Deck 17: Oligopoly

Question 1

The essence of an oligopolistic market is that there are only a few sellers.

Answer 1

True

Question 2

The problems faced by oligopolies with three or more members are entirely different from the problems faced by duopolies.

Answer 2

False

Question 3

Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm has an incentive to maintain the agreement because the firm's individual profits will be the greatest under the cartel arrangement.

Answer 3

False

Question 4

If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly.

Question 5

Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.

Question 6

As the number of firms in an oligopoly becomes very large, the price effect disappears.

Question 7

If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level of output as they would produce in a Nash equilibrium.

Question 8

As the number of firms in an oligopoly increases, the magnitude of the price effect increases.

Question 9

All examples of the prisoner's dilemma game are characterized by one and only one Nash equilibrium.

Question 10

Any market that is served by an oligopoly is in effect served by a monopoly.

Question 11

If two players engaged in a prisoner's dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once.

Question 12

When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is a Nash equilibrium.

Question 13

Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms.

Question 14

In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current individual profits by producing more.

Question 15

A group of firms that collude is called a cartel.

Question 16

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Question 17

Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.

Question 18

If the output effect from increased production is larger than the price effect, then an oligopolist would increase production.

Question 19

Oligopolies produce more when they collude then when they do not.

Question 20

In a competitive market, strategic interactions among the firms are not important.

Question 21

The notion of a tit-for-tat strategy applies to a prisoners' dilemma game that is played repeatedly, but it does not apply if the game is played only once.

Question 22

Tying is always profitable for a monopoly.

Question 23

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

Question 24

One way that public policy encourages cooperation among oligopolists is through antitrust law.

Question 25

In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesirable outcome for the firms that are involved.

Question 26

A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Question 27

The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.

Question 28

The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma.

Question 29

In some games, the noncooperative equilibrium is bad for the players and bad for society.

Question 30

In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does.

Question 31

Tying can be thought of as a form of price discrimination.

Question 32

Resale price maintenance prevents retailers from competing on price.

Question 33

Some business practices that appear to reduce competition, such as resale price maintenance, may have legitimate economic purposes.

Question 34

When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate.

Question 35

Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes.

Question 36

A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever the other player did last time.

Question 37

The Sherman Antitrust Act states that if a person can prove that he was damaged by an illegal arrangement to restrain trade, he could sue and recover three times the damages he sustained.

Question 38

In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners.

Question 39

The decisions of the US and Soviet Union to build nuclear weapons is much like the prisoners' dilemma.

Question 40

A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the bulbs to customers for $2 per bulb. This practice is known as tying.

Question 41

Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Suppose the two farmers try to collude. Explain why their collusion might not be successful.

Question 42

As the number of firms in an oligopoly industry increases, the market moves closer to a __________ market.

Question 43

Compare the equilibrium output in a duopoly to the monopoly output.

Question 44

In cartels, the reason that the monopoly output is unstable is due to the factors that are present in a prisoner's dilemma.
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Question 45

​A Nash Equilibrium always results in the highest total profit for the firms in an oligopoly market.

Question 46

Why are the actions of the firms in an oligopoly interdependent?

Question 47

​A dominant strategy exists for at least one player in every game.

Question 48

Why are the actions of firms interdependent in an oligopoly market but not in a monopolistically competitive market?

Question 49

Table 17-10
Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:

Refer to Table 17-10. Briefly explain why each duopolist earns a lower profit at the Nash equilibrium than if they cooperated to produce the monopoly output.

Question 50

As the number of firms in a cartel increases, the easier it is to enforce the cartel agreement.
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Question 51

In a prisoner's dilemma, the Nash Equilibrium might not have a dominant strategy for either player.
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Question 52

Table 17-10
Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:

Refer to Table 17-10. Discuss the difference between the monopoly outcome and the Nash equilibrium.

Question 53

Why do economists use game theory to study the actions of firms in oligopoly markets but not in other markets?

Question 54

A Nash Equilibrium is a stable outcome for an oligopoly market situation.
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Question 55

In a prisoner's dilemma, only one firm has a dominant strategy.
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Question 56

It is always the case that players in a prisoner's dilemma situation will choose the Nash Equilibrium.
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Question 57

In a prisoner's dilemma situation where firms are setting prices, the dominant strategy is always to charge the price that leads to maximum profits for all firms.
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Question 58

When firms form a cartel in an oligopoly market, the total output is always the same as if the market were perfectly competitive.
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Question 59

Economists use game theory to analyze __________.

Question 60

Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Explain why they might try to collude.

Question 61

To function as a monopoly, OPEC and other cartels rely on __________ among members.

Question 62

Reaching and enforcing an agreement between members of a cartel becomes more difficult as the size of the group __________.

Question 63

OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel in the output market for petroleum. Major League Baseball could be considered a cartel in the __________ market for baseball players.

Question 64

If the output effect is larger than the price effect, an individual firm will __________ production.

Question 65

How does free trade relate to the theory of oligopoly?

Question 66

Table 17-13
Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below:
Howard
Low budget High budget

Refer to Table 17-13. Is there a Nash equilibrium? If so, describe it.

Question 67

Table 17-14
Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits:
Exxon
Drill one well Drill two wells

Refer to Table 17-14. Does BP have a dominant strategy? If so, describe it.

Question 68

Table 17-13
Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below:
Howard
Low budget High budget

Refer to Table 17-13. Does Robert have a dominant strategy? If so, describe it.

Question 69

When a group of firms acts in unison to maximize profits as if they were a monopoly, they form a __________.

Question 70

Table 17-13
Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below:
Howard
Low budget High budget

Refer to Table 17-13. Does Howard have a dominant strategy? If so, describe it.

Question 71

Give an example of a famous cartel.

Question 72

Table 17-12
Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below:
Angelina
Low price High price

Refer to Table 17-12. Does Brad have a dominant strategy? If so, describe it.

Question 73

As the number of firms in an oligopoly industry decreases, the market moves closer to a __________ market.

Question 74

Table 17-14
Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits:
Exxon
Drill one well Drill two wells

Refer to Table 17-14. Is there a Nash equilibrium? If so, describe it.

Question 75

Some people consider the NCAA (National Collegiate Athletic Association) to be a __________ in the market for college athletics.

Question 76

Table 17-12
Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below:
Angelina
Low price High price

Refer to Table 17-12. Does Angelina have a dominant strategy? If so, describe it.

Question 77

Table 17-12
Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below:
Angelina
Low price High price

Refer to Table 17-12. Is there a Nash equilibrium? If so, describe it.

Question 78

Table 17-14
Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits:
Exxon
Drill one well Drill two wells

Refer to Table 17-14. Does Exxon have a dominant strategy? If so, describe it.

Question 79

If the members of an oligopoly could agree on a total quantity to produce and a price to charge, what quantity and price would they choose? Will this choice represent a Nash equilibrium?

Question 80

Define collusion.