Deck 16: Oligopoly Games and Strategy

Question 1

A contestable market is similar to a perfectly competitive market in that there

A) can be only one firm in the market.
B) will be no entry if the existing firm earns an economic profit.
C) are barriers to entry.
D) are no barriers to entry.

Answer 1

are no barriers to entry.

Question 2

A market structure in which a small number of producers compete against each other is

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

Answer 2

an oligopoly.

Question 3

A market with one or a small number of firms but no barriers to entry is known as

A) a perfectly competitive market.
B) a natural monopoly.
C) monopolistic competition.
D) a contestable market.

Answer 3

a contestable market.

Question 4

An equilibrium in game theory in which the players make and share the monopoly profit is called

A) the cooperative equilibrium.
B) limit pricing.
C) a contestable market equilibrium.
D) the Nash equilibrium.

Question 5

If firms in an industry differentiated their products and made economic profits in the short- run, what other characteristic would be important to determine if this is an oligopoly or a monopolistically competitive market?

A) If the good being sold is a normal or inferior good
B) The number of firms in the market
C) The number of buyers in the market
D) The number of close substitutes for the good being produced

Question 6

If a duopolists' collusive price- fixing game can be played repeatedly,

A) players can punish cheaters in the following game.
B) one possible equilibrium is that both firms cheat.
C) players can signal their willingness to cooperate.
D) All of the above answers are correct.

Question 7

A single firm in a contestable market is limited in the amount of economic profit it can earn because there

A) are barriers to entry.
B) is collusion.
C) are no barriers to entry.
D) are government regulations limiting its profit.

Question 8

A cartel is an arrangement

A) by the government to restrict imports.
B) to steal industrial processes from rival firms.
C) to flood the market and eliminate competition.
D) among firms to decrease output and raise price.

Question 9

Adkins Air is the only seller offering service directly from Melbourne to Bendigo. The market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a potential entrant is when the potential entrant

A) does not enter and Adkins earns a normal profit.
B) does not enter and Adkins earns an economic profit.
C) enters and Adkins earns a normal profit.
D) enters and Adkins earns an economic profit.

Question 10

Disney

Disney and Fox must decide when to release their next films. The revenues received by each studio depend in part on when the other studio releases its film. Each studio can release its film at New Year or at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix above. Which of the following statements correctly describes Disney's strategy given what Fox's release choice may be?

A) If Fox chooses a New Year release, Disney should choose a Christmas release.
B) If Fox chooses a Christmas release, Disney should choose a New Year release.
C) Disney should release on New Year regardless of what Fox does.
D) Both answers A and B are correct.

Question 11

In game theory, strategies include _______.

A) all possible actions and payoffs of each player
B) the payoff matrix
C) only the winning action of each player
D) all possible actions of each player

Question 12

One of the reasons that concentration ratios are not a perfect measure of competitiveness is that they

A) cannot be measured.
B) tell nothing about how high prices were in the past.
C) ignore potential competition.
D) do not measure how high the industry's prices are.

Question 13

Game theory is a tool for studying _______.

A) Nash behaviour
B) strategic behaviour
C) payoff dilemmas
D) rational dilemmas

Question 14

Oscar

Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix above shows the economic profit that each firm can make. If the game is played only once, then _______.

A) Felix will comply and Oscar will make $12 million economic profit
B) Felix and Oscar will each make $10 million economic profit
C) Felix and Oscar will each make $1 million economic profit
D) Felix will cheat and Oscar will make - $2 million economic profit

Question 15

The above payoff matrix shows the economic profits (in millions of dollars) of two firms in a duopoly that have agreed to a cartel agreement to restrict their output and set their prices equal to the monopoly price. Assuming the game is played once, the equilibrium outcome is where

A) both choose the competitive price.
B) firm B chooses the monopoly price and firm A chooses the competitive price.
C) both choose the monopoly price.
D) firm A chooses the monopoly price and firm B chooses the competitive price.

Question 16

In what type of market is a cartel possible?

A) A market in which there are many firms
B) A market in which there are only a few firms and barriers to entry exist
C) A market in which firms sell a differentiated good
D) A market in which firms sell an homogeneous good

Question 17

Jane

The payoff matrix of economic profits above displays the possible outcomes for Bob and Jane who are involved in a game of whether or not to advertise. After each player chooses his or her best strategy and sees the result,

A) if Jane does not change her decision, Bob would like to change his.
B) neither player would be willing to change his or her decision unless the other player also changes his or her decision.
C) only Bob would like to change his decision.
D) if Bob does not change his decision, Jane would like to change hers.

Question 18

Game theory is used to explain firms' decisions in

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

Question 19

If firms in an industry make output decisions that are partially based on the price and output decisions of their competitors, then these firms are in _______ market and have _______ with the other firms in the market.

A) an oligopoly or monopolistically competitive; interdependence
B) a monopolistically competitive; no interdependence
C) an oligopoly; no interdependence
D) an oligopoly; interdependence

Question 20

Player A

The table above shows the payoff matrix for a prisoners' dilemma. In the Nash equilibrium,

A) both prisoners get 10 years in jail.
B) both prisoners get 1 year in jail.
C) both prisoners get 3 years in jail.
D) both prisoners get 2 years in jail.

Question 21

A strategy of setting price below the monopoly profit- maximising price but at the highest level that will still result in a loss for a potential entrant into the market is known as

A) limit pricing.
B) entry pricing.
C) unlimited pricing.
D) contestable pricing.

Question 22

Two duopoly firms that sell an identical good form a cartel. They decide to collude and fix the price of their good. In this prisoners' dilemma type situation, the likely outcome is

A) only one will cheat.
B) neither one will cheat.
C) both will cheat.
D) It is impossible to say.

Question 23

Game theory can be used for studying which of the following types of market structure?

A) Monopoly
B) Perfect competition
C) Monopolistic competition
D) Oligopoly

Question 24

The key feature of an oligopoly is that there

A) is one seller.
B) are only a few sellers.
C) are many buyers and sellers.
D) is product differentiation.

Question 25

If two duopolists can collude successfully, then both will

A) price at marginal cost.
B) price below average total cost.
C) lower their economic profits.
D) earn greater profits than if they did not collude.

Question 26

In a prisoners' dilemma game, which of the following strategies gives the best outcome for both
Prisoners?

A) One confesses while the other denies
B) Both deny (collusion)
C) Both confess (not collude)
D) None of the above

Question 27

An oligopoly is a market structure in which there are

A) many sellers selling a differentiated product.
B) only a few buyers but many sellers.
C) only a few sellers selling either an identical or differentiated product.
D) a few products sold by many sellers.

Question 28

A contestable market is one in which there are

A) one or a few firms and entry into the market is not costly.
B) many firms and entry into the market is not costly.
C) one or a few firms and entry into the market is costly.
D) many firms and entry into the market is costly.

Question 29

In an oligopoly with a collusive agreement, the total industry profits will be smallest when

A) the firms act as a monopoly.
B) all firms comply with the agreement.
C) one firm cheats on the agreement and the other firms do not cheat.
D) all firms cheat on the agreement.

Question 30

In _______ market structure, a firm's output depends _______.

A) an oligopoly; only on its own marginal revenue and marginal cost curves
B) an oligopoly; in part on its competitors' price and quantity decisions
C) a monopolistically competitive; in part on its competitors' price and quantity decisions
D) a monopolistically competitive; only on its marginal revenue curve

Question 31

In a prisoner's dilemma game, each person will pick

A) their best outcome given what the other person will do.
B) their worst outcome.
C) their best outcome after consulting with the other person.
D) their best outcome.

Question 32

A merger is unlikely to be approved if _______.

A) it would or would be likely to substantially lessen competition
B) there are fewer than 6 firms in a market
C) the industry is government regulated
D) the good produced in the market has been deemed a necessity

Question 33

Sarah's Soothing Nappies, Inc. and Orville's Odourless Nappies, Inc. are duopolists who have agreed to collude. Orville has decided that he will comply with the collusive agreement as long as Sarah cooperated in the previous period. But if Sarah cheated in the previous period, Orville will punish Sarah by cheating in the current period. Orville's strategy is referred to as a

A) Nash strategy.
B) tit- for- tat strategy.
C) monkey- see, monkey- do strategy.
D) trigger strategy.

Question 34

Australian

There are two can companies, Australian and National, which have entered into a collusive agreement. The payoff matrix of economic profits is above. If National is able to cheat on the agreement but Australian complies with the agreement, what amount of economic profit is made by National?

A) $3,000
B) $2,000
C) $6,000
D) $4,000

Question 35

A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants is called a

A) monopolistic competition market.
B) contestable market.
C) limit- pricing market.
D) cartel.

Question 36

Consider a market in which each firm must predict the price and quantity decisions of other firms, as well as how those price and quantity decisions will affect the first firm's revenue and profit. This market is BEST described as

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

Question 37

A trigger strategy can be used in

A) a single- play game but not a repeated game.
B) a single- play game or a repeated game.
C) a repeated game but not a single- play game.
D) neither a single- play game nor a repeated game.

Question 38

The table above shows the payoff matrix for a prisoners' dilemma game. The Nash equilibrium is that

A) both prisoners confess.
B) both prisoners do not confess.
C) prisoner A confesses while prisoner B does not confess.
D) prisoner A does not confess while prisoner B confesses.

Question 39

A cartel is a group of firms that

A) produce products that are complements.
B) agree to boost output to boost their profits.
C) agree to restrict output to boost their profits.
D) produce differentiated products.

Question 40

The maximum total economic profit that can be made by colluding duopolists

A) exceeds the economic profit made by a monopolist.
B) bears no necessary relation to the economic profit made by a monopolist.
C) is less than the economic profit made by a monopolist.
D) equals the economic profit made by a monopolist.

Question 41

The simplest prisoners' dilemma is a game that, in part, requires

A) an oligopoly with one very large firm.
B) monopolistic competition.
C) two players who are unable to communicate with each other.
D) two players who are able to communicate with each other.

Question 42

The distinguishing features of oligopoly are _______ and _______ in the industry.

A) no barriers to entry; a large number of firms
B) no barriers to entry; few firms
C) barriers to entry; a large number of firms
D) barriers to entry; few firms

Question 43

In a prisoners' dilemma game, in the Nash equilibrium,

A) one player has another outcome that does not occur and is more favourable.
B) neither player has another outcome that does not occur and is more favourable.
C) collusion would not alter the outcome.
D) both players have another outcome that does not occur but is more favourable.

Question 44

Which of the following is a defining characteristic of oligopoly?

A) Selling a differentiated good
B) Collusion
C) Barriers to entry
D) Selling a homogeneous good

Question 45

Asus

Dell and Asus must decide whether to lower their prices, based on the potential economic profits shown in the payoff matrix above (in millions of dollars). In the Nash equilibrium,

A) both Dell and Asus lower prices.
B) both Dell and Asus keep prices high.
C) Dell keeps its prices high and Asus lowers its prices.
D) Asus keeps its prices high and Dell lowers its prices.

Question 46

Oligopoly is

A) like perfect competition because there are many firms in the industry.
B) like monopolistic competition because oligopoly firms all sell differentiated goods.
C) like perfect competition because oligopoly firms all sell homogeneous goods.
D) like monopoly because there are barriers to entry.

Question 47

Natural oligopoly is a situation where

A) there are legal barriers to entry.
B) there is only one firm.
C) there are only two firms.
D) the level of demand can support only a few firms.

Question 48

Which of the following is true regarding a collusive agreement?
I. It is illegal in Australia.
II. Two or more producers agree to restrict output or raise prices.
III. Firms' profits are never maximised under this sort of agreement.

A) I and II
B) I and III
C) II and III
D) I, II and III

Question 49

Which of the following is a distinguishing characteristic of oligopoly?

A) No one firm's actions directly affect the actions of the other firms.
B) Firms are free to enter and exit the industry.
C) A small number of firms compete.
D) Natural barriers cannot prevent the entry of new firms.

Question 50

Trade practices law _______ .

A) always works in the public interest to maximise total surplus
B) can work in the public interest to maximise total surplus or in the self- interest of producers to maximise producer surpluses
C) always works in the self- interest of producers to maximise producer surpluses
D) encourages oligopolies to exhibit more monopolistic behaviours

Question 51

A monopolistically competitive firm is like an oligopolistic firm insofar as

A) both can earn an economic profit in the long run.
B) neither is protected by high barriers to entry.
C) both have MR curves that lie beneath their demand curves.
D) both face perfectly elastic demand.

Question 52

Firm 1

Two software firms have developed an identical new software application. They are debating whether to give the new application away for free and then sell add- ons or sell the application at
$30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is the Nash equilibrium of the game?

A) Firm 1 will give the application away for free and Firm 2 will sell it at $30.
B) There is no Nash equilibrium to this game.
C) Both Firm 1 and 2 will sell the software application at $30 a copy.
D) Both Firm 1 and 2 will give the software application away for free.

Question 53

Price wars are

A) most likely when there is a monopoly.
B) most likely when there is perfect competition.
C) equally likely in the cases of monopoly, oligopoly and perfect competition.
D) most likely when there is oligopoly.

Question 54

In a cartel,

A) each firm has an incentive to raise its price above the level set by the cartel.
B) each firm has an incentive to lower its price below the level set by the cartel.
C) each firm has an incentive to decrease its own production below the level set by the cartel.
D) the firms' marginal cost equals the price set by the cartel.

Question 55

Dr. Smith

Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Smith's strategy given what Dr. Jones may do?

A) Dr. Smith should advertise no matter what Dr. Jones does.
B) Dr. Smith should advertise only if Dr. Jones doesn't advertise.
C) Dr. Smith should advertise only if Dr. Jones advertises.
D) Dr. Smith should not advertise no matter what Dr. Jones does.

Question 56

Dr. Smith

Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly summarises the Nash equilibrium for the game?

A) The game has a Nash equilibrium in which Dr. Smith does not advertise and Dr. Jones does advertise.
B) The game has a Nash equilibrium in which both optometrists advertise.
C) The game has a Nash equilibrium in which Dr. Smith advertises and Dr. Jones does not advertise.
D) The game has a Nash equilibrium in which both optometrists do not advertise.

Question 57

Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms comply with the agreement,

A) together they will operate in a way indistinguishable from a monopoly.
B) the oligopoly will produce more hard drives than a profit- maximising monopoly would produce.
C) each firm will make zero economic profit.
D) the price of a hard drive will be equal to marginal cost.

Question 58

When producers agree to restrict output, raise the price, and increase profits, the agreement is called _______.

A) an oligopoly agreement
B) a collusive agreement
C) a monopoly agreement
D) a pricing agreement

Question 59

Which of the following is a distinguishing characteristic of oligopoly?

A) Firms are free to enter and exit the industry.
B) Natural or legal barriers prevent the entry of new firms.
C) A large number of firms compete.
D) No one firm's actions directly affect the actions of the other firms.

Question 60

A trigger strategy is one in which a player

A) cooperates in the current period if the other player has always cooperated, but cheats forever if the other player ever cheats.
B) cheats in the current period if the other player has always cheated, but cooperates forever if the other player has ever cooperated.
C) cheats in the current period if the other player cooperated in the previous period, but cooperates in the current period if the other player cheated in the previous period.
D) cooperates in the current period if the other player cooperated in the previous period, but cheats in the current period only if the other player cheated in the previous period.

Question 61

In a collusive agreement between two duopolists in an oligopoly, each firm has an incentive to cheat on the agreement because the firm's price

A) exceeds its marginal revenue.
B) exceeds its marginal cost.
C) is less than its average total cost.
D) None of the above answers is correct.

Question 62

With barriers to the entry of new firms,

A) a cartel is guaranteed to earn an economic profit.
B) a cartel's members have no incentive to cheat.
C) industry supply will expand if the firms form a cartel.
D) the cartel might earn an economic profit.

Question 63

Game theory is most useful for analysing

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

Question 64

The prisoners' dilemma describes a single- play game that features

A) a situation in which one player has better odds than the other.
B) a large number of rivals cooperating with each other.
C) two players who are unable to communicate with each other.
D) an outcome in which the participants collude.

Question 65

Which of the following is a distinguishing characteristic of oligopoly?

A) Natural barriers cannot prevent the entry of new firms.
B) Each firm's actions influence the profits of all the other firms.
C) Firms are free to enter and exit the industry.
D) A large number of firms compete.

Question 66

In an oligopoly price- fixing game, each player tries to

A) minimise the profits of its opponents.
B) minimise the market shares of its opponents.
C) maximise its own market share.
D) maximise its own profit.

Question 67

A contestable market is one in which

A) one or a small number of firms operate, but they face competition from potential entrants.
B) if a firm cuts its price, all other firms will follow the price cut.
C) a group of firms enter into an agreement to restrict output and raise prices.
D) one dominant firm sets the market price, and all other firms are price takers.

Question 68

If there is a collusive agreement in a duopoly to maximise profit, then the price will

A) be the same as the price set by a monopoly.
B) be the same as the price set by a competitive industry.
C) equal the marginal cost of production.
D) equal the average total cost of production.

Question 69

_______ is a group of firms that have colluded to limit their output and raise their price.

A) An oligopoly
B) A strategy
C) A duopoly
D) A cartel

Question 70

A collusive agreement between two duopolists is similar to the prisoners' dilemma because in both games

A) each player's strategy depends on what the other player does.
B) the Nash equilibrium is not the best outcome for the players.
C) the best outcome is always achieved.
D) All of the above answers are correct.

Question 71

Limit pricing in a contestable market sets the price at the highest level that .

A) maximises the profit of the existing firm
B) inflicts a loss on an entrant
C) maximises the profit of an entrant
D) maximises the profit of both the existing firm and the entering firm

Question 72

In a repeated game, punishments that result in heavy damages are an incentive for players to adopt the strategies that result in a _ equilibrium.

A) strategic
B) cooperative
C) winner- share- all
D) contestable

Question 73

Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally. In this scenario, which of the following actions will maximise the industry's economic profit?

A) Because the firms are colluding, the profit does not change regardless of whether the firms comply with agreement or cheat on the agreement.
B) Both firms comply with the agreement.
C) One of the firms complies with the agreement while the other firm cheats, producing more than the agreed amount.
D) Both firms cheat on the agreement, producing more than the agreed amount.

Question 74

The practice of the only seller in a market charging a price at the highest level that would still inflict a loss on a new entrant into the market is called

A) limit pricing.
B) trigger pricing.
C) agile pricing.
D) collusive pricing.

Question 75

Dr. Smith

Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Jones' strategy given what Dr. Smith may do?

A) Dr. Jones should not advertise no matter what Dr. Smith does.
B) Dr. Jones should advertise no matter what Dr. Smith does.
C) Dr. Jones should advertise only if Dr. Smith doesn't advertise.
D) Dr. Jones should advertise only if Dr. Smith advertises.

Question 76

A strategy called "limit pricing" sets the price

A) at the monopoly level.
B) at the highest level that inflicts a loss on the entrant.
C) below the competitive level.
D) at the lowest level that inflicts a loss on the entrant.

Question 77

Player A

The problem for the prisoners in the prisoners' dilemma game in the above table is that

A) neither prisoner has a workable strategy.
B) the Nash equilibrium is not the best outcome.
C) there is no equilibrium outcome.
D) None of the above answers is correct.

Question 78

In the prisoners' dilemma game, each player

A) can choose from three strategies.
B) can choose from four strategies.
C) has only one possible strategy.
D) can choose from two strategies.

Question 79

Once a cartel determines the profit- maximising price,

A) entry into the industry by rival firms will not affect the profit of the cartel.
B) changes in the output of any member firm will not affect the market price.
C) each firm faces the temptation to cheat by lowering its price.
D) each firm faces the temptation to cheat by raising its price.

Question 80

In a sequential contestable market game,

A) the dominant firm always makes a monopoly profit, while other firms make zero economic profits.
B) the outcome is always a monopoly equilibrium.
C) a small number of firms can behave like firms in perfect competition.
D) a firm that enters the market first is protected from potential entrants by natural barriers.