Deck 16: Market Structures Iii: Oligopoly

Question 1

The price and quantity generated by a Nash equilibrium is closer to the competitive solution than the price and quantity generated by a cartel.

Answer 1

True

Question 2

When firms cooperate with one another, it is generally good for the cooperating firms.

Answer 2

True

Question 3

As the number of firms in an oligopoly increases, the

A) price approaches marginal cost, and the quantity approaches the socially efficient level.
B) price and quantity approach the monopoly levels.
C) price effect exceeds the output effect.
D) individual firms' profits increase.

Answer 3

price approaches marginal cost, and the quantity approaches the socially efficient level.

Question 4

A market structure in which many firms sell products that are similar but not identical is known as

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

Question 5

If oligopolists engage in collusion and successfully form a cartel, the market outcome is

A) the same as if it were served by competitive firms.
B) efficient because cooperation improves efficiency.
C) the same as if it were served by a monopoly.
D) known as a Nash equilibrium.

Question 6

The dominant strategy for an oligopolist is to cooperate with the group and maintain low production regardless of what the other oligopolists do.

Question 7

When an oligopolist individually chooses its level of production to maximise its profits, it produces

A) more than the level produced by a monopoly and less than the level produced by a competitive market.
B) less than the level produced by a monopoly and more than the level produced by a competitive market.
C) less than the level produced by either monopoly or a competitive market.
D) more than the level produced by either monopoly or a competitive market.

Question 8

There is a constant tension in an oligopoly between cooperation and self-interest, because after an agreement to reduce production is reached, it is profitable for each individual firm to cheat and produce more.

Question 9

An oligopoly is a market structure in which many firms sell products that are similar but not identical.

Question 10

The prisoners' dilemma demonstrates why it is difficult to maintain cooperation even when cooperation is mutually beneficial.

Question 11

As the number of sellers in an oligopoly increases,

A) output in the market tends to fall because each firm must cut back on production.
B) the price in the market moves further from marginal cost.
C) collusion is more likely to occur because a larger number of firms can place pressure on any firm that defects.
D) the price in the market moves closer to marginal cost.

Question 12

As the concentration ratio decreases, an oligopolistic market looks more like

A) monopoly.
B) duopoly.
C) monopolistic competition.
D) a collusion solution.

Question 13

When firms cooperate with one another, it is generally good for society as a whole.

Question 14

When an oligopolist individually chooses its level of production to maximise its profits, it charges

A) more than the price charged by either monopoly or a competitive market.
B) less than the price charged by either monopoly or a competitive market.
C) more than the price charged by a monopoly and less than the price charged by a competitive market.
D) less than the price charged by a monopoly and more than the price charged by a competitive market.

Question 15

The unique feature of an oligopoly market is that the actions of one seller have a significant impact on the profits of all of the other sellers in the market.

Question 16

Predatory pricing occurs when a firm cuts prices with the intention of driving competitors out of the market so that the firm can become a monopolist and later raise prices.

Question 17

The greater the number of firms in the oligopoly, the more the outcome of the market looks like that generated by a monopoly.

Question 18

The simplest type of oligopoly is

A) monopoly.
B) duopoly.
C) monopolistic competition.
D) oligopolistic competition.

Question 19

The market for hand tools in South Africa (such as hammers and screwdrivers) is dominated by three major tool manufacturers. This market is best described as

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

Question 20

Suppose an oligopolist individually maximises its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist

A) should produce more units.
B) has maximised profits.
C) is in a Nash equilibrium.
D) should produce fewer units.
E) should exit the industry.

Question 21

A dominant strategy is one that

A) makes every player better off.
B) makes at least one player better off without hurting the competitiveness of any other player.
C) increases the total pay-off for the player concerned.
D) is best for the player concerned, regardless of what strategy other players follow.

Question 22

Table 1

Refer to Table 1. Boitumelo and Yusuf own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The yearly economic profits from each strategy are indicated in the table. The figures on the right side of each rectangle indicate Boitumelo's profits; the figures on the left side indicate Yusuf's profits. Which of the following statements is correct?

A) Yusuf's dominant strategy is to charge a low price.
B) Boitumelo's dominant strategy is to charge a high price.
C) The dominant strategy for both Boitumelo and Yusuf is to charge a low price.
D) Yusuf's dominant strategy is to charge a high price.

Question 23

An agreement among firms in a market about quantities to produce or prices to charge is called

A) collusion.
B) a strategic situation.
C) excess capacity.
D) tying.

Question 24

In studying oligopolistic markets, economists assume that

A) there is no conflict or tension between cooperation and self-interest.
B) it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
C) each oligopolist cares only about its own profit.
D) strategic decisions do not play a role in such markets.

Question 25

Table 1

Refer to Table 1. Boitumelo and Yusuf own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The yearly economic profits from each strategy are indicated in the table. The figures on the right side of each rectangle indicate Boitumelo's profits; the figures on the left side indicate Yusuf's profits. Which of the following statements is correct for a one trial game?

A) The market equilibrium price is the high price.
B) A market equilibrium price cannot be established unless Boitumelo and Yusuf collude.
C) A market equilibrium price cannot be established without repeated trials.
D) The equilibrium price is the low price.

Question 26

In an oligopoly, each firm knows that its profits

A) depend only on how much output it produces.
B) depend only on how much output its rival firms produce.
C) depend on both how much output it produces and how much output its rival firms produce.
D) will be zero in the long run because of free entry.

Question 27

Game theory is important for understanding which of the following market types?

A) Perfectly competitive and oligopolistic markets.
B) Perfectly competitive markets, but not oligopolistic markets.
C) Oligopolistic, but not perfectly competitive markets.
D) Neither oligopolistic nor perfectly competitive markets.

Question 28

As a group, oligopolists would always be better off if they would act collectively

A) as if they were each seeking to maximise their own individual profits.
B) in a manner that would prohibit collusive agreements.
C) as a single monopolist.
D) as a single perfectly competitive firm.

Question 29

As a group, oligopolists would always earn the highest profit if they would

A) produce the perfectly competitive quantity of output.
B) produce more than the perfectly competitive quantity of output.
C) charge the same price that a monopolist would charge if the market were a monopoly.
D) operate according to their own individual self-interests.

Question 30

In general, game theory is the study of

A) how people behave in strategic situations.
B) how people behave when the possible actions of other people are irrelevant.
C) oligopolistic markets.
D) all types of markets, including competitive markets, monopolistic markets, and oligopolistic markets.

Question 31

An agreement between two duopolists to function as a monopolist usually breaks down because

A) they cannot agree on the price that a monopolist would charge.
B) they cannot agree on the output that a monopolist would produce.
C) each duopolist wants a larger share of the market in order to capture more profit.
D) each duopolist wants to charge a higher price than the monopoly price.

Question 32

As a group, oligopolists would always earn the highest profit if they would

A) produce the perfectly competitive quantity of output.
B) produce more than the perfectly competitive quantity of output.
C) charge the same price that a monopolist would charge if the market were a monopoly.
D) operate according to their own individual self-interests.

Question 33

A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as a

A) Nash equilibrium.
B) dominant strategy.
C) cartel.
D) collusion solution.

Question 34

Many economists argue that resale price maintenance

A) has a legitimate purpose of stopping discount retailers from free-riding on the services provided by full service retailers.
B) is price fixing and, therefore, is prohibited by law.
C) is price fixing and, therefore, is prohibited by law and enhances the market power of the producer.
D) enhances the market power of the producer.

Question 35

In markets characterised by oligopoly,

A) the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
B) collusive agreements will always prevail.
C) collective profits are always lower with cartel arrangements than they are without cartel arrangements.
D) pursuit of self-interest by profit-maximising firms always maximises collective profits in the market.

Question 36

Collusion is difficult for an oligopoly to maintain

A) because, in the case of oligopoly, self-interest is in conflict with cooperation.
B) if additional firms enter of the oligopoly.
C) because competition laws make collusion illegal.
D) all of the answers are correct.

Question 37

In the language of game theory, a situation in which each person must consider how others might respond to his or her own actions is called a

A) quantifiable situation.
B) cooperative situation.
C) strategic situation.
D) tactical situation.

Question 38

A distinguishing feature of an oligopolistic industry is the tension between

A) profit maximisation and cost minimisation.
B) cooperation and self-interest.
C) producing a small amount of output and charging a price above marginal cost.
D) Short-run decisions and long-run decisions.

Question 39

Which of the following statements is correct?

A) If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly.
B) Although the logic of self-interest decreases a duopoly's price below the monopoly price, it does not push the duopolists to reach the competitive price.
C) Although the logic of self-interest increases a duopoly's level of output above the monopoly level, it does not push the duopolists to reach the competitive level.
D) All of the above are correct.

Question 40

As the number of firms in an oligopoly increases, the magnitude of the

A) output effect increases.
B) output effect decreases.
C) price effect increases.
D) price effect decreases.

Question 41

What effect does the number of firms in an oligopoly have on the characteristics of the market?

Question 42

Assume that demand for a product that is produced at zero marginal cost is reflected in the table below.

a. What is the profit-maximising level of production for a group of oligopolistic firms that operate as a cartel?
b. Assume that this market is characterised by a duopoly in which collusive agreements are illegal. What market price and quantity will be associated with a Nash equilibrium?

Question 43

Describe the output and price effects that influence the profit-maximising decision faced by a firm in an oligopoly market. How does this differ from output and price effects in a monopoly market?

Question 44

To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to

A) collude with each other.
B) form various degrees of cartels.
C) compete rather than cooperate with each other.
D) cooperate rather than compete with each other.

Question 45

Explain how the output effect and the price effect influence the production decision of the individual oligopolist.

Question 46

Explain the practice of tying and discuss why it is controversial.

Question 47

Resale price maintenance may be justified if

A) a manufacturer wishes to ensure that its retailers are able to provide knowledgeable sales staff to advise consumers.
B) a manufacturer wishes to ensure that its retailers are able to pay a high price for its products.
C) a manufacturer wishes to ensure that its retailers do not compete with each other.
D) a manufacturer's product is one that has a long life,
E)g. cars.

Question 48

Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why?

Question 49

Outline the purpose of competition laws. What do they accomplish?

Question 50

Explain the practice of resale price maintenance and discuss why it is controversial.

Question 51

Nike and Adidas are considering whether to advertise heavily during the Soccer World Cup. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive agreements) could lead to an outcome that is better than a single period game? Explain the circumstances in which this may be true.

Question 52

The primary purpose of competition legislation is to

A) protect small businesses.
B) protect consumers.
C) ensure firms earn only a fair profit.
D) All of the above.

Question 53

Describe the source of tension between cooperation and self-interest in a market characterised by oligopoly.

Question 54

Laws that make it illegal for firms to conspire to raise prices or reduce production are known as

A) anti-monopoly laws.
B) all of these answers.
C) anti-collusion laws.
D) pro-competition laws.
E) competition laws.

Question 55

In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society?

A) Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells.
B) Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a "high" airfare or a "low" airfare on flights between those two cities.
C) Two superpowers decide whether to build new weapons or to disarm.
D) In all of the above cases, the cooperative outcome of the game is good for the two players and bad for society.