Deck 12: Oligopoly and Strategic Behavior

Question 1

The market structure in which the behavior of any given firm depends on the behavior of the other firms in the industry is

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

Answer 1

oligopoly.

Question 2

Oligopoly is a market

A) with one firm and many different products.
B) with many firms and a homogeneous product.
C) with a few firms and the actions of one firm have a large impact on the others.
D) with a few firms and the actions of one firm have a small impact on the others.

Answer 2

with a few firms and the actions of one firm have a large impact on the others.

Question 3

Which of the following is the best example of an oligopolistic industry?

A) cleaning services
B) airline services
C) local water utility
D) designer shoes

Answer 3

airline services

Question 4

Table 12.1
Refer to Table 12.1.The four-firm concentration ratio of the cigarette industry is equal to

A) 48%.
B) 54%.
C) 71%.
D) 81%.

Question 5

Assume six firms comprising an industry have market shares of 30,30,10,10,10,and 10 percent.The Herfindahl-Hirschman Index for this industry is

A) 80.
B) 1,600.
C) 2,000.
D) 2,200.

Question 6

Table 12.1
Refer to Table 12.1.If Firms L and M were to merge,the four-firm concentration ratio would

A) rise to 71%.
B) fall to 82%.
C) fall to 40%.
D) rise to 82%.

Question 7

Consider four types of markets: monopoly,perfect competition,oligopoly,and monopolistic competition.If they were ranked from the lowest number of firms to the largest number of firms,the ranking would be:

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

Question 8

Assume that firms in an oligopoly are currently colluding to set price and output to maximize total industry profit.If the oligopolies are forced to stop colluding,the price charged by the oligopolies would ________ and the total output produced will ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 9

Suppose four firms in the airline industry have gotten together and formed a cartel.Which of the following is true?

A) The firms will set a price that is equal to minimum average total cost.
B) The firms will produce where the marginal cost curve intersects the average total cost curve.
C) The firms will produce where marginal cost is equal to marginal revenue.
D) The firms will set a price equal to marginal revenue.

Question 10

An arrangement in which firms conspire to fix prices is called

A) a cartel.
B) price ceiling.
C) price fixing.
D) a duopoly.

Question 11

In game theory,a strategy that represents the best choice for a firm no matter what the other firm does is termed

A) a dominant strategy.
B) a Nash equilibrium.
C) a prisoners' dilemma.
D) a duopolists' dilemma.

Question 12

If the five-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal share of the market,the Herfindahl-Hirschman Index is

A) 10,000.
B) 2,500.
C) 2,000.
D) 400.

Question 13

Refer to Figure 12.1.Six firms that produce chewing gum have formed a cartel.The cartel faces the market demand curve given by D.To maximize profits,the cartel should produce ________ packs of chewing gum and the price should be ________.

A) 12,000; $.25
B) 12,000; $.40
C) 14,000; $.30
D) 16,000; $.35

Question 14

A cartel is

A) a group of firms that coordinate their pricing and quantity decisions.
B) a type of oligopoly in which the demand curve is "kinked."
C) a duopoly market where firms have the exact product.
D) a group of firms that all produce the same level of output.

Question 15

Refer to Figure 12.1.Assume the firms have formed a cartel.If the cartel is maximizing profits,the cartel's profits are

A) $0.
B) $1,080.
C) $1,800.
D) indeterminate from this information.

Question 16

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.If both firms follow their dominant strategies

A) both firms will set price high.
B) both firms will set price low.
C) only one firm will set price low.
D) The firms' dominant strategies cannot be determined without more information.

Question 17

Which of the following is a reason for the occurrence of an oligopoly?

A) advertising campaigns
B) economics of scale in production
C) government barriers to entry
D) all of the above

Question 18

Which of the following is a characteristic of an oligopoly market?

A) control over price
B) diseconomies of scale in production
C) firms act independently without regard to each other
D) all of the above

Question 19

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.How many dominant strategies are there for firm A?

A) 0
B) 1
C) 2
D) It cannot be determined without knowing what firm B does.

Question 20

Firms in an oligopoly can increase profit by

A) jointly acting to reduce output and increase prices.
B) independently acting to increase price.
C) acting alone and refusing to join the group.
D) none of the above

Question 21

Recall the Application about the attempt to form a salt cartel in the 19th century to answer the following question(s).
Recall the Application.Why did the salt cartel fail to get established,even though it paid new firms not to produce salt for a year?

A) Individual firms cheated on the cartel by selling outside the cartel.
B) The artificially high price also caused new firms to enter the market.
C) Salt consumers found substitutes and brought the price of salt down.
D) Both A and B are correct.

Question 22

According to one rule of thumb,a four-firm concentration ratio of greater than 40 percent for the industry is considered to be an oligopoly.

Question 23

Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.If both firms follow their dominant strategies,Firm B's profits will be

A) -$2 million.
B) $2 million.
C) $5 million.
D) $8 million.

Question 24

The cigarette industry is NOT an example of an oligopolistic industry.

Question 25

An oligopolistic industry has barriers to entry.

Question 26

A duopolists' dilemma occurs when two firms in a market would be better off if

A) both choose the high price but instead each chooses the low price.
B) both firms act jointly as a cartel and chooses the best price.
C) one firm refuses to participate in the cartel.
D) both firms adopt price matching.

Question 27

The Nash equilibrium is an outcome of a game

A) when each player is doing the best he or she can, given the actions of the other players.
B) in which each player has a competitive advantage over the other players.
C) in which there are no winners only losers.
D) when all the possibilities are revealed to the players.

Question 28

A dominant strategy exists when a firm's choice is the best regardless of other firms' decisions.

Question 29

If one duopolist chooses the highest price it will maximize its profit.

Question 30

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.The dominant strategy for firm A

A) is to set price low.
B) is to set price high.
C) depends on what B does.
D) is to do the opposite of whatever B does.

Question 31

Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game,the dominant strategy for B is to

A) cheat.
B) stand by the agreement.
C) cheat only if A cheats.
D) maximize the maximum losses.

Question 32

Many cartels exist in the United States because cartels and price-fixing are legal under U.S.law.

Question 33

The beer industry is an example of a oligopolistic industry.

Question 34

A game tree is a graphical representation of the consequences of different actions in a strategic setting.

Question 35

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.One way for both firms to charge a high price is for both firms to

A) play their dominant strategies.
B) collude.
C) expand output.
D) any of the above

Question 36

Refer to Figure 12.2.If A adopts a strategy of price fixing then the best choice for A is to choose the ________ price and the best choice for B is to choose the ________ price.

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

Question 37

If firms in an oligopoly form a cartel,the outcome is the same as it would be under monopolistic competition.

Question 38

Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game,the dominant strategy for A is to

A) cheat.
B) stand by the agreement.
C) cheat only if B cheats.
D) maximize the maximum losses.

Question 39

Oligopoly is a market structure where many firms are competing by selling an identical product.

Question 40

The small number of firms is what differentiates oligopoly markets from the other three market structure types (perfect competition,monopoly,and monopolistic competition).

Question 41

In the United States,the price leadership system is

A) illegal.
B) unprofitable.
C) seldom used.
D) legal.

Question 42

In a two-person repeated game,a grim-trigger strategy results in

A) each firm following its own self-interest choice.
B) each firm earning economic profits.
C) one firm choosing a price so low that no firm earns an economic profit.
D) one firm earning economic profits while the other does not.

Question 43

The type of product sold is what differentiates oligopoly markets from the other three market structure types (perfect competition,monopoly,and monopolistic competition).

Question 44

Under what conditions does an oligopoly market result in the same outcome as monopoly? What does this imply for the oligopoly's long-run profits?

Question 45

What is a cartel?

Question 46

A duopoly pricing strategy results in a(n)________ profitable outcome compared to cartel pricing.

A) less
B) more
C) equally
D) indeterminate

Question 47

Consider the decision tree depicted in Figure 12.4 concerning a collusive agreement between firms owned by Bob and Donna.Each participant has the option of following the terms of the agreement or cheating on the terms of the agreement,but neither knows what the other will do.What is the dominant strategy for Bob? For Donna? Which strategy should each player choose to maximize potential gain? What do you think the outcome of this game will be? Carefully explain your answers.

Question 48

Suppose that Sun Beach only has three movie theaters.One movie theater decreases its movie ticket price and later that same day,the other two do the same.Which of the following is true?

A) This is illegal because the movie theaters are colluding.
B) This is an example of explicit price fixing.
C) The first movie theater to lower price is probably the implicit price leader.
D) All of the above are true.

Question 49

Which of the following industries was NOT charged with price fixing?

A) industrial diamonds
B) electric generators
C) music distribution
D) none of the above

Question 50

The cereal industry is an example of a oligopolistic industry.

Question 51

Under price leadership,when firm A suddenly drops its price,what could its competitors interpret by the drop in price?

A) Firm A is breaking an explicit pricing agreement.
B) Firm A is forming a cartel.
C) Firm A is not cooperating with the price fixing.
D) Firm A observed a change in demand or production.

Question 52

Explicit price fixing was outlawed by the ________ Act.

A) Fair Labor Standards
B) Alien and Sedition
C) Sherman Antitrust
D) Freedom of Information

Question 53

In an oligopoly,the behavior of any one firm depends on the reaction it expects of all other firms in the industry.

Question 54

In an oligopolistic market,the government may limit the number of firms in a market by issuing patents.

Question 55

What is one way that firms can overcome the duopolists' dilemma and promote cartel pricing?

A) One firm can guarantee it will match a lower price of a competitor.
B) Firms can come to an agreement to be at Nash equilibrium.
C) Firms create a cartel to control prices.
D) none of the above

Question 56

What does it mean when a firm has a dominant strategy?

Question 57

The house slipper industry is an example of an oligopolistic industry.

Question 58

In a two-person repeated game,a tit-for-tat strategy starts with

A) non-cooperation and then each player follows his or her own self-interest.
B) non-cooperation and then each player cooperates only if the other player cooperates.
C) cooperation and then each player follows his or her own self-interest.
D) cooperation and then each player repeats the other player's previous move.

Question 59

Assuming that firms do not collude,compare the market outcome under oligopoly with the outcome under monopoly.

Question 60

In a duopoly,low-price guarantees

A) lead to higher prices.
B) lead to lower prices.
C) make cartel pricing possible.
D) Both A and C are correct.

Question 61

Under tit-for-tat retaliation,a firm will mimic the other firm's choice from the preceding period.

Question 62

The low-price guarantee results in an outcome equivalent to perfect competition.

Question 63

Low-price guarantees worsen the duopolists' dilemma.

Question 64

Firms participating in implicit price leadership openly discuss their pricing strategies with one another.

Question 65

Low-price guarantees mean lower prices for consumers.

Question 66

12.3 Simultaneous Decision Making and the Payoff Matrix

Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If Zeta commits to charging a high price,Omega can earn the largest profit by

A) also charging a high price.
B) charging a low price.
C) convincing Zeta to charge a low price and then matching it.
D) doing none of the above.

Question 67

Table 12.2
Refer to Table 12.2.Jeri and Tom are arrested for having committed a crime.They are being interrogated individually and need to decide if they should confess or not confess.The police have enough information to put them in jail for 5 years.They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge.The first number in each cell refers to the number of years of prison time Jeri will receive if she takes that action and the second number in each cell refers to the number of years of prison time Tom will receive if he takes that action.If Jeri and Tom can decide jointly then the best strategy is for Jeri to ________ and Tom to ________.

A) confess; confess
B) not confess; not confess
C) not confess; confess
D) confess; not confess

Question 68

Explain the underlying assumptions of the price leadership model.What conclusions can be made about the price charged and the output produced in an industry that has an implicit price leader?

Question 69

Recall the Application about low-price guarantees and the prices of tires to answer the following question(s).
Recall the Application.A study of the retail tire market suggests that prices are generally ________ in markets where firms offer low-price guarantees.

A) higher
B) lower
C) the same
D) unfair

Question 70

The prisoners' dilemma is a simultaneous decision-making game.

Question 71

12.3 Simultaneous Decision Making and the Payoff Matrix

Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If both firms choose a high-price strategy,

A) Omega will earn $300 daily profit and Zeta will earn $100 daily profit.
B) Omega will earn $100 daily profit and Zeta will earn $300 daily profit.
C) Both firms will earn $200 daily profit.
D) Both firms will earn $150 daily profit.

Question 72

If a firm uses a grim trigger retaliation strategy,all firms could end up with zero economic profit.

Question 73

Low-price guarantees are a way to insure that other firms will choose a high price.

Question 74

If firms A and B do not have dominant strategies,the payoff matrix can be used to predict the Nash equilibrium between firms A and B.

Question 75

Under a price leadership agreement

A) one firm is implicitly designated the leader, and the others match the leader's price.
B) firms form a cartel and charge the monopoly price.
C) firms follow a tit-for-tat strategy.
D) one firm is voted in as the leader, and the others match the leader's price.

Question 76

Table 12.2
Refer to Table 12.2.Jeri and Tom are arrested for having committed a crime.They are being interrogated individually and need to decide if they should confess or not confess.The police have enough information to put them in jail for 5 years.They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge.The first number in each cell refers to the number of years of prison time Jeri will receive if she confesses or does not confess and the second number in each cell refers to the number of years of prison time Tom will receive if he confesses or does not confess.The dominant strategy for Jeri is to ________ and the dominant strategy for Tom is to ________.

A) confess; confess
B) not confess; not confess
C) confess; not confess
D) not confess; confess

Question 77

A payoff matrix shows each possible outcome of a game and the consequences for each player.

Question 78

12.3 Simultaneous Decision Making and the Payoff Matrix

Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If both firms follow their individual dominant strategy,

A) Omega will earn $300 daily profit and Zeta will earn $100 daily profit.
B) Omega will earn $100 daily profit and Zeta will earn $300 daily profit.
C) Both firms will earn $200 daily profit.
D) Both firms will earn $150 daily profit.

Question 79

Recall the Application about the economics professor who caught three students cheating on their final exam to answer the following question(s).
Recall the Application.How many of the three students confessed when the professor questioned them about cheating?

A) none
B) one
C) two
D) three

Question 80

12.3 Simultaneous Decision Making and the Payoff Matrix

Refer to Figure 12.7 The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.In the Nash equilibrium

A) both firms would charge a high price.
B) both firms would charge a low price.
C) only Zeta would charge a low price.
D) only Omega would charge a low price.