Deck 13: Strategic Decision Making in Oligopoly Markets

Question 1

When participants in a game choose to take actions that result in a Nash equilibrium,

A)no single participant has an incentive to change its action.
B)each participant has chosen the best action possible,given what the others have chosen.
C)no other set of actions could make ALL participants better off.
D)both a and b
E)all of the above

Answer 1

D

Question 2

Profits are interdependent in oligopoly markets because

A)products are differentiated.
B)managers are trying to set prices cooperatively in order to maximize total industry profit.
C)entry into the market is not restricted by some form of entry barrier.
D)each firm in the market is relatively large.
E)all of the above

Answer 2

D

Question 3

Actions taken by oligopolists to plan for and react to actions of rival firms represent

A)strategic behavior.
B)interdependence.
C)cooperative behavior.
D)game theory.
E)all of the above.

Answer 3

A

Question 4

A form of strategic entry deterrence is

A)forming a cartel.
B)maintaining excess capacity.
C)limit pricing.
D)both b and c
E)all of the above

Question 5

Refer to the following figure.Two firms,A and B,produce similar,but not identical,products.BR_A and BR_B are,respectively,the reaction functions for firms A and B,which compete primarily by price. If firm A predicts B will set a price of $12,then firm A should charge a price of $______ to maximize A's profit.

A)$6
B)$8
C)$10
D)$12

Question 6

In game theory,a dominant strategy is

A)a strategy used by a large firm to compete against smaller firms.
B)a strategy followed by the price leader.
C)a strategy involving a high risk but also a high return.
D)a strategy that leads to the best outcome no matter what a rival does.
E)none of the above

Question 7

One reason a firm or firms might charge a price lower than its profit-maximizing price is

A)to discourage the entry of new firms.
B)to follow a tit-for-tat strategy.
C)to erect multiproduct barriers to entry.
D)both a and c
E)all of the above

Question 8

Refer to the following figure.Two firms,A and B,produce similar,but not identical,products.BR_A and BR_B are,respectively,the reaction functions for firms A and B,which compete primarily by price. A's best-response curve shows

A)all the Nash equilibrium prices that firm A can charge.
B)how firm B should react to any price set by A.
C)the price A should charge to maximize A's profits given each possible price that B might charge.
D)the price A should charge to maximize joint profits.
E)both c and d

Question 9

What is the most important characteristic of oligopoly?

A)firms have market power
B)product differentiation
C)low barriers to entry
D)interdependence of profits
E)none of the above

Question 10

Interdependence occurs when

A)firms consider the actions of other firms when making price and output decisions.
B)all firms in an industry are affected by the same general economic conditions,like consumer incomes and the unemployment rate.
C)firms cooperate to increase profit.
D)both a and b
E)all of the above

Question 11

Refer to the following figure showing the reaction functions of oligopoly firms A and B. In Nash equilibrium,

A)firm A runs 4 ads and firm B runs 7 ads.
B)firm A runs 7 ads and firm B runs 4 ads.
C)firm A runs 2 ads and firm B runs 2 ads.
D)firm A runs 3 ads and firm B runs 5 ads.
E)none of the above.

Question 12

Which of the following is an example of strategic entry deterrence?

A)price reductions to increase market share
B)building excess capacity
C)economies of scale
D)both b and c
E)both a and b

Question 13

In a duopoly situation with two firms A and B,A's best-response curve

A)gives A's profit-maximizing price given B's anticipated price.
B)gives A's minimax solution.
C)is derived based upon the underlying interdependence of firms A and B.
D)both a and c
E)all of the above

Question 14

In an oligopoly market,

A)a firm must lower price in order to sell more output.
B)each firm faces a demand curve that depends on how the firm's rivals behave.
C)a few firms account for a large portion of industry sales.
D)both a and b
E)all of the above

Question 15

Refer to the following figure showing the reaction functions of oligopoly firms A and B. If firm A anticipates that firm B will run 3 ads,then firm A should run _____ ads in order to maximize its own profit.

A)1
B)2
C)4
D)5
E)6.5

Question 16

Refer to the following figure.Two firms,A and B,produce similar,but not identical,products.BR_A and BR_B are,respectively,the reaction functions for firms A and B,which compete primarily by price. If firm A is expected to charge a price of $6,B should charge a price of $______ to maximize B's profit.

A)$4
B)$7
C)$12
D)$16

Question 17

Refer to the following figure.Two firms,A and B,produce similar,but not identical,products.BR_A and BR_B are,respectively,the reaction functions for firms A and B,which compete primarily by price. In Nash equilibrium,

A)each firm has an incentive to increase price unilaterally.
B)the two firms are maximizing joint profit.
C)firm A charges $12 and firm B charges $16.
D)each firm is maximizing its profit,given what the other is doing.
E)both c and d

Question 18

In game theory,what is a dominant strategy?

A)A strategy that leads to the best possible outcome for both firms.
B)Any strategy that leads to a Nash equilibrium.
C)A strategy that yields a minimax outcome.
D)A strategy that leads to the best outcome for a firm no matter what strategy the other chooses.
E)none of the above

Question 19

Refer to the following figure showing the reaction functions of oligopoly firms A and B. If firm B expects firm A will run 2 ads,then firm B should run _____ ads in order to maximize its own profit.

A)1
B)3
C)5
D)6
E)7

Question 20

Oligopolists face interdependent profits because

A)there are few firms in the market.
B)the product is differentiated.
C)industry sales are large.
D)all of the above

Question 21

Use the following payoff table for Hardaway Corporation and Paxton Industries.These two firms must make simultaneous pricing decisions.They can choose low,medium,or high prices. Following the procedure of successive elimination of dominated strategies,the manager of Hardaway Corporation will eliminate in the first round the strategy of setting

A)a low price.
B)a medium price.
C)a high price.
D)None of the above; Hardaway does not have a dominated strategy.

Question 22

Which of the following are trigger strategies?

A)eye-for-an-eye
B)tit-for-tat
C)grim
D)both b and c
E)all of the above

Question 23

In a repeated decision for which the present value of the benefits of cheating is greater than the present value of the costs of cheating,

A)deciding not to cheat is a value-maximizing decision.
B)deciding to cooperate is a value-maximizing decision.
C)deciding to cheat is a value-maximizing decision.
D)both a and b

Question 24

Credible commitments give committing firms

A)the first moves in sequential games.
B)a second-mover advantage in sequential games.
C)a way to improve their payoffs.
D)both a and c
E)both b and c

Question 25

Use the following payoff table for Hardaway Corporation and Paxton Industries.These two firms must make simultaneous pricing decisions.They can choose low,medium,or high prices. Following the procedure of successive elimination of dominated strategies,the manager of Paxton Industries will eliminate in the first round the strategy of setting

A)a low price.
B)a medium price.
C)a high price.
D)None of the above; Paxton Industries does not have a dominated strategy.

Question 26

In a repeated decision for which the present value of the benefits of cheating is less than the present value of the costs of cheating,

A)deciding not to cheat is a value-maximizing decision.
B)deciding to cooperate is a value-maximizing decision.
C)deciding to cheat is a value-maximizing decision.
D)both a and b

Question 27

In sequential decision-making situations,using the roll-back method

A)results in a Nash equilibrium.
B)allows the decision maker going second to predict what the decision maker going first will do.
C)allows predictions about what the decision maker going second will do to be used by the decision maker going first.
D)both a and b
E)both a and c

Question 28

A conditional strategic move,such as a threat or promise,can be credible only if

A)rivals believe the manager making the threat or promise can be trusted to follow through on any commitment,threat,or promise that he or she makes.
B)the strategic move harms rivals.
C)it can increase each firm's payoff.
D)when the time comes to carry out the threat or promise,fulfilling the threat or promise is in the best interest of the firm making the threat or promise.
E)none of the above.

Question 29

Two men's clothing stores that compete for most of the market in a small town in Ohio must choose their advertising levels simultaneously.The following payoff table facing the two firms,Arbuckle & Son and Mr.B's,shows the weekly profit outcomes for the various advertising level combinations. Which of the following statements is NOT true for the advertising decision facing Arbuckle & Son and Mr.B?

A)When both firms choose a high level of advertising,they are in Nash equilibrium.
B)When both firms choose a low level of advertising,they are in Nash equilibrium.
C)This is a prisoners' dilemma decision situation.
D)Cell's B and C are not strategically stable.
E)A dominant strategy equilibrium exists for Arbuckle and Mr.B.

Question 30

A credible commitment is

A)always irreversible.
B)a way of becoming the first-mover in sequential decision situation.
C)an unconditional strategic move.
D)both a and c
E)all of the above

Question 31

Which strategy for punishing cheating has consistently been the winning strategy in tournaments pitting decision strategies against one another?

A)grim
B)eye-for-an-eye
C)tit-for-tat
D)Nash strategy

Question 32

Firms make credible commitments by taking _________________ ,_______________ actions.

A)irreversible,unconditional
B)reversible,uncontrollable
C)reversible,believable
D)costly,but believable
E)costly,reversible

Question 33

In a prisoners' dilemma decision that is made only one time,

A)the Nash equilibrium is a non-cooperative outcome.
B)a set of decisions exists that is better than the Nash decisions for each and every oligopoly firm.
C)the discount rate is irrelevant for decision making.
D)rivals have no way to punish cheaters.
E)all of the above.

Question 34

Two men's clothing stores that compete for most of the market in a small town in Ohio and will choose their weekly advertising levels sequentially.The newspaper advertising department calls the clothing stores in alphabetical order to find out how much advertising each firm wishes to buy.Somehow - and nobody at the newspaper knows exactly how this happens - Arbuckle's advertising decision "leaks out" to Mr.B's,which then knows Arbuckle's advertising decision when it makes its advertising decision for the week. The following payoff table facing the two firms,Arbuckle & Son and Mr.B's,shows the weekly profit outcomes for the various advertising decision combinations.The payoff table is common knowledge.Use this payoff table to construct the appropriate sequential decision on the blank game tree provided below. If the manager at Arbuckle and Son employs the roll-back method to make the advertising decision for Arbuckle,the likely outcome will be$3,500 of weekly profit for Arbuckle and $3,500 of weekly profit for Mr.B's.

A)$5,000 of weekly profit for Arbuckle and $5,000 of weekly profit for Mr.B's.
B)$5,000 of weekly profit for Arbuckle and $3,000 of weekly profit for Mr.B's.
C)$3,000 of weekly profit for Arbuckle and $5,000 of weekly profit for Mr.B's.
D)$4,000 of weekly profit for Arbuckle and $4,000 of weekly profit for Mr.B's.

Question 35

In a one-time prisoners' dilemma decision,

A)all firms expect the other firms to cheat.
B)cheating is usually not a value-maximizing decision.
C)cheating is less likely when the discount rate is low.
D)cheating is less likely when the discount rate is high.

Question 36

In simultaneous decision-making situations,common knowledge means that

A)at least one of the decision makers knows what is going to happen.
B)all of the decision makers know what the outcome of the decision will be.
C)even people not involved in making the decision will be able predict the outcome.
D)the managers of the firms failed to keep all of the information about their decision plans secret.
E)none of the above

Question 37

Two men's clothing stores that compete for most of the market in a small town in Ohio and will choose their weekly advertising levels sequentially.The newspaper advertising department calls the clothing stores in alphabetical order to find out how much advertising each firm wishes to buy.Somehow - and nobody at the newspaper knows exactly how this happens - Arbuckle's advertising decision "leaks out" to Mr.B's,which then knows Arbuckle's advertising decision when it makes its advertising decision for the week. The following payoff table facing the two firms,Arbuckle & Son and Mr.B's,shows the weekly profit outcomes for the various advertising decision combinations.The payoff table is common knowledge.Use this payoff table to construct the appropriate sequential decision on the blank game tree provided below. When Arbuckle and Son makes its advertising decision first,

A)it need not consider what Mr.B's advertising decision will be since Arbuckle and Son cannot know what decision Mr.B will make.
B)the common knowledge that both managers have about the payoff table ensures that Arbuckle will earn $5,000 of weekly profit.
C)it should use the roll-back method to ensure that it will earn $5,000 of weekly profit.
D)all of the above.
E)none of the above

Question 38

Punishment for cheating on pricing agreements usually takes the form of

A)a retaliatory advertising campaign.
B)a retaliatory price cut.
C)a legal suit.
D)a monetary fine.

Question 39

Which of the following is not evidence of oligopoly interdependence?

A)strategic behavior
B)the need to get into the heads of rival managers
C)making decisions that result in the equating of marginal revenue and marginal cost
D)thinking ahead in sequential decisions to anticipate rivals' future actions

Question 40

A second-mover advantage

A)exists when a firm can earn greater profit by reacting to earlier decisions made by rivals.
B)always arises when there is not a first-mover advantage in a sequential decision.
C)arises because rivals have imperfect information about payoffs.
D)none of the above

Question 41

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. If both firms cooperate,Alpha will choose a _________ level of advertising and Beta will choose a _________ level of advertising.

A)high; high
B)high; low
C)low; high
D)low; low

Question 42

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made simultaneously. Sony's dominant strategy is

A)Alpha
B)Beta
C)neither Alpha nor Beta (Sony has no dominant strategy)
D)both Alpha and Beta

Question 43

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made sequentially,and Zenith makes a strategic commitment to one of the technologies so that Zenith can make the first move.Zenith will choose ________ and Sony will choose ______.

A)Alpha; Alpha
B)Alpha; Beta
C)Beta; Beta
D)Beta; Alpha

Question 44

Which of the following will NOT make cooperation more likely?

A)any action that reduces the benefit of cheating
B)a strategy of price matching
C)posting prices on the internet
D)any action that makes it more costly to monitor rival's prices.
E)developing a reputation for harshly punishing cheating

Question 45

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 (rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. If the condition in the question above is met,Burger Doodle will set price equal to $________ and it will earn $__________ of profit while Designer Burger will earn $__________ of profit.

A)8; 125,000; 0
B)8; 75,000; -40,000
C)10; 101,000; 25,000
D)10: 96,000; 25,000
E)12; 165,000; 0

Question 46

Price leadership

A)is rather uncommon today.
B)is a pricing arrangement in which one firm in an oligopoly agrees to act as a cartel manager and set a price that will maximize the profits of all the firms in the oligopoly market.
C)would not be useful to a dominant firm if it could eliminate all its rivals through a price war.
D)none of the above

Question 47

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. Beta expects punishment to last for two months after being caught .What would be the value-maximizing decision for Beta?

A)Cooperate since $3,000 > PV_{Benefits of cheating}.
B)Cooperate since $6,500/(1.025)> PV_{Benefits of cheating}.
C)Cheat since PV_{Benefits of cheating} > $2,820.
D)Cheat since PV_{Benefits of cheating} < $5,641.

Question 48

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. When Alpha punishes Beta with a retaliatory adjustment in its advertising expenditures,Beta will suffer an undiscounted penalty of $_________ for each month that punishment continues.

A)$1,500
B)$2,000
C)$3,000
D)$4,000
E)$5,000

Question 49

Tacit collusion in a market represents a method for

A)collusion to discourage entry into the market.
B)a price-fixing agreement when such agreements are legal.
C)agreeing on price without explicit communication among firms.
D)cheating on a cartel price.
E)none of the above

Question 50

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. If Beta decides not to cooperate,its undiscounted benefit from cheating for one month is

A)$1,500
B)$2,000
C)$3,000
D)$4,000
E)$5,000

Question 51

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 (rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. If the condition in the question 13-67 is NOT met,Burger Doodle will set price equal to $________ at decision node 3 and it will earn $__________ of profit while Designer Burger will earn $__________ of profit.

A)8; 125,000; 0
B)8; 75,000; -40,000
C)10; 101,000; 25,000
D)10: 96,000; 25,000
E)12; 165,000; 0

Question 52

Tacit collusion

A)is a form of cooperation that occurs without explicit communication.
B)is illegal per se in the U.S.
C)involves strict adherence to quotas.
D)seems to rare,especially among manufacturers of consumer durables.

Question 53

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 (rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. If the condition in the question above is NOT met,Burger Doodle will set price equal to $________ at decision node 1 and the outcome _____________(is,is not)a Nash equilibrium.

A)8; is
B)8; is not
C)12; is
D)12; is not

Question 54

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made simultaneously. Which cells are Nash equilibrium cells?

A)Cell A
B)Cell B
C)Cells A and D
D)Cells A,B,and D
E)Cell D

Question 55

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made sequentially,and Sony makes a strategic commitment to one of the technologies so that Sony can make the first move.Sony will choose ________ and Zenith will choose ______.

A)Alpha; Alpha
B)Alpha; Beta
C)Beta; Beta
D)Beta; Alpha

Question 56

Price matching is a strategic move that

A)seeks to make cheating unprofitable.
B)must generally be announced publicly in order to have the desired effect.
C)has no usefulness to managers if a simultaneous pricing decision is going to be made only one time.
D)both a and b
E)all of the above

Question 57

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. If Beta expects to get caught the first month it cheats,the present value of the benefits of cheating is

A)$1,234
B)$2,927
C)$6,500/(1.025)
D)$6,500/(1.025)²

Question 58

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 (rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. In order for Burger Doodle to successfully implement a limit pricing strategy for entry deterrence,it must be able to

A)convince Designer Burger that it will set the Nash price of $10 should Designer Burger decide to stay out of the market.
B)convince Designer Burger that it will set the Nash price of $10 should Designer Burger decide to enter the market.
C)make a credible commitment to maintain its initial price should Designer Burger decide to enter the market.
D)make a credible promise to price its burgers at $12.
E)make a credible threat to lower its price to $8 should Designer Burger choose to enter it market.

Question 59

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made simultaneously. Zenith's dominant strategy is

A)Alpha
B)Beta
C)neither Alpha nor Beta (Zenith has no dominant strategy)
D)both Alpha and Beta

Question 60

Cooperation is achieved in an oligopoly market when

A)most of the firms in the market decide not to cheat.
B)some of the firms in the market decide not to cheat.
C)at least one of the firms in the market decide not to cheat.
D)all of the firms in the market decide not to cheat.

Question 61

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made sequentially.Sony ________ (does,does not)possess a second-mover advantage,and Zenith ________ (does,does not)possess a second-mover advantage

A)does; does
B)does; does not
C)does not; does
D)does not; does not

Question 62

Sony and Zenith must each decide which technology to utilize in building their 2019 model high definition television (HDTV)sets: either Alpha technology or Beta technology.Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology.The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes: Suppose the technology decision will be made sequentially.Sony ________ (does,does not)possess a first-mover advantage,and Zenith ________ (does,does not)possess a first-mover advantage

A)does; does
B)does; does not
C)does not; does
D)does not; does not