Deck 9: Market Structure: Oligopoly

Question 1

Suppose an oligopoly consists of two firms. Firm A lowers price and Firm B responds by lowering its price by the same amount. If average costs and industry output remain the same, which of the following will occur?

A) The profits of the two firms will increase.
B) The profits of the two firms will decrease.
C) The profits of the two firms will remain the same.
D) Barriers to entry will come tumbling down and new firms will enter.

Answer 1

B

Question 2

According to the information presented in the text the bottled water market could best be characterized as:

A) a perfectly competitive market.
B) a monopolistically competitive market.
C) an oligopoly.
D) a monopoly.

Answer 2

C

Question 3

The carbonated soft drink industry can best be described as:

A) an oligopoly.
B) a monopoly.
C) perfectly competitive.
D) monopolistically competitive.

Answer 3

A

Question 4

Which of the following is not an example of a noncooperative oligopoly model?

A) The kinked demand curve model.
B) The model of limit pricing.
C) The prisoner's dilemma game.
D) The cartel model.

Question 5

Which of the following best illustrates the mutual interdependence among firms in the airline industry?

A) The considerable efforts made by the various competitors to coordinate fare increases.
B) The unwillingness of individual firms to match increased amenities offered by other firms.
C) The substantial profits airlines have earned over the past several years.
D) The virtual absence of control over costs by any of the firms operating in the industry.

Question 6

The key distinguishing characteristic of an oligopoly is the:

A) presence of long-run economic profits.
B) fact that in all cases firms produce a standardized product.
C) mutual interdependence of the firms in the market.
D) near total absence of advertising.

Question 7

According to the kinked demand curve model, if an oligopolistic firm lowers its price, it should expect to see its total revenue:

A) increase.
B) stay the same.
C) decrease
D) cannot be determined without more information.

Question 8

Suppose an oligopolistic firm raises the price of its output. Demand for the firm's output will be relatively price if the other dominant firms in the market .

A) elastic; do not raise price
B) unit elastic; do not raise price
C) inelastic; also raise price
D) cannot be determined

Question 9

Assume the production of a particular good is characterized by significant economies of scale. In addition, three different versions of the good can be produced, and large segments of the population prefer different versions of the good. In this case, the preferred market structure for this good would be:

A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) oligopoly.

Question 10

Assume the four-firm concentration ratio in industry X is 75 percent and that the firms in the industry produce a differentiated product. Industry X most likely would be characterized as:

A) perfectly competitive.
B) a monopoly.
C) monopolistically competitive.
D) an oligopoly.

Question 11

Which of the following best describes the basic characteristics of noncooperative oligopoly models?

A) Managers make decisions based on the strategy they think their rivals will pursue.
B) Managers attempt to deliberately mislead their rivals regarding the strategy they will pursue.
C) When making decisions, managers basically ignore the mutual interdependence that exists among rivals.
D) Managers refuse to negotiate with their rivals when it comes to such decisions as what price to charge.

Question 12

Which of the following is cited as a problem with the kinked demand curve model?

A) It assumes that firms do not attempt to maximize profits.
B) It assumes that firms determine the profit-maximizing level of output by equating marginal cost and average variable cost.
C) It does not explain how the equilibrium market price is determined.
D) It does not explain the price stickiness that is routinely observed in oligopolistic markets.

Question 13

Assume the firms firms operating in an oligopolistic market experience a relatively small change in marginal costs. According to the kinked demand curve model this would:

A) cause a large change in the profit-maximizing level of output.
B) leave the equilibrium price unchanged.
C) cause the profit-maximizing level of output to change by the same amount and in the same direction.
D) cause the profit-maximizing price to change by the same amount but in the opposite direction.

Question 14

The fact that the firms in an oligopoly are mutually interdependent means that each firm:

A) must consider the reactions of its competitors when it sets the price for its output.
B) produces a product that is similar, but not identical, to the products of its competitors.
C) produces a product that is identical to the products of its competitors.
D) faces a perfectly elastic demand curve for its product.

Question 15

Over the past few years, airlines have tended to compete in the market for intercontinental business class travelers on the basis of:

A) price.
B) cost.
C) timeliness of their flight schedules.
D) amenities.

Question 16

An industry characterized by a small number of dominant firms that face downward-sloping demand curves is best described as:

A) a monopoly.
B) monopolistically competitive.
C) an oligopoly.
D) perfectly competitive.

Question 17

A common theme in the discussions of the airline, soft drink, doughnut, and express delivery industries is that oligopolistic firms tend to compete:

A) strictly on the basis of price.
B) strictly on the basis of cost minimization.
C) primarily on the basis of product differentiation.
D) primarily by erecting barriers into the market.

Question 18

Which of the following would not be classified as an oligopolistic industry?

A) Defense contractors.
B) The recorded music industry.
C) The tobacco industry.
D) The women's clothing industry.

Question 19

The assumption that rival firms will match a firm's price decreases but not its price increases is a basic feature of:

A) model of limit pricing.
B) the kinked demand curve model.
C) the predatory pricing model.
D) cartel theory.

Question 20

Which of the following is not a characteristic of an oligopolistic industry?

A) Substantial barriers to entry.
B) The output produced by the firms in the industry may be homogeneous or differentiated.
C) A small number of large firms.
D) One dominant firm and low entry barriers.

Question 21

In order for the first player to move in a sequential game to be able to gain an advantage from making the first move, the player must:

A) possess a dominant strategy that is better than the other player's dominant strategy.
B) be able to achieve a higher maximum payoff than the other player.
C) follow the same strategy he would pursue in a Nash equilibrium.
D) be able to make a credible commitment to the strategy.

Question 22

The dominant strategy for each of the players in the prisoner's dilemma game does not yield the optimal outcome for each player because:

A) each player is misinformed about the decision that has been made by the other player.
B) the players do not understand the consequences of each of the choices they can make.
C) the two players are not allowed to communicate or otherwise cooperate with each other.
D) each player fails to consider how the other player might act.

Question 23

The success of a predatory pricing strategy in an oligopolistic market depends on all of the following except:

A) the number of firms operating in the industry prior to enactment of the policy.
B) how far the predatory price is below cost.
C) the period of time for which the predatory price is in effect.
D) the length of time over which recoupment of profits occurs.

Question 24

Predatory pricing is used primarily to:

A) discourage new firms from entering a market.
B) reduce limit) the profits of all of the firms in the industry.
C) drive other firms out of a market.
D) establish a minimum price all of the firms in the market will charge.

Question 25

The primary objective of a cartel is to:

A) maximize the amount of profit received by each member of the organization.
B) maximize the joint profits of the members of the organization.
C) ensure each member of the organization some minimum amount of profit.
D) maximize the average profits of the members of the organization.

Question 26

In which of the following situations would each of the members be responsible for producing an equal share of the total amount of output sold by the cartel engaged in joint profit maximization?

A) When the amount of revenue generated by each member of the cartel is the same.
B) When there are no economies of scale in production.
C) When each member of the cartel is using the same scale of production.
D) When marginal costs of production are the same for each of the members of the cartel.

Question 27

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

A) Marginal cost pricing.
B) Limit pricing.
C) Price leadership.
D) Mark-up pricing.

Question 28

Which of following is not a condition that must be met for a cartel to maximize its joint profits?

A) Total output by the cartel must be allocated among the member firms such that the individual firm's marginal costs are equal.
B) The cartel must produce the level of output at which its marginal revenues and marginal costs are equal.
C) The cartel must be operating in the inelastic portion of its demand curve.
D) Each member firm must employ the least-cost method of production.

Question 29

Assume the four major grocery stores in a large metropolitan area decide to meet secretly to fix prices for meat. It would be easiest to maintain this arrangement when:

A) the number of additional competitors is very small.
B) the cost conditions for the four firms differ substantially.
C) individual firms are able to offer secret price discounts to selected buyers.
D) demand for meat and fresh vegetables is falling.

Question 30

Why is the prisoner's dilemma game useful in studying oligopoly behavior?

A) Because oligopolies make out like bandits.
B) To illustrate the problems encountered when making decisions under uncertainty.
C) To show that oligopolies behave as monopolists in the long run and earn positive economic profits.
D) To illustrate how barriers to entry lead to economic profits.

Question 31

In game theory, a Nash equilibrium is defined as:

A) the dominant strategy of each player.
B) a set of strategies for which all players are choosing their best strategy, given the actions of the other players.
C) the set of strategies that result in the maximum payoff to each player.
D) the set of strategies chosen when the players in a game can cooperate with each other.

Question 32

Limit pricing is used primarily to:

A) discourage new firms from entering a market.
B) reduce limit) the profits of all of the firms in the industry.
C) drive other firms out of a market.
D) establish a minimum price all of the firms in the market will charge.

Question 33

A firm could gain from cheating on a cartel agreement by doing all of the following except:

A) raising its price above the agreed level.
B) lowering its price below the agreed level.
C) selling more than its agreed quota.
D) increasing production.

Question 34

Assume a group of firms has formed a cartel and the cartel is in engaged in joint profit maximization. As such, each firm, acting in its own interests, has an incentive to expand production up to the point at which:

A) its marginal cost equals the marginal revenue earned by the cartel.
B) its marginal cost equals the cartel-determined price of the product being sold.
C) its marginal revenue equals the cartel's marginal costs of production.
D) its marginal cost equals the cartel-determined marginal revenue from the good being sold.

Question 35

In order for "limit pricing" to be effective, the firm practicing such a strategy must be able to charge a price that is:

A) lower than the potential entrant's ATC but greater than the firm's own ATC.
B) greater than the potential entrant's ATC but lower than the firm's own ATC.
C) lower than the potential entrant's ATC but greater than the firm's own AVC.
D) greater than the potential entrant's ATC but lower than the firm's own AVC.

Question 36

To maximize joint profits, a cartel must determine the level of output at which:

A) joint marginal revenue equals the marginal cost of the largest member of the cartel.
B) marginal revenue equals joint marginal cost.
C) the horizontally sum of the members marginal cost curves is at a minimum.
D) joint marginal revenue equals the marginal cost of the smallest member of the cartel.

Question 37

In which of the following scenarios would a predatory pricing scheme have the greatest chance of success, all else constant?

A) The predatory price is set well below cost, many rivals are likely to enter after the strategy ends, and profits can be recouped only over a relatively long period of time.
B) The predatory price is set well below cost, relatively few rivals are likely to enter after the strategy ends, and profits can be recouped in a relatively long period of time.
C) The predatory price is set just below cost, many rivals are likely to enter after the strategy ends, and profits can be recouped in a moderate period of time.
D) The predatory price is set just below cost, relatively few rivals are likely to enter after the strategy ends, and profits can be recouped in a very short period of time.

Question 38

In game theory, the strategy that results in the highest payoff to a player regardless of what the other player decides to do is called the:

A) Stackleberg equilibrium.
B) equilibrium strategy.
C) min-max strategy.
D) dominant strategy.

Question 39

Which of the following statements regarding cartels is not correct?

A) Cartels are sometimes difficult to maintain because a member can cheat by raising its price above the agreed price.
B) Cartels restrict industry output in order to raise price.
C) Cartels are inherently stable, because oligopolistic firms rarely change price.
D) are easier to establish and maintain when the cost functions of the individual members are more similar to one another.

Question 40

Which of the following would make it easier to maintain an effective collusive agreement in a cartel?

A) An increase in the number of potential entrants into the industry.
B) A decrease in the elasticity of demand for the cartel's product.
C) An increase in the number of substitutes for the product produced by the cartel.
D) A new method of pricing that makes it more difficult for each firm to monitor the prices that the other firms in the cartel are charging.

Question 41

It has been observed that whenever one imported beer distributor raises its price, other imported beer distributors quickly raise their price as well. Such behavior is characteristic of:

A) the barometric-firm model of price leadership.
B) explicit collusion.
C) price leadership.
D) the kinked-demand curve model of oligopoly.

Question 42

Firms have tried a number of different strategies to reduce the negative effects of competition on their ability to earn economic profits. Which of the following strategies is most desirable from the viewpoint of economic efficiency and consumer well being?

A) Collusion.
B) Price leadership.
C) Formation of cartels.
D) Investment in research and development.

Question 43

The kinked demand curve model is based on the assumption that firms' pricing decisions are independent of one another because demand is determined by non-market forces.

Question 44

Price leadership:

A) has rarely occurred in U.S. history.
B) is always illegal in the United States.
C) is usually the result of a dominant firm in the industry.
D) usually results in the smaller firms in the industry incurring economic losses.

Question 45

Assume firm X is one of the three largest firms in an oligopolistic industry. Firm X is currently considering a vertical merger with another firm that is the sole supplier of an input used by all of the firms that compete with firm X. If the merger goes through, firm X would be able to operate much like:

A) a perfectly competitive firm.
B) a monopolistically competitive firm.
C) an oligopolist.
D) a monopolist.

Question 46

Which of the following is not an example of a practice that facilitates "tacit collusion"?

A) Uniform prices charged by the firms in a particular industry.
B) Advance notice of price changes by one or more of the firms in an industry.
C) The use of most-favored-customer clauses.
D) The formation of a cartel.

Question 47

Assume the firms in an oligopoly produce a differentiated product and are initially colluding. If each firm begins to cheat to increase sales) by underpricing the other firms, as the amount of cheating increases, the resulting industry price and output will approach the outcome for:

A) perfect competition.
B) monopolistic competition.
C) noncooperative monopoly.
D) noncooperative oligopoly.

Question 48

Firms in an oligopoly market will have a more difficult time maintaining price coordination when:

A) demand for the firms' products remains stable.
B) the firms' cost structures are similar.
C) the firms' products are highly differentiated.
D) each firm controls the same share of the market.

Question 49

Because each firm has a relatively large share of the market, the actions of one firm do not have much effect on the decision making of other firms in an oligopolistic market.

Question 50

From the airlines' perspective, amenities competition is preferable to price competition because revenues are not adversely affected and it is easier to determine the strategies of one's competitors.

Question 51

One of the surprising conclusions of many of the noncooperative models of oligopoly is that firms end up better off with the noncooperative outcome than they would by cooperating with one another.

Question 52

In comparing an oligopolistic firm to a perfectly competitive firm it is generally assumed that the price charged by the competitive firm will be higher than the price charged by the oligopolistic firm.

Question 53

Which of the following is the best example of tacit collusion?

A) The formation of a cartel.
B) Price leadership.
C) Predatory pricing.
D) Noncooperative pricing behavior.

Question 54

Pepsi and Coke have competed in the market for bottled water primarily on the basis of convenience and product differentiation as a means to avoid the negative effects on revenue that result from price competition.

Question 55

Which of the following statements is correct?

A) A firm with high fixed costs tends to decrease prices more and output less in the face of declining demand than a firm with relatively low fixed costs.
B) A firm with high fixed costs tends to decrease prices less and output more in the face of declining demand than a firm with relatively low fixed costs.
C) A firm with high fixed costs tends to decrease prices and output more in the face of declining demand than a firm with relatively low fixed costs.
D) A firm with high fixed costs tends to decrease prices and output less in the face of declining demand than a firm with relatively low fixed costs.

Question 56

It is reasonable to expect that if one firm in an oligopolistic market raises price, the its competitors will do the same so that all firms can earn increased revenues.

Question 57

One could argue that price competition among oligopolistic firms is highly likely to cause the revenues of individual firms to decline, while competition on the basis of product differentiation could cause demand, and total revenues, of individual firms to increase.

Question 58

Although Coca-Cola and PepsiCo are major players in the soft drink industry, the large number of other competing firms means that the industry is most accurately characterized as monopolistically competitive.

Question 59

Which of the following statements regarding OPEC is false?

A) Because it sells a homogeneous product, since its formation in 1960 OPEC has been the clear leader when it comes to determining the price of crude oil.
B) OPEC's membership includes countries from the Middle East, Africa, and South America.
C) Over time, OPEC's ability to control the price of oil has been constrained by changes in consumer demand and increased production of oil by non-member countries.
D) The cartel has not always been successful when it comes to preventing individual members from cheating on the agreed upon production quotas.

Question 60

Mutual interdependence among firms is one of the key characteristics of an oligopoly market that distinguishes it from the other three major market structures.

Question 61

The decision by the federal government to prohibit cigarette companies from advertising on television actually caused the companies' profits to increase, an outcome that is consistent with the prediction of the prisoner's dilemma game.

Question 62

In game theory, a Nash equilibrium is the set of strategies each of the players chooses by selecting the strategy that maximizes her payoff independent of what the other players might choose.

Question 63

Assume a firm has decided to undertake a limit pricing strategy. For the strategy to be successful, the firm does not need to actually possess a cost advantage over potential entrants. Rather, the firm simply has to be able to convince potential entrants that it does, in fact, possess an advantage.

Question 64

Assume the players in a game have reached a Nash equilibrium. It is then reasonable to assume that each player has chosen its dominant strategy.

Question 65

The overriding objective of a cartel is to maximize the amount of profit each of its members can earn through cooperation with the other members.

Question 66

According to the kinked demand curve model, regardless of whether a firm increases or decreases price, its total revenues will decrease as a result of the price change.

Question 67

In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

Question 68

In the case of Matsushita v. Zenith, the fact that the foreign television manufacturers were able to charge lower prices than their domestic competitors in the U.S. market for televisions was sufficient evidence to conclude that the Japanese firms were engaged in predatory pricing.

Question 69

One of the implications of the kinked demand curve model is that even if a firm's costs change by a measurable amount, market price is unlikely to change. This helps explain the price rigidity observed in many oligopolistic markets.

Question 70

A predatory pricing strategy will have the greatest chance of success when the predatory price is set below the cost of the firm's competitors, new rivals are unlikely to enter after the strategy ends, and profits can be recouped in a relatively short period of time.

Question 71

A major weakness of the kinked demand curve model is that it does not explain how the equilibrium price, i.e., the price at the kink in the demand curve, is determined.

Question 72

All else constant, a cartel agreement will become more difficult to enforce as the number of firms competing the market increases and the members of the cartel produce a differentiated product.

Question 73

The ability to make a credible commitment is necessary for the first mover to gain an advantage in a sequential game.

Question 74

Predatory pricing will be most effective when the costs structures of the firms in an industry, including potential entrants into the market, are identical or at least very similar.

Question 75

OPEC has had a sustained effect on the price of oil since it was first founded in 1960.

Question 76

Assume a cartel that consists of two firms has determined its profit-maximizing level of output and must now decide how to allocate total output between the two firms. Assuming firm A's marginal costs are less than firm B's marginal costs, firm A should produce a smaller share of total output than firm B.

Question 77

In the prisoner's dilemma game, each player's dominant strategy leaves her with a larger payoff than she could receive by cooperating with the other player; however, the "prisoner's dilemma" is that as a result of noncooperation she cannot chose her dominant strategy.

Question 78

Because cooperation dominates noncooperation as a strategy for maximizing profits, cheating is rarely if ever an issue that cartels have to contend with.

Question 79

To maximize joint profits, the members of a cartel have to determine the level of industry output by setting marginal revenue qual to the cartel's joint marginal costs of production.

Question 80

Assume that in an effort to discourage competitors, firm X has lowered its price below its average total costs of production. This is an illustration of the limit pricing form of strategic entry deterrence.