econ ch 14 hw
In a negative-sum game the overall loss is greater than the overall gain, but a zero-sum game can be seen as a ______ situation.
"I win-you lose"
At the Nash equilibrium in the sequential game, if Big Box (BB) as first mover chooses to build while Huge Box (HB) chooses to not build, the profits for Big Box will be ______ while the profits for Huge Box will be ______.
$12; $0
Based on the payoff matrix shown, if Big Box makes the first move, what will Huge Box receive?
0
Suppose RareAir honors an agreement to price high with Uptown. Based on the figure, if Uptown cheats and prices low instead of high, then Uptown can increase its payout by $______ million.
3
What is a statement of coercion that is believable by the other firm?
A credible threat
How does a credible threat differ from an empty threat?
A credible threat is believable, but an empty threat is not.
Oligopolies are comprised of ______.
A few large producers
Which situation results when the profit outcomes based on the firms' pricing choices is positive?
A positive-sum game
Which type of game correlates most closely with a win-win scenario?
A positive-sum game
Oligopolistic firms do which of the following when they change their pricing strategies?
Affect profits and influence the profits of rival firms
What is a statement of coercion that is not believable by the threatened firm?
An empty threat
What is the Nash equilibrium?
An outcome in the payoff matrix from which neither firm wants to deviate since the current strategy is optimal given the rival's strategic choice.
Based on the figure, if Big Box decides not to build what will Huge Box decide to do and what are the profits for Big Box and Huge Box respectively?
Build; $0; $12
How can oligopolistic firms influence their profits and the profits of their rivals?
By changing pricing strategies
Dominant firms in an industry can cause the four-firm concentration ratio to be misrepresented, leading the four-firm concentration ratio to overstate the amount of concentration in the industry. How can this problem be resolved?
By using the Herfindahl index
In the payoff matrix what is the Nash equilibrium (dominant strategy)?
Cell A
Based on the payoff matrix if Big Box makes the first move, what will be the outcome of the sequential game?
Cell C
Based on the payoff matrix, what is the Nash equilibrium in a sequential game?
Cells B or C
Based on the payoff matrix, collusion between Chicpo and Dramco would result in policies represented by cell _____.
D
Which of the following are obstacles to collusion in an oligopolistic industry?
Demand and cost differences Recession Cheating Antitrust laws
In a non-collusive oligopolistic industry, prices are generally stable for which of the following?
Demand reasons Cost reasons
Two different industries can have the same the four-firm concentration ratio, yet the amount of monopoly power of each of the firms in the two industries can be drastically different. Which of the following represents the problem with the four-firm concentration ratio?
Dominant firms
Which of the following reflects the possible actions of firms in a repeated game?
Firm "A' will cooperate with Firm "B" in game one with the expectation that Firm "B" will then cooperate with Firm "A" in the next game.
Which scenario describes a simultaneous game?
Firms choose strategies at the same time.
Which of the following is not a characteristic of oligopoly?
Firms have no control over their price.
How does a repeated game impact firms' behaviors?
Firms may restrain from competing as hard as possible. Firms may want to cooperate. Firms may reciprocate their rivals' actions.
What happens after a couple of rounds of a repeated game?
Firms practicing reciprocity will earn more.
Collusion is more likely to occur when which of the following characteristics are true?
Firms produce homogeneous goods. Firms face similar costs.
What is it called when firms reach a verbal or tacit agreement with rivals about price in a social setting like the golf course?
Gentleman's agreements
What are oligopolists able to do by controlling price through collusion?
Increase profits Prohibit the entry of new rivals Reduce uncertainty
What does a demand curve look like for an oligopolistic firm?
It could be downward sloping or kinked.
Suppose that there are two firms Chipco and Dramco. Chipco faces lower costs than Dramco, and both firms follow international strategies. Now, Chipco makes a credible threat that Dramco must follow its national strategy. Else, Chipco will dramatically lower its price to its average total costs, making it difficult for Dramco to compete. Based on the payoff matrix, how will the outcome in the game change?
It will move away from the Nash equilibrium, cell A, to cell D.
When Chipco makes an empty threat that they will lower their price significantly if Dramco does not also follow its national pricing strategies like Chipco, how does it impact the outcome of the game based on the payoff matrix?
It will move towards Nash equilibrium, cell A.
Which of the following is true about the oligopolist if rivals match a price cut but ignore a price increase?
Its marginal revenue curve would consist of two segments
What has been the result of a recent increase in foreign competition in oligopolistic industries?
More competitive pricing
The first firm to move in a sequential game has an advantage by establishing a ______ ______that is favorable to them.
Nash equilibrium
What is the only stable outcome in a payoff matrix?
Nash equilibrium
If the firms, Chipco and Dramco, represented by the payoff matrix decided to collude to reach a common strategy, which strategy would they jointly pursue?
National strategies, cell D
Based on the figure, if Big Box decides to build what will Huge Box decide to do and what will be the profits of Big Box and Huge Box respectively?
Not build; $12; $0
What kind of game is it when firms choose their optimal pricing strategy today without worrying about possible interactions in the future?
One-time game
Which are barriers to entry in both monopolies and oligopolies?
Patents Ownership and control of raw materials Preemptive pricing Large capital investment
What are three models used to study pricing and output by oligopolies?
Price leadership model Collusive pricing model Kinked-demand curve model
In 2009, Walmart cut its price on several new books and Amazon matched it. Walmart then cut its price even more and it was also matched by Amazon, so Walmart cut its price again which was then undercut by Target's even lower price. What is it called when firms behave in this way?
Price war
Based on the graph, which of the following is the reason for the demand curve segment e to D1?
Rivals match a price decrease
In what kind of game does one firm move first and commit to a specific strategy and then the rival responds?
Sequential game
What kind of game is it if the firms must choose their pricing strategies at the same time?
Simultaneous game
What is the term for self-interested actions that take the reactions of others into account?
Strategic behavior
If a firm assumes that its rivals will match all price changes, but the firm's rivals actually charge a lower price what are the potential consequences?
The firm's profits will be lower. The firm's demand curve will shift further to the left. The firm is failing to produce at the profit-maximizing output.
Based on the payoff matrix, if the two firms agreed to both follow national strategies there is an incentive for them to cheat. If one of the firms cheats on this agreement, what will happen?
The game would temporarily move to either cell B or cell C. The game would eventually end in the Nash equilibrium (cell A).
Which of the following is a model used to examine oligopolistic pricing?
The kinked-demand curve model
What is the four-firm concentration ratio?
The percentage of total industry sales accounted for by the four largest firms
Why is collusion desirable to oligopolistic firms?
The possibility of price wars diminishes and profits are maximized.
What is the example of game theory based on a scenario where two people are encouraged to confess to a crime?
The prisoner's dilemma
From society's standpoint, what are the effects of collusion in an oligopolistic industry?
The same as a monopoly
Which statement is true about oligopolies?
They do not achieve allocative efficiency because their price exceeds marginal cost.
Which statement is true about oligopolies?
They may produce homogeneous or differentiated products.
What happens to oligopolistic firms when a recession occurs?
They move leftward and upward to a higher point on the average-total-cost curve.
Which are reasons that that firms merge?
To increase control over the product's price To obtain lower input prices To increase economies of scale To increase market share
Based on the figure, why would a firm deviate from a collusive outcome as presented in the payoff matrix?
To increase its profit
The price leadership model in an oligopoly can break down and when it does it can lead to ______.
a price war
Firms in oligopolistic industries are "price makers" because such firms ______.
are few in number
As the first mover in a sequential game, the firm is able to ______ its rivals from entering the market.
block
Price leaders make price adjustments ______.
by communicating impending price adjustments to the industry; by establishing a price that discourages new entrants into the industry; infrequently, due to the uncertainty in rivals' response to these price changes.
Oligopolists can often benefit from ________ , which means cooperation with rivals.
collusion
What term means "cooperation with rivals?"
collusion
When members of an oligopoly meet to set prices to maximize profits it demonstrates the ______ and/or the ______ model.
collusion; cartel
The shape of the demand curve for an oligopolistic firm ______.
depends on the actions of rivals to price changes
One qualification to why an oligopoly may not act like a monopoly is ______.
due to foreign competition that may increase efficiency through increased rivalry
In the graph, the price elasticity of demand is highly ______ above the price of P0.
elastic
True or false: Firms in an oligopoly always produce a homogeneous product.
false
True or false: Under the price leadership model, the price leader frequently adjusts price in response to day to day changes in the market.
false
Oligopolies have ______.
fewer firms than monopolistic competition
A two-firm payoff matrix shows ______.
firm profit from alternative combinations of strategies.
The prisoner's dilemma is an example of _______ theory.
game
The study of how people behave in strategic situations is called _______ theory.
game
The study of how one firm reacts to the actions taken by another firm or individual when implementing a strategy is called _____.
game theory
The difference in elasticity of demand above and below the going price creates a ______ in the marginal-revenue curve.
gap or vertical segment
Compared to monopolies, oligopolies ______.
give the appearance of increased competition
Usually a larger Herfindahl index means ______ market power within the industry.
greater
For an industry to be considered an oligopoly the four-firm concentration ratio must be ______.
greater than or equal to 40%
After several rounds of a repeated game with reciprocity, the firms' profits will be ______.
greater than the profits without reciprocity
When the number of firms in an oligopolistic industry increases from 3 to 10, it is ______ to collude.
harder
The broken marginal-revenue curve hints that an oligopolist ______ if its costs change substantially.
has no reason to change its prices
Price leadership in an oligopoly entails a type of ______.
implicit collusion
Companies often merge to ______ monopoly power.
increase
A possible effect of limit pricing by oligopolies is that it may ______.
increase efficiency by setting the price closer to marginal cost and the minimum average total cost
An oligopolistic firm's marginal revenue curve is made up of two segments if ______.
its rivals match a price cut but ignore a price increase
An oligopoly firm's demand curve will be kinked if ______.
its rivals match price decreases but ignore price increases
In the _______ model of oligopoly, firms react to price decreases but ignore price increases by other firms.
kinked-demand
Without collusion, if a firm incorrectly assumes that its rivals will charge the same price but its rivals actually charge a lower price, the firm's demand curve will shift to the _________ .
left
For a particular industry there may be a low four-firm concentration ratio since it is measured on a nationwide scale, but there can still be a local oligopoly. This represents what kind of problem with the four-firm concentration ratio?
localized markets
Based on the figure, if RareAir honors an agreement with Uptown to price high, and Uptown needs to increase profits due to stockholder pressure, Uptown will price ______.
low to receive a payout of $15
When oligopolists create entry barriers through limit pricing, consumers will see ______.
lower prices similar to those that competitive, free entry would create
Compared to pure monopolies, oligopolies ______.
may be less desirable because they are not regulated by government to protect consumers
In general, industries that typically have lower Herfindahl index values are ______.
monopolistically competitive rather than oligopolistic
A situation in which each firm's profit depends not entirely on its own price and sales strategies but also on those of other firms is known as ______.
mutual interdependence
The situation in an oligopolistic industry in which the profits of each firm depend on the actions of rivals is called ______.
mutual interdependence
Oligopolies are not a desirable market structure because they achieve ______.
neither productive efficiency nor allocative efficiency
Demand and cost differences, the number of firms in the industry, and the potential for cheating all represent ________ to collusion.
obstacles
A market is considered to be a(n) _______ when the largest four firms in an industry control more than 40% or more of the market.
oligopoly
A(n) _______ is a market dominated by a few large producers of a homogeneous or differentiated product.
oligopoly
A diagram with four cells representing the possible pricing strategies of two firms is known as a ______.
payoff matrix
A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as ______.
price leadership
________ ________ can occur when the price leadership model breaks down.
price war
By controlling ______ through collusion, oligopolists may be able to reduce ______, ______ profits and block the entry of new rivals.
prices; uncertainty; increase
Firms are likely to engage in collusion when they ______.
produce homogeneous products
Since entry of new firms increases the market supply and reduces prices and ______ , successful collusion requires that colluding firms prohibit entry of new firms.
profits
Antitrust laws in the United States ______.
prohibit price fixing
Barriers to entry into an oligopoly most resemble those of a ______.
pure monopoly
Firms are more likely to cheat on a collusive agreement when the economy is experiencing a _______
recession
When a game between rivals occurs more than once, it is called a ______ game.
repeated
The four-firm concentration ratio is based on the ___.
sales of the largest firms in an industry
In a(n) _____ game one firm moves first, committing to a strategy and then the rival firm responds.
sequential
The oligopolistic firm's marginal revenue curve exhibits a gap or vertical segment because of the ______.
sharp difference in elasticity of demand above and below the going price
The Herfindahl index corrects for dominant firms in the industry by _______ the market shares of the firms and therefore giving greater weight to those more powerful firms in the industry.
squaring
Suppose the rivals of an oligopolistic firm ignore both a price increase and decrease. If so, then the firm's demand curve will be ______.
straight
Suppose the rivals of an oligopolistic firm match either a price increase or decrease. If this occurs, then the firm's demand curve will look ______.
straight and steep
Firms have a desire to cheat on a collusive agreement because ______.
their profits and sales will rise
Over a long time period, cheating ______ collusive oligopolies
threatens
To reduce uncertainty or increase profits, oligopolists may change their prices ______.
through collusion
True or false: A cartel abides by a formally written agreement that specifies the output and price of each member firm and is a form of overt collusion.
true
True or false: A one-time game occurs when firms will choose their pricing strategy for today without concern about future interactions with their rivals.
true
True or false: Based on the payoff matrix, 2Cool could improve its outcome if ThirstQ holds its advertising budget to the normal level.
true
True or false: Strategic behavior takes into account the reactions of others.
true
When one firm's gain must equal the other firm's loss it is called a ______ game whereas in a ______ game the net gain is negative.
zero-sum; negative-sum
A firm in an oligopolistic market ______.
can set its price and output to maximize profits
What is it called when a group of producers creates a formal written agreement stating the level of output by each firm and the prices that must be charged?
cartel
Collusion becomes more difficult as the number of firms _____.
increases
Gentleman's agreements are a type of covert collusion, occurring in social settings where a product's _______ is agreed upon and market shares are determined by _________ competition.
price; non-price
