Deck 13: Strategic Decision Making in Oligopoly Markets

Question 1

In a duopoly situation with two firms A and B,A's best-response curve

A)gives A's profit-maximizing price given B's anticipated price.
B)gives A's minimax solution.
C)is derived based upon the underlying interdependence of firms A and B.
D)both a and c
E)all of the above

Answer 1

D

Question 2

In simultaneous decision making situations,common knowledge means that

A)at least one of the decision makers knows what is going to happen.
B)all of the decision makers know what the outcome of the decision will be.
C)even people not involved in making the decision will be able predict the outcome.
D)the managers of the firms failed to keep all of the information about their decision plans secret.
E)none of the above

Answer 2

E

Question 3

Which of the following are trigger strategies?

A)eye-for-an-eye
B)tit-for-tat
C)grim
D)both b and c
E)all of the above

Answer 3

D

Question 4

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

A)price reductions
B)building excess capacity
C)economies of scale
D)both b and c
E)both a and b

Question 5

Actions taken by oligopolists to plan for and react to actions of rival firms represent

A)strategic behavior.
B)interdependence.
C)cooperative behavior.
D)game theory.
E)all of the above.

Question 6

an oligopoly market,

A)a firm must lower price in order to sell more output.
B)each firm faces a demand curve that depends on how the firm's rivals behave.
C)a few firms account for a large portion of industry sales.
D)both a and b
E)all of the above

Question 7

game theory,a dominant strategy is

A)a strategy used by a large firm to compete against smaller firms.
B)a strategy followed by the price leader.
C)a strategy involving a high risk but also a high return.
D)a strategy that leads to the best outcome no matter what a rival does.
E)none of the above

Question 8

A form of strategic entry deterrence is

A)forming a cartel.
B)maintaining excess capacity.
C)limit pricing.
D)both b and c
E)all of the above

Question 9

Credible commitments give committing firms

A)the first moves in sequential games.
B)a second-mover advantage in sequential games.
C)a way to improve their payoffs.
D)both a and c
E)both b and c

Question 10

Two men's clothing stores that compete for most of the market in a small town in Ohio and will choose their weekly advertising levels sequentially.The newspaper advertising department calls the clothing stores in alphabetical order to find out how much advertising each firm wishes to buy.Somehow - and nobody at the newspaper knows exactly how this happens - Arbuckle's advertising decision "leaks out" to Mr.B's,which then knows Arbuckle's advertising decision when it makes its advertising decision for the week. The following payoff table facing the two firms,Arbuckle & Son and Mr.B's,shows the weekly profit outcomes for the various advertising decision combinations.The payoff table is common knowledge.Use this payoff table to construct the appropriate sequential decision on the blank game tree provided below.
When Arbuckle and Son makes its advertising decision first,

A)it need not consider what Mr.B's advertising decision will be since Arbuckle and Son cannot know what decision Mr.B will make.
B)the common knowledge that both managers have about the payoff table insures that Arbuckle will earn $5,000 of weekly profit.
C)it should use the roll-back method to insure that it will earn $5,000 of weekly profit.
D)all of the above.
E)none of the above

Question 11

What is the most important characteristic of oligopoly?

A)firms have market power
B)product differentiation
C)low barriers to entry
D)interdependence of profits
E)none of the above

Question 12

Firms make credible commitments by taking _________________ ,_______________ actions.

A)irreversible,unconditional
B)reversible,uncontrollable
C)reversible,believable
D)costly,but believable
E)costly,reversible

Question 13

Which strategy for punishing cheating has consistently been the winning strategy in tournaments pitting decision strategies against one another?

A)grim
B)eye-for-an-eye
C)tit-for-tat
D)Nash strategy

Question 14

In sequential decision making situations,using the roll-back method

A)results in a Nash equilibrium.
B)allows the decision maker going second to predict what the decision maker going first will do.
C)allows predictions about what the decision maker going second will do to be used by the decision maker going first.
D)both a and b
E)both a and c

Question 15

participants in a game choose to take actions that result in a Nash equilibrium,

A)no single participant has an incentive to change its action.
B)each participant has chosen the best action possible,given what the others have chosen.
C)no other set of actions could make ALL participants better off.
D)both a and b
E)all of the above

Question 16

Two men's clothing stores that compete for most of the market in a small town in Ohio and will choose their weekly advertising levels sequentially.The newspaper advertising department calls the clothing stores in alphabetical order to find out how much advertising each firm wishes to buy.Somehow - and nobody at the newspaper knows exactly how this happens - Arbuckle's advertising decision "leaks out" to Mr.B's,which then knows Arbuckle's advertising decision when it makes its advertising decision for the week. The following payoff table facing the two firms,Arbuckle & Son and Mr.B's,shows the weekly profit outcomes for the various advertising decision combinations.The payoff table is common knowledge.Use this payoff table to construct the appropriate sequential decision on the blank game tree provided below.
If the manager at Arbuckle and Son employs the roll-back method to make the advertising decision for Arbuckle,the likely outcome will be$3,500 of weekly profit for Arbuckle and $3,500 of weekly profit for Mr.B's.

A)$5,000 of weekly profit for Arbuckle and $5,000 of weekly profit for Mr.B's.
B)$5,000 of weekly profit for Arbuckle and $3,000 of weekly profit for Mr.B's.
C)$3,000 of weekly profit for Arbuckle and $5,000 of weekly profit for Mr.B's.
D)$4,000 of weekly profit for Arbuckle and $4,000 of weekly profit for Mr.B's.

Question 17

game theory,what is a dominant strategy?

A)A strategy that leads to the best possible outcome for both firms.
B)Any strategy that leads to a Nash equilibrium.
C)A strategy that yields a minimax outcome.
D)A strategy that leads to the best outcome for a firm no matter what strategy the other chooses.
E)none of the above

Question 18

Oligopolists face interdependent profits because

A)there are few firms in the market.
B)the product is differentiated.
C)industry sales are large.
D)all of the above

Question 19

Interdependence occurs when

A)firms consider the actions of other firms when making price and output decisions.
B)all firms in an industry are affected by the same general economic conditions,like consumer incomes and the unemployment rate.
C)firms cooperate to increase profit.
D)both a and b
E)all of the above

Question 20

One reason a firm or firms might charge a price lower than its profit-maximizing price is

A)to discourage the entry of new firms.
B)to follow a tit-for-tat strategy.
C)to erect multiproduct barriers to entry.
D)both a and c
E)all of the above

Question 21

Tacit collusion in a market represents a method for

A)collusion to discourage entry into the market.
B)a price-fixing agreement when such agreements are legal.
C)agreeing on price without explicit communication among firms.
D)cheating on a cartel price.
E)none of the above

Question 22

Price matching is a strategic move that

A)seeks to make cheating unprofitable.
B)must generally be announced publicly in order to have the desired effect.
C)has no usefulness to managers if a simultaneous pricing decision is going to be made only one time.
D)both a and b
E)all of the above

Question 23

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. In order for Burger Doodle to successfully implement a limit pricing strategy for entry deterrence,it must be able to

A)convince Designer Burger that it will set the Nash price of $10 should Designer Burger decide to stay out of the market.
B)convince Designer Burger that it will set the Nash price of $10 should Designer Burger decide to enter the market.
C)make a credible commitment to maintain its initial price should Designer Burger decide to enter the market.
D)make a credible promise to price its burgers at $12.
E)make a credible threat to lower its price to $8 should Designer Burger choose to enter it market.

Question 24

Tacit collusion

A)is a form of cooperation that occurs without explicit communication.
B)is illegal per se in the U.S.
C)involves strict adherence to quotas.
D)seems to rare,especially among manufacturers of consumer durables.

Question 25

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. If Beta expects to get caught the first month it cheats,the present value of the benefits of cheating is

A)$1,234
B)$2,927
C)$6,500/1.025)
D)$6,500/1.025)²

Question 26

Price leadership

A)is rather uncommon today.
B)is a pricing arrangement in which one firm in an oligopoly agrees to act as a cartel manager and set a price that will maximize the profits of all the firms in the oligopoly market.
C)would not be useful to a dominant firm if it could eliminate all its rivals through a price war.
D)none of the above

Question 27

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. If both firms cooperate,Alpha will choose a _________ level of advertising and Beta will choose a _________ level of advertising.

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

Question 28

In the U.S.,firms that engage in cooperative efforts to coordinate pricing

A)are always in violation of antitrust laws.
B)may face federal charges of illegal collusion if they cannot provide evidence that the coordination of prices was in the best interest of consumers.
C)
C)are simply trying to reach a Nash equilibrium and are not viewed by courts as necessarily breaking any laws.
D)both b and

Question 29

Which of the following will NOT make cooperation more likely?

A)any action that reduces the benefit of cheating
B)a strategy of price matching
C)posting prices on the internet
D)any action that makes it more costly to monitor rival's prices.
E)developing a reputation for harshly punishing cheating

Question 30

In a repeated prisoners' dilemma decision,both managers can make credible threats to punish cheating because

A)if either manager cheats,the other manager can increase its profit by also cheating.
B)both of the cheating cells in the payoff table are strategically stable cells.
C)
C)when both firms cheat,they both avoid the Nash equilibrium cell.
D)both a and

Question 31

Punishment for cheating on pricing agreements usually takes the form of

A)a retaliatory advertising campaign.
B)a retaliatory price cut.
C)a legal suit.
D)a monetary fine.

Question 32

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. Beta expects punishment to last for two months after being caught i.e.,to be penalized in months 2 and 3).What would be the value-maximizing decision for Beta?

A)Cooperate since $3,000 > PV_{Benefits of cheating}.
B)Cooperate since $6,500/1.025)> PV_{Benefits of cheating}.
C)Cheat since PV_{Benefits of cheating} > $2,820.
D)Cheat since PV_{Benefits of cheating} < $5,641.

Question 33

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. When Alpha punishes Beta with a retaliatory adjustment in its advertising expenditures,Beta will suffer an undiscounted penalty of $_________ for each month that punishment continues.

A)$1,500
B)$2,000
C)$3,000
D)$4,000
E)$5,000

Question 34

In a one-time prisoners' dilemma decision,

A)all firms expect the other firms to cheat.
B)cheating is usually not a value-maximizing decision.
C)cheating is less likely when the discount rate is low.
D)cheating is less likely when the discount rate is high.

Question 35

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. If the condition in the question above is met,Burger Doodle will set price equal to $________ and it will earn $__________ of profit while Designer Burger will earn $__________ of profit.

A)8; 125,000; 0
B)8; 75,000; -40,000
C)10; 101,000; 25,000
D)10: 96,000; 25,000
E)12; 165,000; 0

Question 36

In a repeated decision for which the present value of the benefits of cheating is less than the present value of the costs of cheating,

A)deciding not to cheat is a value-maximizing decision.
B)deciding to cooperate is a value-maximizing decision.
C)deciding to cheat is a value-maximizing decision.
D)both a and b

Question 37

In a repeated decision for which the present value of the benefits of cheating is greater than the present value of the costs of cheating,

A)deciding not to cheat is a value-maximizing decision.
B)deciding to cooperate is a value-maximizing decision.
C)deciding to cheat is a value-maximizing decision.
D)both a and b

Question 38

In a prisoners' dilemma decision that is made only one time,

A)the Nash equilibrium is a non-cooperative outcome.
B)a set of decisions exists that is better than the Nash decisions for each and every oligopoly firm.
C)the discount rate is irrelevant for decision making.
D)rivals have no way to punish cheaters.
E)all of the above.

Question 39

Cooperation is achieved in an oligopoly market when

A)most of the firms in the market decide not to cheat.
B)some of the firms in the market decide not to cheat.
C)at least one of the firms in the market decide not to cheat.
D)all of the firms in the market decide not to cheat.

Question 40

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. If Beta decides not to cooperate,its undiscounted benefit from cheating for one month is

A)$1,500
B)$2,000
C)$3,000
D)$4,000
E)$5,000

Question 41

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. If the condition in the question above is NOT met,Burger Doodle will set price equal to $________ at decision node 1 and the outcome _____________is,is not)a Nash equilibrium.

A)8; is
B)8; is not
C)12; is
D)12; is not

Question 42

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. If the condition in the question 13-67 is NOT met,Burger Doodle will set price equal to $________ at decision node 3 and it will earn $__________ of profit while Designer Burger will earn $__________ of profit.

A)8; 125,000; 0
B)8; 75,000; -40,000
C)10; 101,000; 25,000
D)10: 96,000; 25,000
E)12; 165,000; 0