Econ 201 CHAPTER 12

1. The four-firm concentration ratio measures the: a. percentage of market output produced by the four largest firms. b. the elasticity of demand of the four largest firms in an industry. c. the average cost of the four largest firms in an industry. d. number of firms in an industry.

A

3. Which one of the following is the best example of an oligopolisticindustry? a. automobiles b. wheat growers c. apple growers d. public utilities

A

6. In general, the quantity of output in a monopoly market is: a. lower than an oligopoly. b. higher than an oligopoly. c. the same as an oligopoly. d. the answer depends on the shape of the average cost curve.

A

8. Which of the following statements is false? a. Cartels and price fixing are both legal under U.S. antitrust laws. b. Firms in a cartel often charge the same price for a particular goodor service. c. If two firms form a cartel, they could charge the same price as amonopolist. d. A cartel could be made up of as few as two firms.

A

Three features to an oligopoly

A few firms, entry blocked (e.g., economies of scale, gov barrier to entry, and/or advertising) and strategic behavior of firms (unlike monopolistic competition)

Game tree

A graphical representation of the concequences of different actions in a strategic setting

Cartel

A group of firms that act in unison, coordinating their price and quantity decisions

Oligopoly

A market served by a few firms

Contestable market

A market with low entry and exit cost

Duopoly

A market with two firms

Payoff matrix

A matrix or table that shows, for each possible outcome of a game, the consequences for each player

Low price guarantee

A promise to match a lower price of a competitor

Duopolist's dilemma

A situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price

Grim-trigger strategy

A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit

Tit-for-tat strategy

A strategy where one firm chooses whatever price the other firm chose in the preceding period

Price leadership

A system under which one firm in an oligopoly takes the lead in setting prices

Dominant strategy

An action that is the best choice for a player, no matter what the other player does.

Price fixing

An arrangement in which firms conspire to fix prices

Nash equilibrium

An outcome of a game in which each player is doing the best he or she can, given the action of the other player

17. If a firm perceived that the other firm in an implicit pricing agreementdropped its price in an attempt to gain market share, then its mostlikely response would be to: a. merge with the other firm. b. engage in a price war. c. raise price to punish the other firm. d. keep its price the same.

B

21. If there is the legitimate threat of entry into a market, then themarket is said to be: a. perfectly competitive. b. contestable. c. secure. d. reactive.

B

4. Which one of the following would not be true of an oligopolistic marketstructure? a. a few firms serve the market. b. each firm is a price-taker. c. economies of scale in production. d. a firm may carry out a big advertising campaign.

B

7. If the price in an oligopoly market is the same as that of a monopolywith identical cost and demand conditions then: a. the average cost curve must be downward sloping. b. there may be collusion between firms. c. market demand must be unit elastic. d. This could never happen.

B

14. The rational outcome of a guaranteed price matching or"meet-the-competition" policy is that: a. both firms will sell at the low price. b. one firm will sell at a low price and the competitor will sell at ahigh price. c. both firms will sell at the high price. d. consumers will be better off.

C

16. If two firms use a tit-for-tat scheme to maintain cartel pricing and onefirm chooses a low price in the current time period then: a. that firm will also choose a low price in the next time period. b. that firm will also choose a high price in the next time period. c. the other firm will choose a low price in the next time period. d. the other firm will choose a high price in the next time period.

C

18. In a kinked demand model, that part of the demand curve below the kinkis: a. unitary inelastic. b. more elastic than the region above the kink. c. more inelastic than the region above the kink. d. just as elastic as the part above the kink.

C

Oligopolistic firms may _______________ instead of ____________, e.g., form a cartel to coordinate pricing decisions like price fixing

Cooperate, compete

13. A firm announces that it will refund the difference between its priceand any price of a competitor that is lower. This is an example of: a. predatory pricing. b. tying contracting. c. marginal cost pricing. d. guaranteed price matching.

D

2. Oligopoly differs from monopoly and perfect competition in that: a. firms consider each others actions when choosing price and quantity. b. there a few firms in the industry. c. firms act strategically. d. All of the above.

D

5. In general, firms in a cartel: a. agree to set price equal to marginal cost. b. do not consider the actions of the other firms in the cartel whenmaking output decisions. c. produce levels of output exceeding the monopoly output level. d. agree to charge the price the monopolist would charge.

D

5. What makes a grim trigger strategy "grim" is: a. If one player overprices, then the other overprices to the point ofzero quantity demanded. b. If one player underprices, then the other player notifies the FederalTrade Commission. c. If one player underprices, then the other player is driven out of themarket. d. If one player underprices, then the other player drops the price sofar that profits for both firms are zero forever.

D

Game trees, dominant strategies, the Duopolists' Dilemma, and Prisoners' Dilemma are all....

Situation where both firms would be better off if both choose the high price but instead choose the low price

Concentration ratios

The percentage of the market output produced by the largest firms

Limit price

The price that is just low enough to prevent entry

Limit pricing

The strategy of reducing the price to prevent entry

Game Theory

The study of decision making in strategic situtations

Entry Deterrence:

Use Limit Pricing to deter entry

Avoiding Duopolists' Dilemma -

price matching, price fixing, price leadership, kinked demand curve model, and the advertising dilemma.