Deck 16: Competing for Monopoly: the Economics of Network Goods

Question 1

Which of the following statements is TRUE?

A) Network goods are sold mostly in price-taker markets.
B) The network good is always the "best" good.
C) Monopolies may sell network goods.
D) All of these statements are true.

Answer 1

C

Question 2

The equilibrium in a market in which no participant has an incentive to change his or her strategy unilaterally is called a:

A) market equilibrium.
B) Nash equilibrium.
C) coordinating equilibrium.
D) financial equilibrium.

Answer 2

B

Question 3

A network good is:

A) a broadcast show on radio or television.
B) a good that must be bought in large quantities in order to get discounted prices.
C) a good supplied by a large network of competitive firms.
D) a good whose value increases to consumers as more consumers use the good.

Answer 3

D

Question 4

For two players in a game, a Nash equilibrium is different from a dominant strategy in that:

A) the outcome in the Nash equilibrium may not be the best outcome for either of the players.
B) the Nash equilibrium always has unequal outcomes whereas the dominant strategy always has even outcomes.
C) there is always only one Nash equilibrium but there may be more than one dominant strategy.
D) None of the answers is correct.

Question 5

Which of the following best explains why monopolies or oligopolies tend to dominate the market for network goods? I. Their products are the most likely to be compatible with other products. II. They produce the "best" products in terms of quality and compatibility. III. The power of coordination is so strong that monopolists and oligopolists can dominate the market even when they charge prices higher than their competitors.

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

Question 6

A Nash equilibrium in game theory is defined as a situation in which:

A) no player has an incentive to change his or her strategy even when other players change.
B) no player has an incentive to change his or her strategy unilaterally.
C) any player has an incentive to change his or her strategy until he or she reaches the optimum.
D) any player has an incentive to change his or her strategy even when other players remain unchanged.

Question 7

Which of the following is NOT a feature of markets for network goods?

A) Network goods are usually sold by monopolies or oligopolies.
B) Standard wars are common in establishing network goods.
C) Competition in the market for network goods is "in the market" instead of "for the market."
D) When networks are important the "best" product may not always win.

Question 8

A network good is a good whose value to one consumer:

A) increases the network of the consumer.
B) increases some, but to less value as other consumers use the good.
C) also creates the same value to other consumers as they use the good.
D) increases the more that other consumers use the good.

Question 9

What is meant by the concept of a Nash equilibrium?

A) It is an outcome where the player has played his or her dominant strategy.
B) It is an outcome where both players have the incentive to change their strategy.
C) It is the outcome where neither player wishes to change his or her strategy unilaterally.
D) It is the same as a dominant strategy outcome.

Question 10

Which of the following goods represent network goods?

A) Pepsi, toilet paper, headphones
B) calculator, oven, couch
C) Twitter, Microsoft Excel, Facebook
D) fireworks, lighthouse, swimming pool

Question 11

Which of the following conditions is required for a network good to succeed over a better good in the market?

A) The network good should have a minimal number of consumers so that customers are not competing for the same network.
B) The network good should have a much larger number of consumers or users than the better good.
C) The network good should be a free good.
D) All of these conditions are required.

Question 12

Which of the following statements about network goods is TRUE?

A) They are goods that are usually sold by large firms with a great deal of market power.
B) They are goods that tend to have a large number of users or consumers.
C) They are goods whose value to one consumer increases the greater the total number of consumers.
D) All of the answers are correct.

Question 13

(Table: Jim, Dan Payoff Table) Refer to the table. Which of the following outcomes is NOT a Nash equilibrium? I. (12, 12) II. (4, 4) III. (8, 8) IV. (3, 3)

A) I and IV only
B) II and IV only
C) III only
D) I and III only

Question 14

Which of the following would NOT be considered a network good?

A) cell phones
B) quiet study rooms
C) e-mail programs
D) online player versus player games

Question 15

Firms sometimes give away products for free in the hopes of:

A) selling other goods they produce at a higher price.
B) driving the competition out of business.
C) becoming the dominant standarC.
D) creating a loyal customer base.

Question 16

When many people are involved and when they do not all agree about whether one good really is better than another, the best final equilibrium is usually determined by:

A) consumers.
B) the market.
C) the government.
D) historical accidents.

Question 17

A Nash equilibrium:

A) means that no players have an incentive to change their strategy.
B) means that some players could be made better off by changing their strategy.
C) is suboptimal compared to Raj's equilibrium.
D) None of the answers is correct.

Question 18

Which of the following statements is FALSE?

A) Network goods are usually sold by monopolies or oligopolies.
B) When networks are important the "best" products usually win.
C) Standard wars are common in establishing network goods.
D) Competition in network goods is for the market, not in the market.

Question 19

(Table: Homer, Marge Payoff Table) Refer to the table. The Nash equilibrium is (are):

A) (50, 50) and (48, 60)
B) 0, 45.
C) 45, 45.
D) (48, 60) and (45, 45)

Question 20

Firms that produce goods that are the dominant standard goods in the market typically sell these goods at:

A) a loss.
B) a higher price than in a competitive market.
C) a lower price than in a competitive market.
D) marginal cost.

Question 21

When the market for a network good is contestable:

A) there is little competition.
B) many firms operate and compete for consumers in the industry.
C) it is hard for consumers to get locked into a "bad" outcome.
D) monopoly firms always charge prices well above their average costs.

Question 22

Customer loyalty programs, such as frequent flier programs, tend to lead to:

A) more competition and lower prices.
B) more competition and higher prices.
C) less competition and lower prices.
D) less competition and higher prices.

Question 23

Firms that are competing to be the dominant standard:

A) try to lower their prices so as to drive other firms out of business.
B) work to get consumers to recognize both standards.
C) work to get content producers and distributors to sign on to one standard or the other.
D) try to produce the cheapest technology so as to win the standard war.

Question 24

Which of the following statements is TRUE regarding network goods?

A) Network goods are usually sold by monopolies or oligopolies.
B) Microsoft Word has always been the dominant word processing software.
C) Microsoft Excel has always been the dominate spreadsheet software.
D) All of the answers are correct.

Question 25

The online photo-sharing Web site Shutterfly offers unlimited free uploads. Which of the following best explains why they offer this service at no charge?

A) Shutterfly is trying to increase switching costs for their consumers.
B) Shutterfly is trying to decrease their average costs.
C) Shutterfly is trying to increase competition.
D) The marginal cost of uploading photos is near zero; setting price equal to marginal cost is simply an efficient pricing strategy.

Question 26

Markets tend to be more easily monopolized when:

A) marginal costs are low.
B) average costs are high.
C) the good is a network good.
D) fixed costs are high.

Question 27

The Blu-ray standard war illustrates that:

A) once a product standard is established the rival product disappears from the market.
B) government protection may lead to the demise of the superior product.
C) bilateral monopolies sometimes price below average cost.
D) complementary goods have high income elasticities.

Question 28

In a "standard war":

A) there are two good equilibria, but the players differ over which equilibrium is the best.
B) there is only one good equilibrium, but players get locked into the "bad" equilibrium.
C) the Nash equilibrium always dominates.
D) both players would prefer to have no standard.

Question 29

Duncan Watts' research suggested that:

A) the best music is also the most popular music.
B) people base their musical preferences on what other people think.
C) people are biased against free downloaded music.
D) QWERTY was inferior to Dvorak.

Question 30

The market for network goods: I. is dominated by a single monopolist. II. is dominated by a series of monopolies. III. ensures long-term profits for those companies that win the standard war.

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

Question 31

Antitrust authorities have a difficult time with network goods because:

A) they know that with network goods, only a few firms will always dominate the market.
B) profits tend to be higher in network markets, and thus firms are willing to fight harder.
C) when monopolies exist, there is no competition to help lower prices.
D) increased competition can easily lead to corruption in network markets.

Question 32

Contestable markets tend to arise when:

A) fixed costs are high.
B) the threat of new firms entering the market is low.
C) the incumbent firm does not control access to an important resource.
D) government regulations are in effect.

Question 33

Competition for the market rather than in the market:

A) is the reason why Friendster is no longer the leading social network.
B) explains why Microsoft Word is the leading word processing network.
C) means that Facebook may one day no longer be one of the leading social networks.
D) All of the answers are correct.

Question 34

Standard wars illustrate the idea that:

A) the best product will typically become the dominant standard as consumers search to maximize benefits.
B) network goods are usually produced in competitive markets.
C) for network goods, competition occurs in the market.
D) for network goods, competition occurs for the market.

Question 35

Which of the following is NOT a good example of a contestable market?

A) low-cost airlines
B) electricity providers
C) a local Mexican restaurant
D) bottled water manufacturers

Question 36

Which of the following explains why frequent flier programs reduce contestability in the airline industry?

A) Frequent flier programs make demand for each airline more elastic and thus lead to more competition.
B) Frequent flier programs make demand for each airline more inelastic and thus lead to more monopoly power and higher prices.
C) Frequent flier programs increase demand for each airline, ultimately leading to increased competition and lower prices.
D) Frequent flier programs lead to lower switching costs and therefore less contestability in the market.

Question 37

Music is a network good because:

A) most people want to listen to music that is popular.
B) music that is popular is a more valuable gooB.
C) music that is popular offers more benefits to the listener than does music that is obscure.
D) All of the answers are correct.

Question 38

Firms that operate in contestable markets:

A) still price competitively since they face the threat of competition from new entrants.
B) are pure monopolies that set price equal to consumers' highest willingness to pay.
C) earn zero economic profits.
D) face more competition when fixed costs are high.

Question 39

An experiment by Duncan J. Watts, a sociologist at Columbia University, showed that when consumers knew a particular song had been downloaded by a lot of other people, more consumers wanted to download that song as well. If this is true, this suggests that music itself may be:

A) a competitive good.
B) a network good.
C) a system good.
D) an association good.

Question 40

Music is an example of a ________ good.

A) network
B) played
C) reverse
D) mirrored

Question 41

The market for Internet dating is dominated by eHarmony, Match.com, and Yahoo. This market is an example of monopolistic competition.

Question 42

Which of the following is FALSE?

A) Music is a network good.
B) Some musicians get lucky and become popular quickly.
C) Popularity is less important than musicianship.
D) A musician's current success is no guarantee of future success.

Question 43

A network good is a good whose value to one consumer increases the more that other consumers use the good.

Question 44

An outcome where both players have played their dominant strategy is also a Nash equilibrium.

Question 45

1957(Table: Cell Service) Refer to the table. Mr. Brooks and Ms. Gertrude are good friends who like to talk on the phone. Each is deciding on a cell phone service to sign on with, where each service offers free unlimited calls to other customers who subscribe to the same service. The payoff table shows the rewards to Mr. Brooks and Ms. Gertrude from choosing either cell service A or
B. a. What is(are) the Nash equilibrium(s) in this coordination game? b. Which equilibrium will Mr. Brooks and Ms. Gertrude end up at? Explain your answer. c. Does the coordination game get easier or harder if there are 100 friends instead of just 2? Explain.
A. a. There are two Nash equilibriums-(A, A) and (B, B) b. If Mr. Brooks and Ms. Gertrude are the only "players" in this game, they could probably talk to each other and coordinate on the best equilibrium (B, B). However in reality the coordination is between Mr. Brooks, Ms. Gertrude, and many other people, and so coordinating on the best equilibrium may be very costly or impossible. In this case, the final equilibrium may come down to other random factors such as which company is better at marketing its service, which company gives out free phones, etc. c. Harder. See answer to part b.

Question 46

Most contestable markets have high fixed costs.

Question 47

Explain why network goods are typically sold by either monopolists or oligopolists. In your answer, address how standard wars play a role and whether or not the "best" product always wins.

Question 48

A fax machine is a network good because it becomes more useful when greater numbers of people have them.

Question 49

Describe the features of markets for network goods.

Question 50

When networks are important, the "best" product may not always win.

Question 51

What is the difference between competition "for the market" and competition "in the market"?