Question 1

Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What is the outcome of this game if it is only played once?

Accepted Answer

This is a classic game theory problem known as the Prisoner's Dilemma. In this case, both Kellogg's and General Mills have two choices: to sign an athlete or not to sign an athlete. The outcome depends on the choice of the other firm.
If only one firm signs, they earn a higher profit than if both firms sign. However, if both firms sign, they earn a lower profit than if only one firm signs. Therefore, each firm has an incentive to sign, but if both firms sign, they both lose.
Given this, the rational choice for each firm is to sign an athlete. This leads to the outcome where both firms sign and earn a lower profit. Therefore, Choice C, both Kellogg's and General Mills will sign an athlete, is the best choice.

Question 2

Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. Both Kellogg's and General Mills have signed athletes in 2008, Michael Phelps and Nastia Liukin, respectively. What does this suggest about the outcome of the oligopoly game?

Accepted Answer

The answer of Kellogg's and General Mills are two of...

Question 3

Two firms make most of the consumer alkaline batteries in the country: Duracell and Energizer. The market for batteries is most likely

Accepted Answer

The market for consumer alkaline batteries is most likely an oligopoly because it is dominated by a few large firms (Duracell and Energizer), which control a significant portion of the market share. The barriers to entry are high due to the costs of manufacturing and distribution, and the products are relatively homogeneous (meaning there are few differences between the batteries offered by different firms). Additionally, the firms in this market may engage in non-price competition (such as advertising), which further suggests that it is an oligopoly.

Question 4

Which of the following statements about the Sherman Act is correct?

Accepted Answer

The Sherman Act, passed in 1890, made the restriction of interstate trade illegal. It was the first federal antitrust law, and it did not legalize monopolization in any circumstances. The Act did not outlaw natural monopolies, but it did prohibit any company from using monopolistic practices to maintain or acquire a monopoly.

Question 5

The local pizza delivery industry currently has a Herfindahl-Hirschman index (HHI) value of 999 and two of the competing pizza shops have considered merging. Because the merger would raise the HHI by 55 points, the Federal Trade Commission would likely

Accepted Answer

The answer of The local pizza delivery industry currently has...

Question 6

Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. Which of the following pairs of payoffs would NOT appear together in a square of the payoff matrix?

Accepted Answer

The answer of Kellogg's and General Mills are two of...

Question 7

The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1945 and two of the competing banks have considered merging. Because the merger would raise the HHI by 155 points, the Federal Trade Commission would likely

Accepted Answer

The increase of 155 points in the HHI indicates that the merger would result in a highly concentrated market, which is likely to raise concerns about anti-competitive behavior. Therefore, the Federal Trade Commission is likely to challenge the merger.

Question 8

In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or develop their own R&D. If both firms develop their own R&D, economic profit will be $50 million each. If one company steals R&D, that firm earns $100 million in economic profit while the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is NOT true about this game?

Accepted Answer

The answer of In 2008, a former Intel engineer has...

Question 9

In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. The microprocessor market is most like an example of:

Accepted Answer

The fact that Intel owns 80 percent of the worldwide market for microprocessors and AMD has the rest indicates that there are a limited number of firms in the market, making it an oligopoly.

Question 10

The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 2175 and two of the competing banks have considered merging. Because the merger would raise the HHI by 25 points, the Federal Trade Commission would likely

Accepted Answer

The answer of The local banking industry currently has a...

Question 11

Market share in the Widget industry 
-Using the market shares in the table above, if Widgotech buys Widgette the HHI will

Accepted Answer

To calculate the HHI, we square the market share percentages and sum them up.

For Widgotech, the market share percentage is 35%, so the contribution to the HHI is 1225 (35^2).

For Widgette, the market share percentage is 15%, so the contribution to the HHI is 225 (15^2).

So before the acquisition, the HHI is 1450 (1225 + 225).

If Widgotech buys Widgette, then Widgotech's market share will increase from 35% to 50%, since Widgette's market share is 15%. So the contribution to the HHI from Widgotech after the acquisition will be 2500 (50^2).

The HHI after the acquisition will be 2725 (2500 + 225), which is an increase of 1275 from the initial HHI of 1450.

Therefore, the correct answer is D, which indicates a rise in the HHI by 18 points.

Question 12

Market share in the Widget industry 
-Using the market shares in the table above, if Big W wants to buy Widgette, the Federal Trade Commission will probably

Accepted Answer

The Herfindahl-Hirschman index (HHI) is a commonly used measure of market concentration. In this case, the HHI before the merger is 2,945, which already exceeds the threshold for a highly concentrated industry (2,500). If Big W buys Widgette, their combined market share would increase to 53%, significantly increasing the HHI. Therefore, the Federal Trade Commission will likely block the merger.

Question 13

The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1575 and two of the competing banks have considered merging. Because the merger would raise the HHI by 55 points, the Federal Trade Commission would likely

Accepted Answer

The answer of The local banking industry currently has a...

Question 14

In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or develop their own R&D. If both firms develop their own R&D, economic profit will be $50 million each. If one company steals R&D, that firm earns $100 million in economic profit while the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is the outcome of this game?

Accepted Answer

The answer of In 2008, a former Intel engineer has...

Question 15

Market share in the Widget industry 
-In the table above, the Herfindahl-Hirschman Index in the widget industry is

Accepted Answer

The answer of Market share in the Widget industry 
-In...

Question 16

Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What are the strategies in this game?

Accepted Answer

The best choice for each firm is to sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of their cereal box while the other firm does not. This would result in each firm earning $8 million in economic profit, which is more than if both firms signed (resulting in $5 million in profit each). If neither firm signs, they break even, but they have the potential to earn more if they sign the athlete. Therefore, the dominant strategy for each firm is to sign the athlete, regardless of what the other firm chooses to do.

Question 17

The Hirschman-Herfindahl index (HHI) in an industry is 50. A merger is proposed that will raise the HHI to 100. In this case, the

Accepted Answer

According to the Horizontal Merger Guidelines issued by the Federal Trade Commission and the Department of Justice, a merger resulting in an HHI between 1000 and 1800 is considered moderately concentrated and may raise antitrust concerns. However, the guidelines state that an HHI increase of less than 100 points in a market with an initial HHI of less than 2500 is unlikely to have any adverse effect on competition. Since the proposed merger would only result in an increase of 50 points, and the initial HHI is only 50, the Federal Trade Commission would not challenge the merger.

Question 18

The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1575 and two of the competing banks have considered merging. Because the merger would raise the HHI by 215 points, the Federal Trade Commission would likely

Accepted Answer

The FTC is likely to challenge the merger because the increase in HHI by 215 points would result in a highly concentrated market, which could potentially lead to decreased competition and increased market power.

Question 19

Suppose the Herfindahl-Hirschman Index (HHI) in the market for chocolate is 3,200. Two companies want to merge. The FTC definitely will challenge the merger if it increases the HHI by more than

Accepted Answer

The best choice is D, as it represents the largest increase in the HHI that the FTC would challenge. The FTC usually challenges mergers that increase the HHI by more than 100 points, but this threshold can vary depending on the industry and market conditions. A 200-point increase in HHI would signal significant market concentration, which could lead to market power and competitive concerns. Therefore, the FTC is likely to challenge the merger in this case.

Question 20

The iPhone 5 no longer comes pre-loaded with Google Maps and uses the Apple map application instead. Regulators might be concerned with this requirement because they might see it as an example of

Accepted Answer

This requirement could be seen as a tying arrangement because Apple is requiring consumers to use their map application in conjunction with their iPhone product. This could be seen as an antitrust concern if it is seen as reducing competition and limiting consumer choice.

Quiz 15: Oligopoly