ECP 6705 Module 4

A simultaneous-move pricing game played by two firms is often called a ___ duopoly game.

Bertrand

A ___ equilibrium is a condition describing a set of strategies in which no player can make themselves better off by unilaterally changing their strategy, given the other players' strategy choices.

Nash

In order to sustain punishment strategies, it is important for firms to

be able to punish rivals for deviating. know when their rivals deviate from a collusive agreement.

For a manager who is risk ___________, the __________ of profits does not affect managerial decisions.

neutral; variance

Changing prices from hour to hour or day to day in an attempt to "hide" pricing information from consumers is called - strategy.

randomized pricing

A game in which a player moves after observing another player's move is called a -move game.

sequential

The marginal revenue for a firm with market power is given by

MR = P × (1+EF/EF)

What occurs if players know precisely when a repeated game will end?

The end-of-period problem

Suppose that a fair coin is tossed and if a head appears you receive $10 and if a tail appears you receive $20. The expected value of this game is:

$15

Suppose that a fair die is rolled and, based on the result, you receive the following payout:Rolling a six pays $12, a five pays $10, a four pays $8, a three pays $6, a two pays $4, and a one pays $2.The expected value of the game equals $

7

Why is it expressly more difficult to determine optimal bidding strategies with correlated values than with independent private values?

Bidders don't know their own valuations. Bidders don't know the valuations of others. Bidders learn the valuation of others through the auction process.

If demand is highly elastic, what is true of the profit-maximizing markup? Why?

It is relatively low due to the availability of substitutes.

Suppose that Jack, the manager of "Roper's Rice," sorts a group of newly hired employees (about whom he is uninformed) according to their characteristics.

Jack is screening.

How might asymmetric information lead some consumers to leave a market completely?

The belief that a seller will only sell a good for a price that exceeds its value.

What is the optimal bidding strategy for a second-price, sealed-bid auction?

The player bids his own valuation of the item.

Compare the search strategy of a risk-neutral producer to a risk-neutral consumer.

The strategies are exactly the same.

The different auction types differ with respect to:

The timing of the bidder's decisions The amount the winner pays

Suppose your managerial economics professor auctions off a jar of various coins to the highest bidder and no one knows exactly how many coins are in the jar. The winning bidder will likely encounter which of the following?

The winner's curse

Firms spend substantial amounts of money in order to verify the credit-worthiness of their customers. Why?

To reduce asymmetric information

Why do producers offer money-back guarantees?

To signal the hidden qualities of the product.

Given independent private values, the expected revenues of the auctioneer in an English auction

are the same as a first-price auction. are the same as a second-price auction.

When one party to a transaction has better information than another, it is called

asymmetric information.

Comparison advertising is a technique used to induce risk ___ individuals to try new products.

averse

Individuals who are generally willing to pay an insurance premium to avoid risk are called risk

averse

When the true underlying value of an item is the same for all bidders, it is called a(n) -value auction.

common

Extended warranties and money-back guarantees are examples of

insurance aimed at risk averse consumers.

The __________ -form of a game indicates the number of players, the potential strategies, and the payoffs to alternative strategies.

normal

A pricing strategy that involves charging higher prices during times of increased demand is called _________.

peak-load pricing

In an infinitely repeated game,

players receive payoffs during each play of the game collusion is possible.

Suppose profits earned by one firm are independent of profits earned by other firms. When managers and shareholders diversify, then

poor outcomes of some projects can be offset by favorable outcomes of other projects.

In order to effectively engage in price matching, a firm must be able to

prevent consumers from claiming they have found a lower price when they have not.

A pricing strategy in which a firm advertises a price and a promise to match any lower price offered by a competitor is pursuing what kind of pricing strategy?

price matching

When a firm advertises that it "Will Not Be Undersold" it is likely pursuing a - strategy.

price matching

Brand loyalty can be difficult to establish if consumers believe that

products in a market are homogeneous.

When a consumer reaches a point of indifference between paying a given price and searching for a lower price, then that consumer has reached his/her ___ price.

reservation

Signals in both the product market and the labor market are useful if

they are reliable. they are observable. they are difficult to mimic.

A manager's attitude toward risk _______ affect the likelihood that they will pursue a risky project.

will

If winning a common value auction informs the bidder that the winning bid exceeds the valuations of all other bidders, then the winning bidder experiences the

winners curse

Describe the information in an auction characterized by independent private value.

Asymmetric information

Which of the following can yield profits higher than those achieved by charging a single price to all buyers?

Commodity bundling Price discrimination Block pricing

Why do out-of-town consumers tend to make purchases in chain stores?

Consumers opt for familiar products, even if the expected quality is lower. They have less information about local products.

An auction environment where bidders know neither their own valuation of the item nor the other bidders' valuation of the item.

Correlated value estimates

Cross subsidization is an appropriate pricing strategy when which of the following are present?

Cost complementarities Interrelated costs Interrelated demand

Indicate the four basic types of auctions.

First-price, sealed bid Second-price, sealed-bid English Dutch

How do many firms induce brand loyalty?

Frequent-visit cards and preferred customer cards Advertising that promotes a product as "better" than a competitor's product.

Suppose option 1 is the realization of a random variable with an expected value equal to zero and variance equal to 100, and option 2 is the realization of a random variable with an expected value equal to zero and variance equal to 10,000. Which of the two options is riskier?

Option 2

Consider the following pricing strategy:"Accept the market price as given and sell all you can at that price."To which market structure does this apply?

Perfect Competition

Chain stores can compete with local retailers even when local stores sell superior products. Why is this?

Risk averse consumers are less likely to try unfamiliar products.

As medical costs increase, healthy individuals tend to leave the market for heath insurance. The result is a pool of less healthy individuals who pay the higher price for medical services. This is known as _______.

adverse selection

Due to the hidden characteristics of consumers, insurance companies often face a problem of:

adverse selection.

Consider the following statement: "The higher one bidder's value estimate, the more likely it is that other bidders have high value estimates." This statement describes ___ value estimates.

correlated

By investing in multiple projects simultaneously, a manager can reduce risk. This is called

diversification

A ___ strategy is one that results in the highest possible payoff independent of other players' actions.

dominant

The information available in a first-price, sealed-bid auction is identical to a(n) ___ auction.

dutch

Given independent private values, the expected revenues of the auctioneer in a first-price auction,

equal those in a Dutch auction.

The overall profits of a firm are maximized when the upstream division produces the inputs such that its marginal cost

equals the net marginal revenue of the downstream division.

Managers can more accurately estimate the profit-maximizing price using a(n)

estimated demand function and marginal cost.

True or false: A secure strategy is a strategy that results in the highest payoff to a player regardless of the opponent's action.

false

In a finitely repeated game, a firm has no incentive to cheat if

it expects to earn less from cheating than from not cheating.

Rising medical costs and insurance premiums have increased, in part, due to _________.

moral hazard

A(n) ________ is a condition describing a set of strategies that constitutes a Nash equilibrium and allows no player to improve his or her own strategy at any stage of the game by changing strategies.

subgame perfect equilibrium

Non-credible threats prevent strategies for a multistage game from being

subgame perfect equilibrium.

The internal price at which an upstream division should sell inputs to a downstream division in order to maximize overall profits is called ___ pricing.

transfer

The assumption that bargaining ends as soon as the second player rejects or accepts an offer is a criticism of sequential-move bargaining game.

true

True or false: A strategy is a decision rule that describes the actions a player will take at each decision point.

true

True or false: One of the reasons it is more difficult to determine the optimal bidding strategy in auctions with correlated values is that bidders do not know their own valuations of the item.

true

True or false: Transfer pricing is important when a firm has upstream and downstream divisions.

true

"The sum of the probabilities that different outcomes will occur multiplied by the squared deviations from the mean of the random variable" describes which of the following?

variance

Suppose that two-thirds of the stores in a market charge $800 for a certain brand of mountain bike while one-third of the stores charge $500. The expected benefit of an additional search equals $

100

When the number of firms, N, equals 1 (monopoly), what is true of the market elasticity (EM) and the individual firm's elasticity (EF)?

EM= EF

In order to maximize expected profits, a manager should produce a level of output where

E[MR] = MC

In a simultaneous-move, one-shot game, a Nash outcome is often inferior to the outcome that would result if the firms colluded. Why might collusion disintegrate among profit-seeking firms?

Each firm has an incentive to cheat in order to obtain higher profits.

Charging higher prices when demand is higher (peak times) than when demand is lower (off-peak times) tends to do which of the following?

Enhance profits

Firm B Strategy High Price Low Price Firm A High Price 5, 5 -2, 10 Low Price 10, -2 2, 2 What is the Nash equilibrium in the above one-shot pricing game?

Firm A charges Low; Firm B charges Low

Insider trading is an example of ___ information.

asymmetric

By pursuing a dominant strategy, a player ensures that he/she will

maximize payoff independent of other players' actions.

If a firm's owners allow division managers to set internal prices in order to maximize their division's profits,

the firm earns lower overall profits.

Suppose you value a painting at $500 and you are bidding on it against someone who values the painting at $75. If you knew what the other bidder's valuation was, how would this affect your own valuation? Your bidding strategy?

Valuation would not change; bidding strategy would be less aggressive.

In a repeated game with a known final period, why are promises to cooperate generally broken?

"Backwards unraveling" continues until players know that no punishment can be used in any period. Players understand that there is no effective punishment in the last period.

When a monopolist or a monopolistic competitor faces a price elasticity of demand equal to -2.4, the optimal markup factor equals

1.7

Which of the following describes a dominant strategy?

A strategy that results in the best possible outcome regardless of choices by other players.

Consider the payoffs for the following simultaneous, one-shot game:Firm A charges low, Firm B charges low: 0,0, (respectively)Firm A charges low, Firm B charges high: 50, -10 (respectively)Firm A charges high, Firm B charges low: -10, 50 (respectively)Firm A charges high, Firm B charges high: 10,10 (respectively)What is the outcome of the game?

Both charge low

Consider the following payoffs available to two firms in the United States, "A" and "B", in a one-shot game.When "A" and "B" both advertise: $3, $3, respectivelyWhen neither "A" nor "B" advertise: $12, $12, respectivelyWhen "A" advertises and "B" does not: $20, $2, respectivelyWhen "A" doesn't advertise and "B" does: $2, $20, respectivelyWhy don't the firms agree to not advertise?

Both firms have an incentive to cheat.

When the number of firms, N, equals 2 (Cournot duopoly), what is true of the relationship between market elasticity (EM) and the individual firm's elasticity (EF)?

EF= 2EM

Which of the following are criticisms of the mark-up formula?

Elasticity of demand increases as price increases. Elasticity of demand changes as price changes.

What is true of collusion in a repeated game with a known final period?

It is not possible.

Which game strategy prevents rivals from easily predicting a player's actions?

Mixed strategy

Entry and exit into and out of a market can often be analyzed using which of the following game representations?

Multistage games

In a __________ game, two players "bargain" over some object of value.

Nash bargaining

When every player is doing the best that he or she can do, given the actions of other players, this outcome is referred to as a _______.

Nash equilibrium

If price elasticity, EF= -∞, the price should be set such that

P = MC

If the profits earned by the firm are the same in each period and the horizon is infinite, the present value of a firm is given by:

PV firm=(1+i/i)π

A dispute between a firm and its stockholders over what to do with a $10 million surplus would likely be analyzed using which application of multistage games?

Sequential bargaining

Which pricing strategy is easily employed by monopolists, Cournot oligopolists, and monopolistic competitors?

Set price such that MR = MC

Suppose πCheat−πCoop/πCoop−πN ≤1/i, where πCheat is the maximum one-shot payoff if the player cheats, πCoop is the cooperative, one-shot payoff, πN is the one-shot Nash equilibrium payoff, and "i" is the interest rate.

The cooperative outcome can be sustained.

When an employee announces his intention to quit an existing job, he has an increased incentive to "shirk" work on his last (or next-to-last) day. What is this an example of?

The end-of-period problem

It is possible for firms to collude without the fear of being cheated on when they adopt which of the following strategies?

Trigger strategy

When a firm charges a fee for the right to purchase a product plus a per-unit charge for each unit purchased, what type of pricing strategy is the firm employing?

Two-part pricing

When strategies for a multistage game are a Nash equilibrium, but involve a threat that is not credible, then we say that these strategies

are not a subgame perfect equilibrium.

In a sequential-move game, the player who moves first

cannot make decisions based on what the other player does.

In two-part pricing, the optimal fixed fee is the amount of the ___ surplus.

consumer

In order to sustain a cooperative outcome in an infinitely repeated game, players should

cooperate provided no player has ever cheated. punish a player that cheats by selecting the one-shot, Nash equilibrium strategy.

Optimal pricing strategies in various market structures tend to be

different depending on the structure and the instruments.

In order to maximize profits under a third-degree price discrimination scheme, a firm with market power produces the output where marginal revenue

equals marginal cost to each group.

True or false: Commodity bundling can enhance a firm's profits only if consumers have an identical willingness to pay for each product sold by the firm.

false

Games in which players know a game will end, but they do not know when the game will end are called ___ ___ games.

finitely repeated

Games in which a player knows the game will end AND knows when it will end are called

finitely repeated games.

If firms seek to be infinitely lived,

it does not pay to cheat customers if the one-time gain is offset by a loss in future sales.

When oligopolistic firms compete a finite, but uncertain, number of times, the firms

may or may not collude.

Suppose a manager flips a coin to decide whether or not she should monitor employees' production. This is an example of a(n) (one word) strategy.

mixed

Consider the following payoffs available to two firms, "A" and "B", in a one-shot game.When "A" and "B" both advertise: $3, $3, respectivelyWhen neither "A" nor "B" advertise: $12, $12, respectivelyWhen "A" advertises and "B" does not: $20, $2, respectivelyWhen "A" doesn't advertise and "B" does: $2, $20, respectivelyThe "best" outcome for BOTH firms occurs when:

neither firm advertises

The value of a firm is the

present value of all future profits.

The higher the marginal cost, the higher the profit-maximizing

price

When price elasticity of demand is infinite,

profit-maximizing price equals marginal cost.

In the absence of a dominant strategy, a player might pursue a strategy that guarantees the highest payoff given the worst possible scenario. Such a strategy is call a(n) ___________.

secure strategy

Multistage games permit players to make

sequential decisions.

Suppose firm "A" observes a price decrease by firm "B". As a result, firm "A" also lowers its price. This is an example of a(n)

sequential-move game.

A decision rule that describes the actions that a player will take at each decision point is called a

strategy

The normal-form of a game includes all of the following:

the possible strategies of the players the players in the game the payoffs that result from the alternative strategies

Oligopolistic firms are more likely to collude and charge high prices in a finitely repeated game played an uncertain number of times if

there is a high probability that the game will be played in subsequent periods.

In order for punishments to work,

there must be a way to link the past, future, and present to the seller.

Student discounts and senior citizen discounts are examples of - price discrimination.

third degree

True or false: An example of commodity bundling is a computer package sold for one price that includes the computer, monitor, keyboard, and software.

true

True or false: Block pricing enhances a firm's profits because it forces consumers to either purchase all of the units in the package or none of the units.

true

Players find it in their interest to maintain a collusive agreement when πCheat - πCoop _____ 1/i(πCoop - πN)

≤

If expected marginal revenue exceeds marginal cost, a manager should

increase output to increase profits.

Firms can reduce the incentive to shop for low-price information by

increasing uncertainty about the best deals. changing prices with unpredictable regularity.

A game that is played over and over and provides payoffs during each repetition is called a(n) ___ ___ game.

infinitely repeated

Suppose that two-thirds of the stores in a market charge $800 for a certain brand of mountain bike while one-third of the stores charge $500. If a customer is at a store charging $800 and the cost of an additional search equals $125, then

it isn't worthwhile to continue searching for a lower price.

For small gambles, people are generally risk ___.For larger gambles, people are generally risk

loving, averse

One of the most basic pricing strategies for firms with market power is to set price such that marginal revenue equals ___ ___

marginal cost

The simple pricing rule for a Cournot oligopoly, P = (NEM/1+NEM) × MC, suggests that the more elastic the market demand, the closer the profit-maximizing price is to

marginal cost

MR = P × (1+EF/EF) is an expression that tells us the marginal revenue for a firm that has at least some ___ ___

market power

Commodity bundling can enhance profits when

the firm does not know consumers' willingness to pay. consumers differ in their willingness to pay.

Suppose 25% of workers in a market are willing to work for $55,000 and 75% of workers are willing to work for $63,000. The expected benefit of searching (interviewing) another worker equals $

2000

Suppose the inverse demand function is: P = 12 - Q, and cost is given by C(Q) = 4Q. If marginal revenue is MR = 12 - 2Q and marginal cost is MC = 4, then the profit-maximizing level of output equals $ and the profit-maximizing price equals $

4, 8

Suppose there is an auction where bidders have independent private values and bids are evenly distributed between $2 and $10. If John recognizes that his valuation of the item equals $5.00, then his optimal bidding strategy in a second-price, sealed bid auction with 5 bidders equals $

5

Suppose the inverse demand function is:P = 12 - 4Q, and cost is given by C(Q) = 4Q.The profit-maximizing price equals $

8

Suppose 5 firms compete in a homogeneous-product Cournot oligopoly. If each firm's marginal cost equals $75 and market price elasticity of demand equals -1.7, the profit-maximizing, equilibrium price equals $

85

Suppose a downstream division pays a price for inputs from an upstream division that exceeds marginal cost. What is the result?

A final price that exceeds the profit-maximizing price Less-than-optimal overall profits for the firm

Which of the following is a reason to avoid a price matching strategy?

A firm cannot prevent a consumer from lying about lower prices elsewhere. A competitor has lower costs.

Which of the following methods can firms use to induce brand loyalty?

Advertising campaign Rebates after multiple purchases

Identify the term that refers to the practice of combining several products together and selling them together at one price.

Commodity bundling

If the demands for two products produced by a firm are interrelated through costs or demand, selling one product at or below cost and the other product above cost can enhance profits. What is this strategy called?

Cross-subsidization

Reservation price satisfies which of the following conditions? (Where p represents the price and c represents the cost per search.)

EB(R) = c

The optimal bids of which two types of auctions are strategically equivalent?

Dutch and first-price, sealed-bid

How does block pricing enhance a firm's profits?

It forces consumers to make an all-or-nothing purchase.

Indicate how a manager can induce a risk averse individual to consume new products.

Offer free samples Lower price

If firms seek to be infinitely lived, what can firms do if low-quality goods are produced out of honest error?

Offer product guarantees

A criticism of sequential bargaining applications of multistage games includes which of the following?

Players don't know the true payoffs to other players.

Which of the following pricing strategies extract additional surplus from consumers?

Price discrimination Two-part pricing Block pricing Commodity bundling

Suppose an individual prefers $12 with certainty over a risky prospect with the possibility to win $18, but an expected value of $12. What type of individual is this?

Risk averse

Suppose an individual prefers a risky prospect with the possibility to win $18, but an expected value of $12, over $12 with certainty. What type of individual is this?

Risk loving

Consider the following two scenarios:1). Roll a fair die. If it comes up 1, 2, or 3, you receive $5. If it comes up 4, 5, or 6, you pay $5.2). Roll a fair die. If it comes up 1, 2, or 3, you receive $50. If it comes up 4, 5, or 6, you pay $50.Which scenario is riskier?

Scenario 2

How can a firm overcome the problem of double marginalization?

Set transfer prices that maximize the overall value of the firm.

Since airlines are relatively uninformed about consumers' exact preferences, they often charge different prices for different tickets depending on length-of-stay, Saturday stay-over, time of purchase, etc. As a result, consumers reveal their preferences by choosing the ticket option that best suits their needs. This process is called

a self-selection device.

Asymmetric information and hidden characteristics can lead to:

adverse selection

In two-part pricing, firms extract _____ of the consumer surplus.

all

If a firm manager is able to determine and charge the maximum amount that each consumer would be willing to pay for a good or service, it is called ___ -degree price discrimination.

first

By inducing brand loyalty, a firm reduces the number of consumers who will

switch to another firm if it undercuts its price

In the last period of a repeated game with a known end, players behave

the same as they would in a one-shot game.

The standard deviation equals

the square root of the variance.

Suppose Player "A" adheres to the same action each time the game is played until Player "B" takes an action that causes Player "A" to shift his approach. Player "A" has adopted a ___ strategy.

trigger

True or false: A Nash bargaining game is an application of a simultaneous-move, one-shot game.

true

When a monopolist or a monopolistic competitor faces a price elasticity of demand equal to -1.7, the optimal markup equals ________.

2.4

Consider the following payoffs available to two firms, "A" and "B", in a one-shot game.When "A" and "B" both advertise: $3, $3, respectivelyWhen neither "A" nor "B" advertise: $12, $12, respectivelyWhen "A" advertises and "B" does not: $20, $2, respectivelyWhen "A" doesn't advertise and "B" does: $2, $20, respectivelyWhat is the Nash equilibrium?

Both advertise

When firms know who their rivals are and who their rivals' customers are

it is easier to sustain a collusive agreement.

A health club charges consumers an enrollment fee and also a monthly fee. This is an example of - pricing.

two part

Suppose that "Roper's Rice" faces a price elasticity of demand estimated to be -2.7. In this case, the profit-maximizing price will be ___ times the marginal cost (round to the tenths place).

1.6

Suppose that "Wilson's Wheat" faces a price elasticity of demand estimated to be -1.1. In this case, the profit-maximizing price will be ___ times the marginal cost (round to the tenths place).

11

Suppose 2 firms compete in a homogeneous-product Cournot oligopoly. If each firm's marginal cost equals $50 and market price elasticity of demand equals -1.5, the profit-maximizing, equilibrium price equals $

75

In a simultaneous-move, one-shot game, a Nash outcome is often inferior to the outcome that would result if the firms colluded. Which of the following is a reason why firms do not collude to reach a "better" outcome?

Collusion is illegal in the U.S.

A sandwich shop has identified two groups of consumers for its pulled-pork sandwiches: A and B. Group A's price elasticity of demand is -3.75 and group B's is -1.8. If there is no possibility of resale, then the shop should charge a higher price to which group?

Group B

Indicate which of the following are applications of multistage games.

Innovation game Entry game Sequential bargaining

A Bertrand duopoly game has which characteristics?

It is a simultaneous-move game It involves two firms

In order to be considered a subgame perfect equilibrium, a set of strategies must

be a Nash equilibrium. be a Nash equilibrium for each subgame.

Firms use ___ pricing when they package products together in order to enhance profits by forcing consumers to make an all-or-nothing decision.

block

Six-packs of soda, cartons of eggs, and three-packs of paper towels are all examples of products sold using what kind of pricing strategy?

block pricing.

Firm A and Firm B are playing a finitely repeated pricing game with an unknown number of periods. If Firm A cooperated with Firm B, they receive $12 each period the game is played. If Firm A cheats, they receive a one-time payment of $80 and $0 every other period of play. If θ = 0.2, Firm A has an incentive to ________.

cheat