Microeconomics Study Plan CH 14

Which of the following terms is a barrier to​ entry?

All of the above

How could repeated playing of the game change the strategy each firm​ uses?

All of the above are possible strategies

Actions of firms that are aimed at deterring entry include

All of the above.

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

False

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 strategy for each​ firm?

The dominant strategy for each firm is to set a low price

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?

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 scale LOADING... ​, 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 comma 0002,000 ​units, should he choose the smaller or larger​ operation?

The smaller operationThe smaller operation.

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 one newspaper headline put​ it: "Applicants Continue to Flock to Early Admission​ Programs." ​Source: Jacques Steinberg and Tanya​ Abrams, "Applicants Continue to Flock to Early Admission​ Programs," New York Times​, December​ 20, 2012. Can game theory help analyze this​ situation? Game theory can help us analyze this situation as an example of​ what?

The​ prisoner's dilemma.

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

True

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"?

Whether the market is monopolistic or competitive.

Is there a Nash equilibrium?

Yes. Apple chooses low and Microsoft chooses high.

Consider the entries in the row of the payoff matrix ... 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 equilibrium LOADING... to this​ game? If​ so, what is​ it?

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?

Yes. Both Saudi Arabia and Nigeria choose low output.

Which of the following is not one of the competitive forces included in the competitive forces​ model?

government taxation

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.

high; more

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.

implicit collusion

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

ompetition from substitute goods or services.

How are decision trees used to analyze sequential​ games? A decision tree

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

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

signaling intent which is a form of implicit collusion

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

the bargaining power of buyers.

The effect on the Carmike 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

the bargaining power of suppliers.

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 scale LOADING... ​, 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 6 comma 0006,000 ​units, should he choose the smaller or larger​ operation?

the larger operation

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

the threat from potential entrants.

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

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​ gam

. all of the above.

Give an example of a​ government-imposed barrier to entry. An example of a​ government-imposed barrier to entry is

. both a and b.

Which of the terms below is defined as​ "anything that keeps new firms from entering an industry in which firms are earning economic​ profits"?

Barriers to entry

Finding dominant strategies 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?

Choosing low is a weakly dominant strategy for Apple.

Michael Porter has argued that in many industries ​" strategies 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

Are there any differences in the outcomes of these two games and if so​ why?

No because Saudi​ Arabia's dominant strategy is to choose low output.

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?

Not unless they are top performers in the market.

Why would the government be willing to erect barriers to entering an​ industry? The government would be willing to impose barriers to

all of the above.

Given the decision tree above for an entry​ game, Wal-Mart will

build a small store.

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?

competition from existing firms and the threat from potential entrants

Briefly explain which of the five competitive forces is involved in each of the following business developments. The effect on​ Samsung, maker of the Galaxy​ large-screen smartphone, as Apple introduces the iPhone 6 with a larger screen. The competitive force involved in this business development is

competition from existing firms.

A game theory analysis of deterring entry concludes that

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

Does the strength of each of the five competitive forces remain constant over​ time? Briefly explain. The strength of the five competitive forces

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

What are the most important barriers to​ entry? The most important barriers to entry are

economies of​ scale, ownership of a key​ input, and government imposed barriers.

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

increase and the price to fall.

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

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

The​ well-being of consumers of​ teeth-whitening services in North Carolina

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.

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 submarketslong dash—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

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

How does the​ prisoner's dilemma compare to the outcome of a repeated​ game?

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

What do barriers to entry have to do with the extent of​ competition, or lack​ thereof, in an​ industry? Without barriers to​ entry,

new firms will enter industries where firms are earning economic profits

What do barriers to entry have to do with the extent of​ competition, or lack​ thereof, in an​ industry? Without barriers to​ entry,

new firms will enter industries where firms are earning economic profits.

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

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

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

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

What is a sequential​ game? A sequential game is a game

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

Is this game a prisoner's dilemma?

yes

Does FedEx have a dominant strategy?

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

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 dominant ​strategy?

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

Economies of scale exist when a​ firm's ___________ average costs fall as it​ __________ output.

​long-run; increases

A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off is called a

​prisoner's dilemma.