Chapter 14 Oligopoly and Strategic Behavior

Which of the following apply to oligopoly industries?

strategic behavior, a few large producers

b. Which of the following are products or services of oligopolists that you own or regularly purchase?

Automobiles, personal computers, and gasoline

Consider an oligopoly industry whose firms have identical demand and cost conditions. If the firms decide to collude, then they will want to collectively produce the amount of output that would be produced by:

a pure monopolist.

a. The kinked-demand curve for oligopolists assumes that rivals will

match price cuts, but ignore price increases.

Facepalm, Instarant, and Snaphat are rival firms in an oligopoly industry. If kinked-demand theory applies to these three firms, Facepalm's demand curve will be:

more elastic above the current price than below it.

a. Price collusion might occur in oligopolistic industries because

price competition can lower revenue for all firms

b. Advertising helps consumers and promotes efficiency by

providing information about new products, increasing sales and output, and lowering average total cost.

Consider a "punishment" variation of the two-firm oligopoly situation shown in the figure below. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars are taken from the low-price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will always want to set the high price? (Note: Profit payoffs are shown in millions of dollars.) In order for both firms to always want to set the high price, the fine must be set just over what value?

3 million

Collusive agreements can be established and maintained by:

credible threats.

c. Price leadership is legal in the United States, whereas price-fixing is not. This is because

price leadership is not an agreement, whereas price-fixing is.

In an oligopoly, each firm's share of the total market is typically determined by:

product development and advertising.

b. Assess the economic desirability of collusive pricing.

Collusive pricing is economically desirable from the oligopoly's viewpoint because it results in monopoly profits.

Property developers who build shopping malls like to have them "anchored" with outlets of one or more famous national retail chains, like Target or Nordstrom. Having such "anchors" is obviously good for the mall developers because anchor stores bring a lot of foot traffic that can help generate sales for smaller stores that lack well-known national brands. But what's in it for the national retail chains? Why should they become "anchors"? Choose the best answer from the following list.

The anchor stores may feel there is a first-mover advantage to becoming one of only a few anchor stores at a new mall.

c. Which of the following statements is true?

When advertising either leads to increased monopoly power or is self-canceling, economic inefficiency results.

What is the meaning of the following four-firm concentration ratios? a. A four-firm concentration ratio of 60 percent means the largest four firms in the industry account for _____ percent of sales. b. A four-firm concentration ratio of 90 percent means the largest four firms in the industry account for _____ percent of sales.

a. 60 b. 90

Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of dollars.) a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game? b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to part a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will both firms do in the second game?) c. Given your answers to parts a and b, what strategy will each firm choose in the first game?

a. Low-price strategy b. No c. Low-price strategy

Suppose that​ Firm A and Firm B are independently deciding whether to sell at a low price or a high price. The payoff matrix below shows the profits per year for each company resulting from the two price options. a. Does​ Firm A have a dominant strategy? b. Does​ Firm B have a dominant strategy? c. What are the Nash equilibria in this​ game?

a. No, there is no dominant strategy for Firm A. b. No, there is no dominant strategy for Firm B. c. Both Firm A and Firm B charge a high price. Both Firm A and Firm B charge a low price.

Suppose you are playing a game in which you and one other person each picks a number between 1 and 100, with the person closest to some randomly selected number between 1 and 100 winning the jackpot. (Ask your instructor to fund the jackpot.) Your opponent picks first. a. You expect your opponent to choose the number 50 because You would then pick the number: b. The two numbers are so ______ because c. Home Depot and Lowes, Walgreens and Rite-Aid, McDonald's and Burger King, and other major pairs of rivals locate close to each other in many well-defined geographical markets that are large enough for both firms to be profitable. This is because all of these companies

a. choosing this number lowers the chance of winning below 50-50. 51 b. close; each person maximizes his or her probability of winning. c. NOT sell similar products. try this answer instead: choose a central location to maximize their share of customers.

Identify the definition for each term from the following list. 1. Payoff-matrix format. 2. Game-tree format. 3. A junction on a game tree. 4. One of the final outcomes of a game tree. 5. Divides the overall game tree into nested subgames before working backward from right to left. 6. A mini-game within the overall game. 7. The process of backward induction that relies on both firms having perfect information about the decisions made in each subgame. 8. A statement of coercion that is not believable by the threatened firm. 9. A statement of coercion (a threat!) that is believable by the other firm. 10. Allows a firm to preempt major rivals, or greatly slow their entry into an industry. 11. Both rivals see their current strategy as optimal given the other firm's strategic choice.

a. extensive form: 2 b. first-mover advantage: 10 c. Subgame perfect Nash equilibrium: 7

Refer to the profit payoff matrix, and then answer the following questions. All profit figures are in thousands. a. Using the payoff matrix, X and Y are b. Using the payoff matrix, and assuming no collusion between X and Y, what is the likely pricing outcome? c. Price collusion is mutually profitable because each firm achieves d. Firms might be tempted to cheat on the collusive agreement because each firm could achieve

a. interdependent, because their profits depend not just on their own price but also on the other firm's price. b. Both firms will set price at $35. c. higher profits. d. higher profits.

Match the definition to each term listed below. 1 - A table that shows the payoffs each firm earns from every combination of firm strategies 2 - An agreement among firms to charge the same price or otherwise not to compete 3 - An option that is better than any alternative option regardless of what the other firm does 4 - An outcome of a strategic game from which neither rival wants to deviate 5 - A game outcome in which players seek to increase their mutual payoff 6 - A practice where one firm initiates a price change and the other firms follow the leader 7 - A game in which the firms choose their strategies at the same time 8 - One firm's gain must equal the other firm's loss 9 - A game in which the sum of the two firms' outcomes is positive 10 - Firms select their optimal strategies in a single time period without regard to possible interactions in subsequent time periods 11 - A game that occurs more than once

a. repeated game: 11 b. cooperative equilibrium: 5 c. simultaneous game: 7 d. payoff matrix: 1 e. nash equilibrium: 4

b. There is a gap in the oligopolist's marginal-revenue curve because

the slope of the demand curve changes abruptly.

True or false. Potential rivals may be more likely to collude if they view themselves as playing a repeated game rather than a one-time game.

true

The following strategic form payoff matrix involves two firms and their decisions on high versus low advertising budgets and the effects of each on profits. a. What is the best strategy for Firm A? The best strategy for Firm B? b. What is the equilibrium outcome and payoffs given these strategies? c. Can these two firms do better?

a. High budget; High Budget b. Firm A: $80 Firm B: $80 c. Yes

a. There is so much advertising in monopolistic competition and oligopoly because

brand distinction encourages consumer loyalty, which increases profits.

a. The most common reason that oligopolies exist is

economies of scale.

c. The kinked-demand curve explains price rigidity in oligopoly because

firms expect any change in price will lower revenue and profits.

c. Oligopoly differs from monopolistic competition in that

oligopoly has few firms, whereas monopolistic competition has many firms.