Deck 14: Oligopoly

Question 1

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

Answer 1

Oligopoly results in the perfectly competitive outcome when markets are contestable and oligopolists do not or are not successful at colluding. Because prices are pushed to their long-run average costs, positive profits will not persist.

Question 2

Explain what a "perfectly contestable" market means. Give an example of a perfectly contestable market. Explain why the outcome in a perfectly contestable market is that firms produce efficiently.

Answer 2

A perfectly contestable market is a market in which entry and exit are costless. An example of a perfectly contestable market is the market for trucking services. The firms are forced to behave efficiently because of the threat of competition.

Question 3

How do you think the theory of contestable markets has been used as a means of arguing for weaker enforcement of antitrust laws? Explain.

Answer 3

The theory of contestable markets can be used to argue for weaker enforcement of antitrust laws by observing that a monopoly market may not prove that a firm is exploiting its market power to control the price level since excess profits will quickly lead to entry by new firms.

Question 4

What is a perfectly contestable market?

Question 5

What two conditions must be present for a cartel to work?

Question 6

What is tacit collusion?

Question 7

Explain what the Five Forces Model is useful for and identify each of them.

Question 8

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 9

Suppose that the firms in an oligopolistic industry successfully collude. What will be the outcome? Explain.

Question 10

Assume that we are concerned about the existence of one firm (monopoly) in a market because of the potential for economic profits. If, however, there is free entry and exit, should our concerns change? Why or why not?

Question 11

Do firms in a perfectly contestable market earn positive economic profit in the long run? Explain.

Question 12

What is an oligopoly?

Question 13

What is a cartel?

Question 14

What is necessary for a firm to be part of a perfectly contestable market?

Question 15

AirTran, JetBlue, Southwest Airlines and Sun Country Airlines are generally referred to as low-cost airlines. Why might this type of industry be used as an example of a contestable market? Can you think of any reasons why this might not be a good example of a contestable market?

Question 16

Comment on the following statement: "In an oligopoly, the behavior of any one firm depends on the reaction it expects of all the others in the industry."

Question 17

Why might an oil cartel's effectiveness be undermined during a recession but strengthened during an economic boom?

Question 18

Define the concentration ratio.

Question 19

When does an oligopoly market result in a cartel? What conditions must be present for the cartel to be successful?

Question 20

How do we know when a market is contestable?

Question 21

The prisoners' dilemma shows that the players' dominant strategies often lead them to less than optimal outcomes. Is there any way in which this will not be the case?

Question 22

Bob and Joe both own convenience marts on opposite corners. Both firms are considering expanding the size of their stores. The payoff matrix for this decision is shown below. Does Bob's Mart have a dominant strategy? Explain.

Question 23

An essential assumption of the Cournot model is that each firm aims to maximize profits, based on the expectation that its own output decision will not have an effect on the decisions of its rivals. Critically evaluate this assumption.

Question 24

Describe the Cournot model.

Question 25

What is game theory?

Question 26

What is a dominant strategy?

Question 27

Arguments by regulators are often made that predatory pricing, with its attendant temporary price-cutting below costs, is an attempt to eliminate rivals with the intent of raising prices after the competition has left. Critically evaluate this argument.

Question 28

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

Question 29

What conditions are necessary for a cartel to work? Diagram equilibrium price and output determination in a collusive oligopoly market. Explain how a decrease in demand accompanied by cheating by members can help break up a cartel.

Question 30

What is price leadership?

Question 31

What is the output level predicted by the Cournot model? Discuss this in terms of the different market models that have been surveyed so far.

Question 32

Explain how the outcome of the Cournot model is achieved.

Question 33

In choosing the optimal output, the monopolist had only to consider its own costs and the demand curve that it faced. How do things change under duopoly and what does the Cournot model argue about how firms will behave?

Question 34

Fred and Barney are arrested and charged with illegal concealment of a weapon. The police suspect that Fred and Barney have robbed the local McDino's (fast food restaurant), but do not have enough evidence to make the robbery charge stick. The district attorney separates them and offers them the deal shown in the payoff matrix below. Can we predict what each will do? Explain.

Question 35

Evaluate the following statement. The Cournot model basically assumes that the sole decision of each firm in a duopoly is one of determining how much to produce not which price to set.

Question 36

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

Question 37

What is predatory pricing?

Question 38

Comment on the following statement: "If one player in the game does not have a dominant strategy, it is impossible to predict the outcome of the game."

Question 39

Assume two nations are involved in an arms race. They both assume that each faces two choices - sign disarmament accord or continue with military expansion and the building of more nuclear missiles. Explain using the prisoner's dilemma model why both of these nations will choose to escalate the arms race rather than choose bilateral disarmament. During the Cold War President Ronald Reagan was quoted as saying that the United States will "trust, but verify" when discussing nuclear nonproliferation agreements between the U.S. and the Soviet Union. How does this relate to your answer to the first part of this question?

Question 40

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 a dominant price leader?

Question 41

Suppose that the widget industry contains only four firms. The table below shows the market share of each firm in the market. Calculate the Herfindahl-Hirschman index for the widget industry.

Question 42

What is a maximin strategy?

Question 43

The philosopher John Rawls argued that if people could make arrangements about how society would be organized before they were born that one of the principles that we would agree upon is that social and economic inequalities are to be arranged so that they are to be of the greatest benefit to the least-advantaged members of society. What economic strategy sounds akin to this idea? Explain.

Question 44

If an adult plays tic-tac-toe with another adult typically the result is that neither player wins. However, when adults play small children they are usually successful in beating them. How is it that there could be Nash equilibrium in the first case and not the second?

Question 45

What is the Herfindahl-Hirschman index?

Question 46

What is a Nash equilibrium?

Question 47

What evidence exists that industrial concentration increases the rate of technological advance?

Question 48

Define a tit-for-tat strategy.

Question 49

When an oligopolist chooses a maximin strategy, how is that helpful and what is being assumed about the other players?

Question 50

Assume two locally owned used car dealerships that have been in direct competition for many decades. They have a choice of selling high-quality cars at a high price but also high costs because of the repairs that have to be made. The other choice is to sell low-quality cars at a low cost but market them as high quality cars. Explain using game theory why it is in the interest of both of these companies to continue to sell high-quality cars but it may not necessarily be in the interest of a new out-of-town dealership that has recently moved into town to do the same.

Question 51

What is the Celler-Kefauver Act?

Question 52

In a game theory model, how is Nash equilibrium achieved?

Question 53

List three reasons why oligopolies are considered to be inefficient.