FINAL EXAM
People do not usually behave in a noncooperative fashion even when it is in their immediate interest to do so because
they know they will have repeated dealings with the other people.
One of the fundamental problems a cartel faces is
to determine how much each producer will decrease its output.
Which of the following is LEAST likely to be a reason for firms to form a cartel?
to raise competition among firms in the cartel
Which of the following is likely among the most concentrated industries in the United States?
tobacco products
If a company that drilled for and produced oil acquired a firm which refined oil into gasoline, this would be referred to as a
vertical merger.
Suppose Nabisco merges with both a wheat firm and milling firm. This is an example of a
vertical merger.
A game in which any gains within the group are exactly offset by equal losses by the end of the game is a
zero-sum game.
Suppose a ten firm industry has total sales of $35 million per year. The largest firm have sales of $10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of $2 million. If the rest of the industry has annual sales of $12 million, the second largest firm has sales of
$7 million.
Which of the following statements about concentration ratios is correct?
A high concentration ratio suggests that the industry is characterized by strategic dependence.
Distinguish between a horizontal merger and a vertical merger.
A horizontal merger is a merger between two firms selling a similar product. A vertical merger is a merger between two firms when one firm purchases the output of the other firm as an input.
Why would a member of a cartel cheat?
After setting a common price or production quotas, a member of a cartel can earn more profits individually by "cheating": setting a slightly lower price than the cartel price and producing and selling more output than specified under the cartel agreement.
Firms faced with prisoners' dilemma can always make more profits by engaging in opportunistic behavior. Why is this type of behavior NOT commonly found even in oligopolistic markets?
The prisoners' dilemma describes noncooperative behavior, but in reality most businesses engage in repeat transactions so that cooperation is likely to occur. One cooperative strategy is tit-for-tat behavior.
An association of producers in an industry that agree to set common prices and output quotas to prevent competition is
a cartel.
A network effect exists whenever
a consumerʹs willingness to purchase a particular good or service is influenced by how many others also buy or have bought the item.
In the mobile device industry, an example of a platform firm is
a developer of mobile device operation systems.
A noncooperative game is
a game in which firms will not negotiate in any way.
A cartel behaves like
a monopolist.
In a cartel, firms jointly act as
a monopoly firm.
People's willingness to buy the PC or Mac format of computer software depends on how popular the software format is among other consumers. This is an example of
a network effect.
A realtor in the real estate market is an example of
a platform in a matchmaking market.
The network effect in the TV broadcasting industry results in
a positive market feedback between the number of advertisers and the size of TV audience.
The mutual interdependence of oligopolists ensures that each oligopolist has
a reaction function.
The joining of a firm with another to which it sells an output or from which it buys an input is known as
a vertical merger.
The Herfindahl-Hirschman index is measured by
adding the squares of the market shares of all firms in an industry.
Product differentiation exists in
all market structures except perfect competition.
In the television broadcasting industry, ________ is an end user and ________ is a platform.
an advertiser; a TV service provider
A cartel most likely forms in
an oligopolistic market.
If we observe firms earning zero economic profits in the short run, we know that
any market structure is possible since firms under any market structure can earn zero profits at some time.
Oligopoly is a situation when there
are a few large firms in the industry.
Which of the following is most likely to be sold in an oligopoly market?
cell phone service
The measurement of industry concentration which calculates the percentage of all sales contributed by a specific number of leading firms is called the
concentration ratio.
A tit-for-tat strategy is one in which oligopolies
cooperate as long as other members cooperate, but if anyone cheats, they cut the price until the cheater reverts to cooperation.
Collusion always involves firms engaging in a
cooperative game.
Which of the following would be the best example of an oligopolistic industry?
large aircraft manufacturing
Which of the following is NOT a condition that helps enforce a cartel agreement?
large variation in input prices
All of the following can create an oligopolistic structure EXCEPT
low barriers to entry.
Which of the following is NOT a characteristic of pure monopoly?
many sellers
Which of the following is NOT a common characteristic of oligopoly?
marginal cost pricing.
Using the concentration ratio to measure the degree of competition
may understate the degree of competition because it ignores imported goods.
In which market structures does a firm have at least some ability to set the market price?
monopolistic competition, oligopoly and monopoly
Which of the following has the highest Herfindahl-Hirschman index?
monopoly
The number of firms in an oligopolistic industry
must be small enough that firms are interdependent.
Because all of his friends stopped exclusively wearing black clothes, Doug wears anything but black clothes. This is known as
negative market feedback.
A game in which players as a group lose at the end of the game is referred to as
negative-sum game.
Within a game theory model, if a change in decision-making raises corporation A's profits by $50 and lowers corporation B's profits by $60, the game is a
negative-sum game.
When Goodyear increases its production when Michelin reduces its production, Goodyear is playing a
non-cooperative game.
A game in which the players neither negotiate nor coordinate in any way is a
noncooperative game.
The dominant strategy allows a firm to
obtain the highest benefit, regardless of its rivals' actions.
In game theory, actions such as cheating that focus solely on short-run gains are referred to as
opportunistic behavior.
The industry concentration ratio measures the
percentage of industry sales accounted for by the top four or eight firms.
Unrestricted entry and exit into the market is found in
perfect competition and monopolistic competition.
A market with many sellers, no influence over price, no barriers to entry, a homogeneous product, and an absence of non-price competition is known as
perfect competition.
In the wireless communication industry, firms that provide broadband access to the Internet are best regarded as
platforms in a shared-input market.
A dominant strategy is a
player's best strategy regardless whatever strategies are adopted by his rivals.
An example of a zero-sum game is
poker.
A tendency for a good to come into favor with consumers because other consumers have chosen to buy the item is
positive market feedback.
Jane purchases snickle-dees only because her friends do. This is
positive market feedback.
When network effects are important, then an industry can experience
positive market feedback.
Which of the following is NOT subject to a network effect?
rotating your tires every six months
In a two-sided market with network effects, the platform will most likely
set different prices for the two sides of the market.
Which of the following is NOT a reason why some industries are oligopolies?
strategic independence
The prisoners' dilemma is a game in which
the dominant strategy for all participants is to choose a strategy that makes them all worse off.
Economies of scale means that
the long-run average total cost curve slopes downward over it entire range.
A cartel will break down more easily if
there are many entrants in the industry.
One of the strongest reasons that oligopolies exist is due to
economies of scale.
The most common reason for the existence of oligopolies is
economies of scale.
Oligopolistic industries are characterized by a
few large firms and substantial barriers to entry.
The analytical framework in which two or more firms compete for certain payoffs that depend on the strategy that the others employ is
game theory.
If Target were to merge with Wal-Mart, this would be referred to as a(n)
horizontal merger.
After participating members of a cartel form an agreement on common prices and output quotas, then an individual firm can increase its own profits by
increasing production.
When oligopolistic firms in an industry form a cartel, then it is most likely that
industry output will decrease while prices will increase.
If industry sales are $2,000, and the top four firms have sales of $170, $140, $100, and $80, respectively, what will be the four-firm concentration ratio?
24.5 percent
Suppose a ten firm industry has total sales of $35 million per year. The largest firm have sales of $10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of $2 million. If fifth through tenth largest firms combined have annual sales of $12 million, the four-firm concentration ratio for this industry is
65.7 percent.
Which of the following is LEAST likely to be an outcome of a cartel as compared to the situation before the cartel was formed?
Cartel members make fewer profits.
How does the presence of network effects in a two-sided market affects the pricing behavior in the market?
In a two-sided market, platform firms may set different prices for groups of end users with different network effects. Platform firms are intermediary firms that link together groups of producers and consumers as end users. In a transaction-based market for credit cards, for example, credit card issuers are platforms while retailers and credit card holders are end users. Credit card issuers may find network effects to be greater for retailers than for credit card holders. As such, retailers' willingness to accept credit cards responds to greater customer use more strongly than customers' willingness to use the cards responds to retailers' acceptance. If both retailers and card holders are equally responsive to changes in card fees, then credit card issuers would find it more profitable to charge lower card-usage fees to card holders than to retailers.
What is meant by the concentration of an industry? How is concentration measured? What are likely causes of high concentration?
Industry concentration means that a relatively large share of the industry's output is produced by the largest firms in the industry. It is often measured with concentration ratios. The four-firm concentration ratio is the percentage of total industry sales generated by the four largest firms in the industry. High concentration is likely to be associated with economies of scale, barriers to entry, and a history of mergers.
In general, horizontal mergers will
decrease the number of firms in an industry.
After participating members of a cartel form an agreement on common prices and output quotas, then an individual firm can increase its own profits by
decreasing prices.
All of the following are characteristics of an oligopoly EXCEPT
diseconomies of scale over all ranges of output.
An action that is the best choice under all conditions is known as the
dominant strategy.
Decision makers in oligopolistic firms must devise a strategy. One that yields the highest benefit, regardless of what the other players do is a
dominant strategy.
In game theory, the strategy that always yields the highest benefit for the player using it is the
dominant strategy.
When a player in a game adopts a strategy which always yields the highest benefit regardless of what the other player does, that player is using a(n)
dominant strategy.
