects if large oligopolists do not advertise?

c) Customers might purchase less efficient products that cost more. d) Consumers would be unaware of important new products.

Which of the following is a measure of industry concentration that equals the sum of the squared percentage market shares of all firms in the industry?

c) Herfindahl Index

When Mary tried to get an appointment with a local dentist she was told that the earliest the doctor could see her was in three weeks. This may have been due to a lack of ________.

c) excess capacity

Oligopolies have:

c) fewer firms than monopolistic competition

Productive efficiency in monopolistically competitive markets does not occur in the long run because firms set the price

c) on the demand curve where MR=MC to maximize economic profit, making output less than optimal from society's perspective.

If a monopolistically competitive firm is producing where its marginal revenue is less than its marginal cost, then the firm

c) should produce less output to increase profits or reduce losses

Firms in monopolistic competition produce goods with:

c) slightly varying physical characteristics d) varying degrees of customer service

A firm in an oligopolistic market ______.

can set its price and output to maximize profits Reason: An oligopoly is a price maker and can set its output and price levels to maximize its profit, the latter which is greater than the lowest ATC. However, it must consider how its rivals will react to any change in its price, output or any other non-price strategy. As a price maker, it can raise or lower its prices as it sees fit.

When firms is an oligopoly ________, their payoffs will be greater than if they did not.

collude

What term means "cooperation with rivals?"

collusion

When members of an oligopoly meet to set prices to maximize profits it demonstrates the ______ and/or the ______ model.

collusion; cartel Reason: It is reasonable to assume that the kinked-demand curve reflects a noncollusive oligopolist's market, not one that meets to set or illegally set prices. Under the price leadership model, one firm takes the lead and others follow. There is no meeting to set or fix (collude) prices.

Advertising benefits society by ______.

conveying information to consumers. Reason: Monopolies do not benefit society and are hardly the result of advertising. Advertising provides consumers with information on product characteristics and prices.

Compared to the outcomes with collusion in the figure provided, if one firm cheats it can increase its payoff by

d) $3

Which of the following best exemplifies a firm with excess capacity?

d) A fast-food restaurant where customers never have to wait to place an order.

Compared to monopolies, oligopolies

d) give the appearance of increased competition

During macroeconomic instability, the lack of determination of price and price rigidity is best described by:

d) the shortcomings of the kinked-demand curve of oligopolistic firms

The shape of the demand curve for an oligopolistic firm ______.

depends on the actions of rivals to price changes

Which of the following is not an example of how products can differ in terms of service?

e) Some stores may charge different prices.

Firms in an oligopoly may produce

e) either a homogeneous product or a differentiated product.

As a means of conveying information, advertising is a relatively

e) low-cost way to get information to consumers

In the short run, monopolistically competitive firms maximize profits or minimize losses by producing the output level where

e) marginal revenue equals marginal cost

Entry to and exit from monopolistically competitive industries is

e) relative easy

When the ________ is stable, oligopoly prices tend to be stable.

economy

It is reasonable to assume that the demand for a non-colluding oligopolist facing a kinked-demand curve is highly ________ above the going price.

elastic

The study of how one firm reacts to the actions taken by another firm or individual when implementing a strategy is called _____.

game theory

The study of how people behave in strategic situations is called _________ _________.

game theory

For an industry to be considered an oligopoly the four-firm concentration ratio must be ______.

greater than or equal to 40%

When the number of firms in an oligopolistic industry increases from 3 to 10, it is ______ to collude.

harder

Price leadership in an oligopoly entails a type of ______.

implicit collusion

An oligopoly firm's demand curve will be kinked if ______.

its rivals match price decreases but ignore price increases

In the _______ model of oligopoly, firms react to price decreases but ignore price increases by other firms.

kinked-demand

The price at convenience stores for a bottle of soda is almost always higher than at supermarkets owing to the price customers are willing to pay to make their purchase at a more convenient ________.

location

Oligopolies are not a desirable market structure because they achieve ______.

neither productive efficiency nor allocative efficiency

The ability of monopolistically competitive firm to engage in __________ competition makes the market situation more complex because of differentiated product differences and advertising.

nonprice

A(n) ___________ is a market dominated by a few large producers of a homogeneous or differentiated product.

oligopoly

An ________ is present when the largest four firms is an industry control more than 40% or more of the market.

oligopoly

When four or five auto parts stores serve a medium-sized town this can be considered a(n) ________.

oligopoly

Non-________ competition is competition illustrated through product differentiation and advertising.

price

A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as _______ _______.

price leadership

When members of an oligopoly react to price changes by a dominant firm, the ________ ________ model is most applicable.

price leadership

A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as ______.

price leadership Reason: Game theory simply refers to the study of how people behave in strategic situations. This question solicits a type of strategy that specifically circumvents outright collusion.

By controlling ______ through collusion, oligopolists may be able to reduce ______, ______ profits and block the entry of new rivals.

prices; uncertainty; increase Reason: Colluding firms, such as in an oligopoly, control prices through supply. They may individually control their own costs, but not collectively.

By changing their advertising and __________ strategies, firms competing in an oligopoly can affect profits and influence the profits of rivals.

pricing

Oligopolists often compete through product development and advertising instead of price because ______.

product development and advertising are relatively difficult to copy Reason: Whether prices change slowly or not, it is not the reason why oligopolists compete on product development and advertising. Product development and advertising (research and development) is not cheap. Price changes can be quickly and easily matched. Price changes are easy to match. Rivals just match them.

The equality of price and minimum average total cost yields technical _________ efficiency; the equality of price and marginal cost yields _________ efficiency.

productive; allocative

Barriers to entry into an oligopoly most resemble those of a ______.

pure monopoly

When a game between rivals occurs more than once, it is called a ______ game.

repeated

When measuring industry concentration, the four-firm concentration ratio is the percentage ratio of total industry ________ (one word) for the four largest firms in an industry relative to total industry sales.

sales

Suppose the rivals of an oligopolistic firm ignore both a price increase and decrease. If so, then the firm's demand curve will be ______.

straight Reason: The demand curve will look kinked to reflect the fact that rivals will match price decreases but ignore price increases.

Suppose the rivals of an oligopolistic firm match either a price increase or decrease. If this occurs, then the firm's demand curve will look ______.

straight and steep Reason: The demand curve will look kinked to reflect the fact that rivals will match price decreases but ignore price increases.

Oligopolistic behavior implies that oligopolists prefer competition ______. Select all that apply

through advertising through product development

To reduce uncertainty or increase profits, oligopolists may change their prices ______.

through collusion