Exam 14: Oligopoly

Explain the underlying assumptions of the price leadership model. What conclusions can be made about the price charged and the output produced in an industry that has a dominant price leader?

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Question 1

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The assumptions are: the industry is made up of one large firm and a number of smaller, competitive firms; the dominant firm maximizes profit subject to the constraint of market demand and subject to the behavior of smaller, competitive firms; and the dominant firm allows the smaller firms to sell all they want to at the price that the leader has set. The price charged and the output produced is between the price set by the perfectly competitive and the monopoly solutions.

Under what conditions does an oligopoly market result in the same outcome as perfect competition? What does this imply for the oligopoly's long-run profits?

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Question 2

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Oligopoly results in the perfectly competitive outcome when markets are contestable and oligopolists do not or are not successful at colluding. Because prices are pushed to their long-run average costs, positive profits will not persist.

What is a dominant strategy?

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Question 3

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In game theory, a dominant strategy is a strategy that is best no matter what the opposition does.

Assuming that firms do not collude, compare the market outcome under oligopoly with the outcome under monopoly.

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Question 4

List three reasons why oligopolies are considered to be inefficient.

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Question 5

Evaluate the following statement. The Cournot model basically assumes that the sole decision of each firm in a duopoly is one of determining how much to produce not which price to set.

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Question 6

What is a cartel?

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Question 7

What two conditions must be present for a cartel to work?

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Question 8

The philosopher John Rawls argued that if people could make arrangements about how society would be organized before they were born that one of the principles that we would agree upon is that social and economic inequalities are to be arranged so that they are to be of the greatest benefit to the least-advantaged members of society. What economic strategy sounds akin to this idea? Explain.

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Question 9

Bob and Joe both own convenience marts on opposite corners. Both firms are considering expanding the size of their stores. The payoff matrix for this decision is shown below. Does Bob's Mart have a dominant strategy? Explain.

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Question 10

What is necessary for a firm to be part of a perfectly contestable market?

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Question 11

What conditions are necessary for a cartel to work? Diagram equilibrium price and output determination in a collusive oligopoly market. Explain how a decrease in demand accompanied by cheating by members can help break up a cartel.

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Question 12

Why might an oil cartel's effectiveness be undermined during a recession but strengthened during an economic boom?

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Question 13

Suppose that the firms in an oligopolistic industry successfully collude. What will be the outcome? Explain.

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Question 14

How do we know when a market is contestable?

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Question 15

Fred and Barney are arrested and charged with illegal concealment of a weapon. The police suspect that Fred and Barney have robbed the local McDino's (fast food restaurant), but do not have enough evidence to make the robbery charge stick. The district attorney separates them and offers them the deal shown in the payoff matrix below. Can we predict what each will do? Explain.

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Question 16

What is the Celler-Kefauver Act?

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Question 17

Describe the Cournot model.

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Question 18

Define a tit-for-tat strategy.

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Question 19

Assume two nations are involved in an arms race. They both assume that each faces two choices - sign disarmament accord or continue with military expansion and the building of more nuclear missiles. Explain using the prisoner's dilemma model why both of these nations will choose to escalate the arms race rather than choose bilateral disarmament. During the Cold War President Ronald Reagan was quoted as saying that the United States will "trust, but verify" when discussing nuclear nonproliferation agreements between the U.S. and the Soviet Union. How does this relate to your answer to the first part of this question?

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Question 20

Showing 1 - 20 of 53

Explain the underlying assumptions of the price leadership model. What conclusions can be made about the price charged and the output produced in an industry that has a dominant price leader?

Under what conditions does an oligopoly market result in the same outcome as perfect competition? What does this imply for the oligopoly's long-run profits?

What is a dominant strategy?

Assuming that firms do not collude, compare the market outcome under oligopoly with the outcome under monopoly.

List three reasons why oligopolies are considered to be inefficient.

Evaluate the following statement. The Cournot model basically assumes that the sole decision of each firm in a duopoly is one of determining how much to produce not which price to set.

What is a cartel?

What two conditions must be present for a cartel to work?

Bob and Joe both own convenience marts on opposite corners. Both firms are considering expanding the size of their stores. The payoff matrix for this decision is shown below. Does Bob's Mart have a dominant strategy? Explain.

What is necessary for a firm to be part of a perfectly contestable market?

What conditions are necessary for a cartel to work? Diagram equilibrium price and output determination in a collusive oligopoly market. Explain how a decrease in demand accompanied by cheating by members can help break up a cartel.

Why might an oil cartel's effectiveness be undermined during a recession but strengthened during an economic boom?

Suppose that the firms in an oligopolistic industry successfully collude. What will be the outcome? Explain.

How do we know when a market is contestable?

What is the Celler-Kefauver Act?

Describe the Cournot model.

Define a tit-for-tat strategy.

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Monopolistic Competition

Externalities, Public Goods, and Social Choice

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