Deck 9: Oligopoly

Question 1

The quantity that is set by the dominant firm in an oligopolistic industry:

A)is based on the price set by other firms.
B)is at the level where its marginal revenue and marginal cost are equal.
C)is equal to the total industry output.
D)ensures that there is zero economic profit in the industry.
E)is equal to the output produced in a perfectly competitive industry.

Answer 1

B

Question 2

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

A)The firms in an oligopoly are mutually interdependent.
B)There are a small number of buyers in an oligopoly market.
C)There are a large number of firms in an oligopoly market.
D)Firms in an oligopoly market earn zero economic profit.
E)There are no entry barriers in an oligopoly market.

Answer 2

A

Question 3

The model of the kinked demand curve in price competition implies that:

A)strong brand loyalty by consumers gives firms little incentive to reduce prices.
B)free entry in the market will eventually reduce economic profits to zero.
C)a firm's competitors will match any price cuts by the firm but not price hikes.
D)firms will coordinate prices so as to maximize group profit.
E)firms in the market match the market price set by a single dominant firm.

Answer 3

C

Question 4

The demand function in a duopoly is: P = 100 - 2(Q1 + Q2),where P = price,Q1 = output of the firm,and Q2 = output of the second firm.If the first firm decides to sell 10 units while the second firm sells 20 units,which of the following will be true?

A)The second firm will earn twice as much revenue as the first firm.
B)The second firm will sell at a lower price than the first firm.
C)An increase in one firm's output will not affect the other firm's revenue.
D)The first firm will earn a higher profit than the second firm.
E)The market price will be determined by the second firm's output which is larger than the first firm's output.

Question 5

Between 1950 and 1956,the three leading aluminum producers in the U.S.changed prices nine times by exactly the same amount each time and usually within one to three days of the initial price increase.This is an example of _____.

A)sequential pricing
B)price leadership
C)price discrimination
D)tacit collusion
E)price fixing

Question 6

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1

Refer to Table 9-1.If Firm A sets a high price,Firm B will _____.

A)also set a high price
B)earn a profit of $35,000
C)follow the low-price strategy
D)earn a profit of $30,000
E)earn a lower profit than firm A

Question 7

Which of the following statements is true?

A)The higher the market concentration,the lower the price in the market.
B)An increase in market concentration will lead to an increase in prices and profits.
C)A decrease in market concentration will lead to a decrease in efficiency.
D)Market concentration and profits are independent of each other.
E)?The larger the concentration ratio,the higher the number of firms in the market.

Question 8

During the 1990s,one of the dominant firms in the U.S.cigarette industry would raise prices once or twice a year by about 50 cents per carton.Other firms in the industry typically raised their prices by the same amount.This is an example of _____.

A)predatory pricing
B)price skimming
C)price leadership
D)profit maximization
E)a Sweezy oligopoly

Question 9

The kinked demand curve model explains _____ in an oligopoly.

A)the number of firms that can profitably exist
B)the market share of each firm
C)the outcome of price discrimination
D)price rigidity among firms
E)collusive price agreements between firms

Question 10

The laundry machine industry has a four-firm concentration ratio of 98%.Based on this information,we can conclude that:

A)each firm in the laundry machine industry has an equal share of the market.
B)the laundry machine industry is a tight oligopoly.
C)the laundry machine industry is monopolistically competitive.
D)the top four firms in the laundry machine industry have a low market capitalization.
E)the laundry machine industry is perfectly competitive.

Question 11

When the four-firm concentration ratio is less than 40 percent,we can conclude that:

A)the four dominant firms in the industry enjoy a high degree of market power.
B)the industry is a tight oligopoly.
C)the market shares of each firm in the industry are highly unequal.
D)the industry is monopolistically competitive.
E)the industry is competitive.

Question 12

An oligopoly firm's effective demand curve will be kinked at the current market price if:

A)the firm acts as a price leader in the industry.
B)demand is elastic for price increases by the firm.
C)the firm expects other firms to match all price changes.
D)there is free entry and exit in the market.
E)the firm produces a differentiated product.

Question 13

During the 1990s,the U.S.cigarette industry was dominated by four major firms that charged similar prices for the cigarettes they sold under a variety of brand names.When one firm raised its prices,the other firms generally followed.The cigarette industry is best characterized as _____.

A)an oligopoly
B)a monopolistically competitive industry
C)a monopoly
D)a perfectly competitive industry
E)a duopoly

Question 14

The Herfindahl-Hirschman Index _____.

A)takes into account the market share of all the firms in the market
B)is equal to 10,000 for a market with an infinite number of small firms
C)is equal to 0 for a market that is an effective monopoly
D)is smaller the more unequal the market shares of a group of firms
E)is negatively correlated with the concentration ratio

Question 15

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1

Refer to Table 9-1.If both the firms act noncooperatively,which of the following is most likely?

A)Firm B will set a high price.
B)Both Firm A and Firm B will earn profit equal to $35,000.
C)Both Firm A and Firm B will set a low price.
D)Firm A will set a high price.
E)Firm A's profit will be equal to $37,000.

Question 16

Which of the following correctly explains the dominant firm model of an oligopoly?

A)The firm that sets the lowest price gains the entire market share.
B)A single firm sets a price which is lower than the current market price and gains market share at the expense of the other firms.
C)A single firm sets the price in the market,which is taken as given by the other smaller firms.
D)Each firm in the market sets its price based on the reaction of the other firm.
E)The firms in the market collude and set prices in order to maximize their combined profits.

Question 17

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1

Refer to Table 9-1.If Firm B sets a high price,Firm A will _____.

A)earn a profit equal to $41,000
B)earn a profit equal to $35,000
C)earn a higher profit than firm B
D)earn the same profit as firm A which is equal to $30,000
E)follow the low-price strategy

Question 18

The concentration ratio for an industry with four firms shows the:

A)percentage of sales accounted for by the four firms.
B)total market capitalization of the four firms.
C)percentage of profits accounted for by the four firms.
D)total quantity of output of the four firms.
E)total costs of production of the four firms.

Question 19

Which of the following is true of the Cournot model of a duopoly?

A)The products sold by the firm are imperfect substitutes.
B)The equilibrium price in a Cournot duopoly is higher than the price in a monopoly.
C)The demand curve facing each firm is horizontal.
D)The market price is determined by the output produced by the firm with the larger market share.
E)The duopoly equilibrium lies between the pure-monopoly and purely competitive outcomes.

Question 20

In the Cournot model of quantity competition,as the number of firms increases:

A)the total industry output declines asymptotically.
B)the difference between price and marginal cost increases.
C)price approaches average cost.
D)the equilibrium price steadily increases.
E)the price elasticity of demand for the product falls.

Question 21

How does Michael Porter's Five Forces model explain the structures of different industries?

Question 22

Five oligopoly firms have market shares of 40%,20%,18%,12%,and 10%.Compute the four-firm concentration ratio,and the Herfindahl-Hirschman index for the industry.

Question 23

Briefly explain the concept of price leadership and why it occurs in oligopolistic markets.

Question 24

An oligopoly firm faces the demand curve P = 50 - Q for Q < 10 units and P = 65 - 2Q for Q > 10 units.What is the marginal cost range within which the firm can operate?

Question 25

The U.S.Department of Justice (DOJ)merger guidelines call for the DOJ to examine proposed mergers,and approve or disapprove them.Mergers which are disapproved,and which are nonetheless consummated,face potential court challenge.The guidelines are based on the post-merger HHI.If the HHI after the merger is less than 1,000,the DOJ hardly ever disapproves the proposed merger.If the HHI after the merger is above 1,800,and has increased by more than 100 points,the DOJ is very likely to contest the proposed merger.Is this a reasonable stance on merger activity by the antitrust authorities?

Question 26

Which of the following is true of the Bertrand model of a duopoly?

A)Each firm matches the price increases by the other firm.
B)The firm that sets the lower price claims the entire market.
C)The total output supplied by the firms determines the market price.
D)Firms compete on multiple dimensions like quantity,price,and advertising.
E)The demand curve facing an individual firm is kinked at the market price.

Question 27

George Stigler,a Nobel laureate in economics,suggested that one reason why oligopolies have prices higher than competitive industries is that tacit coordination concerning output and price is much easier when there are only a few competing firms.In addition,it is easier to detect cheating on some agreed-upon price or output level.Evaluate this argument.

Question 28

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1

Refer to Table 9-1.If the firms are able to enforce a collusive agreement,which of the following is most likely?

A)Firm A will earn profit equal to $41,000.
B)Firm A will earn a higher profit than Firm B.
C)Firm A will set a high price while Firm B will set a low price.
D)Firm A and Firm B will earn set a low price.
E)Firm A and Firm B will earn profit equal to $35,000.

Question 29

What is the concentration ratio? How is it used to measure oligopoly? What are its drawbacks?

Question 30

What is meant by market skimming?

A)The strategy of setting a higher price for a good than for close substitutes of the good,based on product differentiation.
B)The strategy of combining several products in the market such that the consumer cannot buy the goods individually.
C)The strategy of setting a price that is lower than the current market price in order to undercut competing firms.
D)The strategy of setting a higher price for a good when it is first introduced in the market and then gradually lowering the price.
E)The strategy of setting a low price in order to induce consumers to buy the good and then consequently increasing the price.

Question 31

Distinguish between the degree of concentration for U.S.sales and the degree of concentration for U.S.production.Give at least two examples of U.S.industries that have significantly different production and sales ratios.

Question 32

The kinked demand curve in an oligopolistic market is defined by the equations: P = 140 - 0.5Q and P = 200 - 2Q.Derive equations for the marginal revenue curves and determine the price and quantity at the "kink" of the demand curve.

Question 33

In the Cournot model of duopoly,explain whether the quantities chosen by the firms are strategic complements or strategic substitutes.

Question 34

How does firm behavior in an oligopoly differ from behavior in other market structures?

Question 35

Which of the following is true of product differentiation?

A)Product differentiation increases information asymmetry in a market.
B)Product differentiation reduces price differentials among competing goods by informing consumers about the features of a product.
C)Product differentiation can be based on perceived differences among products.
D)Product differentiation is the process of determining the optimal production of various products by a multi-product firm.
E)Firms in a perfectly competitive market practice product differentiation to attract consumers.

Question 36

Firms do not have the economic incentive to advertise when:

A)there are a small number of firms in the market.
B)the goods that are produced are imperfect substitutes.
C)there are entry barriers in the market.
D)there is information asymmetry in the market.
E)products are standardized.

Question 37

Among competing firms,a firm's actions are considered strategic substitutes when:

A)increasing one firm's action causes the other firm's optimal reaction to decrease.
B)competing goods are very close substitutes for one another.
C)firms compete on multiple dimensions like price,quantity,and product attributes.
D)one firm's actions do not trigger a reaction from the other firms.
E)firms compete on the basis of price.

Question 38

Which of the following,if true,would be the best example of the Bertrand model of oligopoly?

A)The automobile market where the market price is set by the price leader
B)The electricity market where there are significant barriers to entry
C)The cigarette market where there are a small number of large firms
D)The breakfast cereal market where the product is highly differentiated
E)A competitive auction where the good that is auctioned goes to the lowest bidder

Question 39

Why do antitrust authorities prefer to use the Herfindahl-Hirschman Index for their analyses instead of concentration ratios?

Question 40

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1

What is meant by a prisoner's dilemma?

A)A strategic situation in which some individuals enjoy the benefits of a good without incurring any of the costs associated with the good.
B)A strategic situation where there is a collective benefit from cooperation but the self-interest of individuals leads to an inferior outcome.
C)A strategic situation in which players make decisions in a sequential manner based on some information on the previous player's moves.
D)A strategic situation where a group of firms collude to set higher prices and maximize profits.
E)A strategic situation in which all players make their moves simultaneously,with no information about the other players' actions and in the process maximize individual returns.

Question 41

What are the assumptions of the kinked demand curve model? What is its main conclusion about oligopoly behavior? How realistic is the model?

Question 42

What is meant by the prisoner's dilemma? Why is it important to the study of managerial decision making?

Question 43

Compare and contrast profitability in equilibrium for symmetric firms when the firms' actions are strategic substitutes and when the firms' actions are strategic complements.

Question 44

Antitrust laws in the United States generally forbid tie-in arrangements.What reasons might firms give to justify tying of goods? What reasons might antitrust authorities state to prevent it?

Question 45

The demand function for an oligopolistic market is given by the equation,Q = 180 - 4P,where Q is quantity demanded and P is price.The industry has one dominant firm whose marginal cost function is: MC = 12 + 0.1QD,and many small firms,with a total supply function: QS = 20 + P.
(a)Derive the demand equation for the dominant oligopoly firm.

Question 46

In a Cournot duopoly,both firms face the market demand: P = 100 - QD,where P is price and QD is total quantity demanded in the market.Firm 1's cost function is given by C1 = 0.8Q12 and firm 2's cost function is given by C2 = 6Q2,where Q1 is firm 1's output and Q2 is firm 2's output.Derive firm 1's optimal reaction function.

Question 47

An oligopoly firm faces a kinked demand curve with segments given by: P = 100 - Q and P = 120 - 2Q,where P is the price and Q is the quantity demanded.The firm has a constant marginal cost,MC of $45.
(a)Determine the firm's profit-maximizing level of output and price.

Question 48

Statistical evidence suggests that concentrated industries have higher profits than competitive industries.Is this necessarily harmful to consumer interests?

Question 49

Demand in a market dominated by two firms (a Cournot duopoly)is determined according to: P = 300 - 4(Q1 + Q2),where P is the market price,Q1 is the quantity demanded by Firm 1,and Q2 is the quantity demanded by Firm 2.The marginal cost for each firm is constant;MC = $60.
(a)Derive an equation for Firm 1's revenue.

Question 50

The following matrix displays the advertising rates and the resultant profits (in thousands of dollars)for two rival newspapers in a major city.
(a)Assume that the newspapers set their advertising rates independently.Determine the optimal strategy for each firm.Explain briefly.