Chap 17

The Sherman Act made cooperative agreements

a criminal conspiracy.

To be successful, a cartel must

agree on the total level of production and on the amount produced by each member.

The theory of oligopoly provides another reason that free trade can benefit all countries because

as the number of firms within a given market increases, the price of the good decreases.

Table 17-11Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Total Revenue 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0 Refer to Table 17-11. ABC and XYZ agree to jointly maximize profits. If ABC and XYZ each break the agreement and each produce 5 more than agreed upon, how much less profit does each make, compared to the profit at to the cartel output?

$20

Table 17-6Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much water as they want without cost so that the marginal cost of water equals zero.The weekly town demand schedule and total revenue schedule for water are shown in the table below. Refer to Table 17-6. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating as a monopolist. What will the new price of water be once the Nash equilibrium is reached?

$4

Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next?

Bieber and Rihanna will each break the agreement. Both singers' profits will decrease.

Table 17-19Consider a small town that has two grocery stores from which residents can choose to buy a loaf of bread. The store owners each must make a decision to set a high bread price or a low bread price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2). Store 2 Low Price High Price Store 1 Low Price (250, 250) (400, 50) High Price (50, 400) (325, 325) Refer to Table 17-19. If grocery store 2 sets a low price, what price should grocery store 1 set? And what will grocery store 1's payoff equal?

Low price, $250

Why would lack of cooperation between criminal suspects be desirable for society as a whole?

More criminals will be convicted.

Which of the following statements is correct?

When oligopoly firms collude, they are behaving as a cartel.

When oligopolistic firms interacting with one another each choose their best strategy given the strategies chosen by other firms in the market, we have

a Nash equilibrium.

If four firms comprise the entire golf club industry, the market would be

characterized by interdependence of firms.

In studying oligopolistic markets, economists assume that

each oligopolist cares only about its own profit.

Which government entity is charged with investigating and enforcing antitrust laws?

the U.S. Justice Department

Table 17-11Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Total Revenue 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0 Refer to Table 17-11. ABC and XYZ agree to maximize joint profits. However, while ABC produces the agreed upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make?

$140

Table 17-26Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. Cant insert table here Refer to Table 17-26. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be

$-24 and $-24, respectively.

Scenario 17-2. ​ Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. Refer to Scenario 17-2. If BQ were to drill a second well and Exxoff also drilled a second well, what would BQ's profit be?

$62 million

Table 17-1Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the table below: Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn, assuming that the two producers split the market equally?

$9,000

Table 17-37​ Two restaurants with a focus on Mexican dining operate in Texama. Both Mitch's Mexican and Tim's Tacos need to decide whether to add Zesty Queso or Fresh Guacamole to their menus. The circumstances are that each firm wants to add only one of the two choices on their menu. Below you will find the profits for the stores, shown as: (1) the payoff to Mitch; (2) the payoff to Tim. Tim's Tacos Zesty Queso Fresh Guacamole Mitch's Mexican Zesty Queso 5, 5 9, 3 Fresh Guacamole 3, 8 7, 7 ​ Refer to Table 17-37. Based upon the information from the table, if the two firms could coordinate the decisions about product introductions, how much profit would each firm make?

Each firm would earn 7.

During the 1990s, the members of OPEC operated independently from one another, causing the world market for crude oil to become close to

a competitive market.

A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is

an antitrust law.

Scenario 17-2. ​ Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. Refer to Scenario 17-2. If BQ and Exxoff are able to successfully cooperate to maximize their joint profits, BQ will

drill one well and Exxoff will drill one well.

Scenario 17-4. ​ Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million. Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,

neither company will advertise.

For cartels, as the number of firms (members of the cartel) increases,

the magnitude of the price effect decreases.

A cooperative agreement among oligopolists is more likely to be maintained,

the more likely it is that the game among the oligopolists will be played over and over again.