Reading Quiz: Chapter 14 - Oligopoly and Strategic Behavior
Firms in oligopolistic industries are "price makers" because such firms ______.
are few in number
A firm in an oligopolistic market ______.
can set its price and output to maximize profits
A situation where firms meet to fix prices, divide markets, or restrict competition is called ______.
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
Advertising benefits society by ______.
conveying information to consumers.
Based on the payoff matrix, collusion between Chicpo and Dramco would result in policies represented by cell .
d
The shape of the demand curve for an oligopolistic firm ______.
depends on the actions of rivals to price changes
In the graph, the price elasticity of demand is highly ______ above the price of P0.
elastic
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
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
Compared to pure monopolies, oligopolies ______.
may be less desirable because they are not regulated by government to protect consumers
Which of the following represent shortcomings of the four-firm concentration ratio?
world trade interindustry competition localized markets dominant firms
How does a repeated game impact firms' behaviors?
Firms may reciprocate their rivals' actions. Firms may restrain from competing as hard as possible. Firms may want to cooperate.
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
The fact that industry concentration may be overstated because the four-firm concentration ratio only accounts for production within the United States represents what kind of shortcoming with the four-firm concentration ratio?
Import competition
What are the positive effects of large oligopolists advertising?
It lowers search costs of information for consumers. It enhances competition and reduces monopoly power.
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
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
Which of the following are obstacles to collusion in an oligopolistic industry?
Recession Antitrust laws Cheating Demand and cost differences
What are oligopolists able to do by controlling price through collusion?
Reduce uncertainty Increase profits Prohibit the entry of new rivals
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
In a sequential game, how does the firm that moves first impact the outcome of the game?
The first firm can establish a Nash equilibrium that is favorable to the first firm.
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).
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.
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.
Based on the figure, why would a firm deviate from a collusive outcome as presented in the payoff matrix?
To increase its profit
Which are reasons that that firms merge?
To increase market share To increase economies of scale To obtain lower input prices To increase control over the product's price
Oligopolies are comprised of ______.
a few large producers
Over a long time period, cheating ______ collusive oligopolies
threatens
To reduce uncertainty or increase profits, oligopolists may change their prices ______.
through collusion
Oligopolistic behavior implies that oligopolists prefer competition ______.
through product development through advertising
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
As the first mover in a sequential game, the firm is able to its rivals from entering the market.
: preempt, prevent, block, prohibit, or restrict
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 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
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
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.
What does a demand curve look like for an oligopolistic firm?
It could be downward sloping or kinked.
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?
Ownership and control of raw materials Patents Large capital investment Preemptive pricing
What are three models used to study pricing and output by oligopolies?
Price leadership model Collusive pricing model Kinked-demand curve model
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 is failing to produce at the profit-maximizing output. The firm's demand curve will shift further to the left. The firm's profits will be lower.
Which of the following is a model used to examine oligopolistic pricing?
The kinked-demand curve model
Advertising can persuade consumers to pay higher prices for products that are well (one word) instead of purchasing unadvertised products with lower prices.
advertised
True or false: Firms in an oligopoly always produce a homogeneous product.
false
Oligopolies have ______.
fewer firms than monopolistic competition
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
Compared to monopolies, oligopolies ______.
give the appearance of increased competition
For an industry to be considered an oligopoly the four-firm concentration ratio must be ______.
greater than or equal to 40%
When the number of firms in an oligopolistic industry increases from 3 to 10, it is ______ to collude.
harder
Price leadership in an oligopoly entails a type of ______.
implicit collusion
Companies often merge to ______ monopoly power.
increase
Collusion becomes more difficult as the number of firms .
increases, rises, goes up, or grows
Oligopolies are not a desirable market structure because they achieve ______.
neither productive efficiency nor allocative efficiency
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) _ (Enter one word) is a market dominated by a few large producers of a homogeneous or differentiated product.
oligopoly
When members of an oligopoly react to price changes by a dominant firm, the model is most applicable. (Enter one word per blank.)
price leadership
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. (Enter one word for each blank.)
price; non-price
The greater the difference in demand and costs between firms, the more difficult it is for firms to agree on .
prices
By controlling ______ through collusion, oligopolists may be able to reduce ______, ______ profits and block the entry of new rivals.
prices; uncertainty; increase
Oligopolists often compete through product development and advertising instead of price because ______.
product development and advertising are relatively difficult to copy
Advertising can reduce efficiency by ______.
providing misleading information manipulating consumer preferences
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 (Enter one word).
recession
When a game between rivals occurs more than once, it is called a ______ game.
repeated
A game that is played more than once between rivals is a (Enter one word) game.
repeated or repeat
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, prisoners dilemma, or repeated
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