ECON 308: Chapter 9 Market Structure. Oligopoly

Which of the following statements is correct?

A firm with high fixed costs tends to decrease prices and output more in the face of declining demand than a firm with relatively low fixed costs.

A firm acting as a price leader would never reduce market price because this would clearly make all of the firms in the market worse off and defeat the purpose of having a firm act as the price leader.

False

Although Coca-Cola and PepsiCo are major players in the soft drink industry, the large number of other competing firms means that the industry is most accurately characterized as monopolistically competitive.

False

Because cooperation dominates noncooperation as a strategy for maximizing profits, cheating is rarely if ever an issue that cartels have to contend with.

False

Because there is no formal agreement among the participating firms, firms that engage in tacit collusion are exempt from prosecution under the anti-trust laws.

False

In comparing an oligopolistic firm to a perfectly competitive firm it is generally assumed that the price charged by the competitive firm will be higher than the price charged by the oligopolistic firm.

False

In game theory, a Nash equilibrium is the set of strategies each of the players chooses by selecting the strategy that maximizes her payoff independent of what the other players might choose.

False

In the case of Matsushita v. Zenith, the fact that the foreign television manufacturers were able to charge lower prices than their domestic competitors in the U.S. market for televisions was sufficient evidence to conclude that the Japanese firms were engaged in predatory pricing.

False

In the prisoner's dilemma game, each player's dominant strategy leaves her with a larger payoff than she could receive by cooperating with the other player; however, the "prisoner's dilemma" is that as a result of noncooperation she cannot chose her dominant strategy.

False

Predatory pricing will be most effective when the costs structures of the firms in an industry, including potential entrants into the market, are identical or at least very similar.

False

Which of the following best describes the basic characteristics of noncooperative oligopoly models?

Managers make decisions based on the strategy they think rivals will pursue.

Which of the following is not a characteristic of an oligopolistic industry?

One dominant firm and low entry barriers.

Which of the following is the best example of tacit collusion?

Price leadership.

Which of the following is not an example of a practice that facilitates "tacit collusion"?

The formation of a cartel.

Suppose an oligopoly consists of two firms. Firm A lowers price and Firm B responds by lowering its price by the same amount. If average costs and industry output remain the same, which of the following will occur?

The profits of the two firms will decrease.

Which of the following would not be classified as an oligopolistic industry?

The women's clothing industry.

A major weakness of the kinked demand curve model is that it does not explain how the equilibrium price, i.e., the price at the kink in the demand curve, is determined.

True

According to the kinked demand curve model, regardless of whether a firm increases or decreases price, its total revenues will decrease as a result of the price change.

True

All else constant, a cartel agreement will become more difficult to enforce as the number of firms competing the market increases and the members of the cartel produce a differentiated product.

True

In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

True

One could argue that price competition among oligopolistic firms is highly likely to cause the revenues of individual firms to decline, while competition on the basis of product differentiation could cause demand, and total revenues, of individual firms to increase.

True

One of the implications of the kinked demand curve model is that even if a firm's costs change by a measurable amount, market price is unlikely to change. This helps explain the price rigidity observed in many oligopolistic markets.

True

Pepsi and Coke have competed in the market for bottled water primarily on the basis of convenience and product differentiation as a means to avoid the negative effects on revenue that result from price competition.

True

The decision by the federal government to prohibit cigarette companies from advertising on television actually caused the companies' profits to increase, an outcome that is consistent with the prediction of the prisoner's dilemma game.

True

To maximize joint profits, the members of a cartel have to determine the level of industry output by setting marginal revenue qual to the cartel's joint marginal costs of production.

True

Assume firm X is one of the three largest firms in an oligopolistic industry. Firm X is currently considering a vertical merger with another firm that is the sole supplier of an input used by all of the firms that compete with firm X. If the merger goes through, firm X would be able to operate much like:

a monopolist.

According to the kinked demand curve model, if an oligopolistic firm lowers its price, it should expect to see its total revenue:

decrease

Limit pricing is used primarily to:

discourage new firms from entering a market.

In game theory, the strategy that results in the highest payoff to a player regardless of what the other player decides to do is called the:

dominant-strategy.

Suppose an oligopolistic firm raises the price of its output. Demand for the firm's output will be relatively price ________ if the other dominant firms in the market ________.

elastic; do not raise price

Price leadership:

is usually the result of a dominant firm in the industry.

Assume a group of firms has formed a cartel and the cartel is in engaged in joint profit maximization. As such, each firm, acting in its own interests, has an incentive to expand production up to the point at which:

its marginal cost equals the cartel-determined price of the product being sold.

The fact that the firms in an oligopoly are mutually interdependent means that each firm:

must consider the reactions of its competitors when its set the price for its output.

The key distinguishing characteristic of an oligopoly is the:

mutual interdependence of the firms in the market.

The dominant strategy for each of the players in the prisoner's dilemma game does not yield the optimal outcome for each player because:

the two players are not allowed to communicate or otherwise cooperate with each other.

According to the information presented in the text the parcel and express delivery industry could best be characterized as:

an oligopoly.

An industry characterized by a small number of dominant firms that face downward-sloping demand curves is best described as:

an oligopoly.

The airline industry is best classified as:

an oligopoly.

The soft drink industry can best be described as:

an oligopoly.

In order for the first player to move in a sequential game to be able to gain an advantage from making the first move, the player must:

be able to make a credible commitment to the strategy.