Deck 14: Oligopoly and Strategic Behavior

Question 1

All other things equal, the larger the number of firms in an oligopolistic industry, the more difficult it is for those firms to collude.

Answer 1

True

Question 2

Two industries that have the same four-firm concentration ratio can have significantly different Herfindahl indexes.

Answer 2

True

Question 3

Mutual interdependence means that oligopolistic producers rely primarily on price competition in determining their shares of the total market for their product.

Answer 3

False

Question 4

A player is said to have a dominant strategy when one of the options available is superior, regardless of what strategy the other player chooses.

Question 5

Collusion among firms always involves formal agreements.

Question 6

If an oligopolist's several rivals exactly match any price changes it initiates, the demand curve will be less elastic than if its price changes are ignored by its rivals.

Question 7

Firms are more likely to collude when the economy is in a recession.

Question 8

Oligopolists use limit pricing to maximize short-run profits.

Question 9

As it relates to oligopoly, game theory focuses on the strategic behavior of rival firms.

Question 10

If one player in a game has a dominant strategy, the other player must also have a dominant strategy.

Question 11

A Nash equilibrium can only occur in repeated games.

Question 12

Homogeneous oligopolists tend to advertise more than do differentiated oligopolists.

Question 13

Both collusive and noncollusive oligopoly models suggest that price changes will be relatively infrequent in these types of industries.

Question 14

The U.S. steel industry is an example of homogeneous oligopoly.

Question 15

If three or four homogeneous oligopolists collude, the resulting price and production outcomes will be similar to those of pure monopoly.

Question 16

Generally speaking, oligopolistic industries producing raw materials and semifinished goods usually offer differentiated products, while oligopolists producing consumer goods usually offer standardized products.

Question 17

One characteristic of sequential games is that they all have first-mover advantages.

Question 18

If neither player has an incentive to deviate from the outcome of a game, the outcome is a Nash equilibrium.

Question 19

The highest possible value of the Herfindahl index is 1,000.

Question 20

The U.S. breakfast cereal industry is an example of differentiated oligopoly.

Question 21

Negative-sum games do not exist, because neither player has an incentive to play the game.

Question 22

Mutual interdependence refers to the situation when entry by new firms into an industry will tend to shrink the profits of existing firms.

Question 23

Monopolistic competition and oligopoly are more common in the real world than pure competition and monopoly.

Question 24

In repeated games, credible threats are necessary for the players to reach a Nash equilibrium.

Question 25

A cartel of four firms that controls 100 percent of the sales in a market, and faces the same cost schedules of a monopolist, will set a price somewhat lower than the monopoly price for its product.

Question 26

Patents and copyrights were established by the government to reduce oligopoly and monopoly power.

Question 27

When oligopolists collude, they collectively tend to achieve similar results as a monopolist.

Question 28

Two important characteristics of oligopolists are that they have significant control over price and that there is mutual interdependence among them.

Question 29

Prices in oligopolistic industries are predicted to fluctuate widely and frequently compared to other market structures.

Question 30

Game-theory models analyze the interdependence of oligopolists' strategies.

Question 31

OPEC functions as a classic example of a kinked demand curve oligopoly.

Question 32

Game-theory analyzes oligopoly behavior by using concepts derived from the study of games-of-chance such as dice games, solitaire, and roulette.

Question 33

The first mover in a sequential game always has the advantage over the second mover.

Question 34

A homogeneous oligopoly means that the few firms in the industry have identical cost and demand curves.

Question 35

In a zero-sum game, the gains by one player will be exactly offset by the losses of the other.

Question 36

Repeated games may involve either simultaneous or sequential decision making.

Question 37

One common factor that often weakens collusion among cartel members is the incentive to cheat.

Question 38

The kinked-demand curve model applies to a noncollusive oligopoly situation.

Question 39

In repeated games, players may be willing to accept lower payoffs in the short run in exchange for greater net payoffs over the long run.

Question 40

If an oligopolist's competitors follow its price cuts but ignore its price increases, the oligopolist would end up holding its price constant even if its marginal cost changes.

Question 41

Nash equilibrium is an outcome of a game from which neither rival will want to deviate.

Question 42

Price leadership in an oligopoly entails an implicit or tacit form of collusion.

Question 43

An empty threat is a statement of coercion that is not believed by the threatened firm.

Question 44

A sequential game can be modeled in two forms: payoff-matrix form and game-tree form.

Question 45

Unlike a monopoly, an oligopoly tends to achieve allocative efficiency due to the rivalry among several firms.

Question 46

Potential entry by new firms and competition from imports tend to worsen the economic inefficiency in an oligopoly.

Question 47

First-mover advantage cannot happen in a one-time simultaneous game.

Question 48

If advertising succeeds in enhancing brand loyalty among consumers, it tends to enhance the monopoly power of the seller.

Question 49

Repeated games with reciprocity tend to reduce the payoffs for both players, as compared to a one-time game with a similar payoff matrix.

Question 50

The kinked-demand curve model shows that oligopolistic firms tend to change their prices frequently.

Question 51

In game theory, credible threats can be used to maintain collusive agreements between firms.

Question 52

If the four-firm concentration ratio for industry X is 60,

A)the four largest firms account for 60 percent of total sales.
B)each of the four largest firms accounts for 15 percent of total sales.
C)the four largest firms account for 60 percent of total advertising expenditures.
D)the industry is monopolistically competitive, but on the threshold of being an oligopoly.

Question 53

An industry having a four-firm concentration ratio of 32 percent

A)approximates pure competition.
B)is an oligopoly.
C)is a pure monopoly.
D)is monopolistically competitive.

Question 54

Mutually cancelling advertising by oligopolistic firms tends to improve economic efficiency in the industry.

Question 55

A firm in a cartel typically cheats on its collusive agreement by raising its price and restricting output more than it agreed to with other cartel members.

Question 56

The adoption of a limit-pricing strategy by oligopolists would tend to make the price of the product closer to marginal cost.

Question 57

According to the definition of a positive-sum game, both players get positive payoffs.

Question 58

A zero-sum game is one where a player will always end up gaining nothing, regardless of his strategy.

Question 59

Advertising increases the costs of firms and could be manipulative; therefore, it does not really have a positive economic effect.

Question 60

Advertising can increase a firm's sales, thereby allowing the firm to gain economies of scale, and that would be good for efficiency.

Question 61

Industries X and Y both have four-firm concentration ratios of 53 percent, but the Herfindahl index for X is 1,965, while that for Y is 2,019. These data suggest

A)greater market power in X than in Y.
B)greater market power in Y than in X.
C)that X is more technologically progressive than Y.
D)that price competition is stronger in Y than in X.

Question 62

Suppose that a particular industry has a four-firm concentration ratio of 25 and a Herfindahl index of 600. Most likely, this industry would achieve

A)$15M for firm A and $5M for firm B.
B)$17M for firm A and $17M for firm B.
C)$3M for firm A and $3M for firm B.
D)$5M for firm A and $15M for firm B.

Question 63

Refer to the data. Suppose that enforcement of antitrust laws resulted in any firm in this industry with market share of 20 percent or above to be split into two firms, with each having equal market share. That would cause this industry to

A)remain monopolistically competitive.
B)change from monopolistic competition to oligopoly.
C)change from oligopoly to monopolistic competition.
D)remain an oligopoly.

Question 64

The industry characterized by these data is

A)an oligopoly.
B)a monopolistically competitive industry.
C)a purely competitive industry.
D)a pure monopoly.

Question 65

This industry shown in this table illustrates

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

Question 66

If enforcement of antitrust laws caused the two largest firms in this table to be divided in half, with each half having equal market share, the industry's four-firm concentration ratio would ____ and its Herfindahl index would ____.

A)fall; fall
B)fall; rise
C)remain the same; rise
D)remain the same; fall

Question 67

Suppose the Herfindahl indexes for industries A, B, and C are 2,200, 2,000, and 1,600, respectively. These data imply

A)that market power is greatest in industry C.
B)that market power is greatest in industry B.
C)that market power is greatest in industry A.
D)nothing about the degree of concentration across the three industries.

Question 68

The Herfindahl index for an industry is 3,000. Which of the following sets of market shares and industry with four firms would produce such an index?

A)lose $150 million in profit and firm A will gain $25 million in profit.
B)gain $75 million in profit and firm A will lose $50 million in profit.
C)gain $25 million in profit and firm A will gain $150 million in profit.
D)gain $25 million in profit and firm A will lose $50 million in profit.

Question 69

Suppose that Firm C in this table was found guilty of antitrust violations and split into two firms with equal market share. This would cause the Herfindahl index to

A)rise to 2,064.
B)fall to 2,064.
C)fall to 1,936.
D)rise to 1,936.

Question 70

The Herfindahl index for the industry described in this table is

A)90.
B)2,750.
C)greater than it would be if there were only four firms in the industry.
D)2,700.

Question 71

You are told that the four-firm concentration ratio in an industry is 16. Based on this information you can conclude that

A)each of the top four firms has, on average, 16 percent of industry sales.
B)this industry's market structure is oligopoly.
C)the four largest firms account for 16 percent of industry sales.
D)each of the four largest firms accounts for 4 percent of industry sales.

Question 72

Refer to the data. Suppose that firms A and F merged into a single firm. The four-firm concentration ratio and the Herfindahl index would be

A)93 percent and 2,537, respectively.
B)100 percent and 2,537, respectively.
C)87 percent and 2,586, respectively.
D)93 percent and 2,586, respectively.

Question 73

The four-firm concentration ratio for the industry described in this table is

A)100 percent.
B)indeterminate since we don't know which four firms are included.
C)70 percent.
D)30 percent.

Question 74

Assume six firms composing an industry have market shares of 35, 25, 15, 10, 10, and 5 percent. The Herfindahl index for this industry is

A)2,175.
B)2,300.
C)1,225.
D)85.

Question 75

If the four-firm concentration ratio in an oligopolistic six-firm industry is 66.7 percent, and each firm has an equal percentage of sales, the Herfindahl index is

A)6,667.
B)1,668.
C)400.
D)2,000.

Question 76

If firms E and F in this table merged into a single firm, the Herfindahl index would

A)not change.
B)rise, as would the four-firm concentration ratio.
C)rise, but the four-firm concentration ratio would remain unchanged.
D)fall.

Question 77

Suppose that firms A and D in this table merged into a single firm. The four-firm concentration ratio and the Herfindahl index would

A)remain unchanged and rise, respectively.
B)rise and remain unchanged, respectively.
C)both fall.
D)both rise.

Question 78

Industry Y is dominated by five large firms that hold market shares of 41, 21, 17, 12, and 9. The Herfindahl index for this industry is

A)2,555.
B)2,636.
C)2,225.
D)3,494.

Question 79

Industry Y is dominated by five large firms that hold market shares of 27, 23, 16, 16, and 18 percent. The four-firm concentration ratio for this industry is

A)82 percent.
B)84 percent.
C)88 percent.
D)92 percent.

Question 80

The smaller the Herfindahl index, the

A)less the degree of import competition in an industry.
B)greater the degree of import competition in an industry.
C)greater the degree of market power in an industry.
D)less the degree of market power in an industry.