Exam 14: Oligopoly: Firms in Less Competitive Markets

In which of the following cartels is total cartel profit likely to be the highest?

Table 14-4 Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito.Each firm must decide on whether to increase its advertising budget to compete for customers.If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit.Table 14-4 shows the payoff matrix for this advertising game. -Refer to Table 14-4.Does Baine have a dominant strategy and if so, what is it?

Figure 14-4 Rainbow Writer (RW)is a small online company selling a highly rated software package for engraving words onto objects produced by 3D printers.The firm currently earns a profit of $2 million per year selling its package exclusively on its Website.Odeon, the producer of the most popular 3D printers has expressed interest in bundling Rainbow Writer's product with its printers.Odeon expects that bundling would further boost its sales and allow it to sell its printers at a higher price, thus raising its profits beyond its current profit of $12 million.Figure 14.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 14-4.How will Rainbow Writer respond to Odeon's two possible offers?

Table 14-1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow.Each firm must decide on whether to increase its advertising spending to compete for customers.Table 14-1 shows the payoff matrix for this advertising game. -Refer to Table 14-1.Is there a dominant strategy for Star Connections and if so, what is it?

Each member of OPEC can increase its income by selling more oil than its output quota because

Article Summary In June 2015, Fiat Chrysler outsold Ford in terms of sales to individual consumers at dealerships, with one reason being the higher incentives offered by Fiat Chrysler. According to Autodata Corp., Fiat Chrysler spent an average of $3,382 in incentives on each vehicle sold, compared to $2,595 by Ford. For the first six months of 2015, General Motors spent an average of $3,427 on discounts, lease incentives, and rebates, compared to $3,277 for Fiat Chrysler and $2,736 for Ford. According to the National Auto Dealers Association, the industry is on track to sell 17.2 million domestic automobiles in 2015, which would be the second-best year for auto sales for American car companies. Source: Mike Ramsey and John D. Stoll, "Chrysler Hits Retail Milestone, Tops Ford," Wall Street Journal, July 1, 2015. -Refer to the Article Summary above.What happens to the profit a car company makes on each car sold if it offers incentives such as discounts, cash rebates, or lease incentives to customers? How might a car company decide which of these strategies to use?

When Walmart decides to build a new retail store in a town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit.What other motive would Walmart have for choosing to build a large store?

We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries, but not for oligopoly firms.The reason for this is

Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs.

Figure 14-4 Rainbow Writer (RW)is a small online company selling a highly rated software package for engraving words onto objects produced by 3D printers.The firm currently earns a profit of $2 million per year selling its package exclusively on its Website.Odeon, the producer of the most popular 3D printers has expressed interest in bundling Rainbow Writer's product with its printers.Odeon expects that bundling would further boost its sales and allow it to sell its printers at a higher price, thus raising its profits beyond its current profit of $12 million.Figure 14.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 14-4.What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium?

Why are decision trees useful to managers who plan business strategies?

Explain how collusion makes firms better off.Given the incentives to collude, briefly explain why every industry does not become a cartel.

Explain why OPEC is caught in a prisoner's dilemma?

Table 14-10 -Refer to Table 14-10.Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil.Saudi Arabia and Yemen must decide how much oil to produce.Since the demand for oil is inelastic, relatively low production rates drive up prices and profits.Saudi Arabia, the world's largest and lowest-cost producer, is able to influence market price; it has an incentive to keep output low.Yemen, on the other hand, is a relatively high-cost producer with much smaller reserves.Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output. a.Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Yemen $25 million to produce a low output. b.What is the dominant strategy for each country in this new game? c.What is the new Nash equilibrium?

What do Spotify and Apple have in common?

In Porter's Five Competitive Forces model, "competition from substitute goods or services" refers to

A market comprised of only two firms is called a

In an oligopoly market

Which of the following is not one of the five competitive forces?

Which of the following is an example of implicit collusion?