Question 1

The U.S.steel industry is an example of homogeneous oligopoly.

Accepted Answer

An oligopoly is a market structure characterized by few large firms that dominate the industry. In a homogeneous oligopoly, the products produced by the firms in the market are identical. The U.S. steel industry is an example of a homogeneous oligopoly as there are a few large steel producers that dominate the industry and produce the same type of steel products.

Question 2

All other things equal, the larger the number of firms in an oligopolistic industry, the more difficult it is for those firms to collude.

Accepted Answer

With more firms in the industry, the number of potential competitors increases, making it harder for them to coordinate and reach an agreement to collude on price or output. Therefore, competition intensifies in larger oligopolistic industries, making collusion less likely to occur.

Question 3

Both collusive and noncollusive oligopoly models suggest that price changes will be relatively infrequent in these types of industries.

Accepted Answer

Both collusive and noncollusive oligopoly models predict that price changes will not occur frequently due to the interdependence of firms and the potential for retaliation from competitors.

Question 4

Firms are more likely to collude when the economy is in a recession.

Accepted Answer

Firms are less likely to collude during a recession because there is lower demand and less profit to be made, leading to stronger competition.

Question 5

Generally speaking, oligopolistic industries producing raw materials and semifinished goods usually offer differentiated products, while oligopolists producing consumer goods usually offer standardized products.

Accepted Answer

In oligopolistic industries, it is more common for firms producing consumer goods to offer differentiated products to create brand loyalty and market segmentation, while those producing raw materials and semifinished goods are more likely to offer standardized products due to the nature of these goods being fundamental inputs into other production processes.

Question 6

Two industries that have the same four-firm concentration ratio can have significantly different Herfindahl indexes.

Accepted Answer

The four-firm concentration ratio is just a measure of the market share of the top four firms in an industry, whereas the Herfindahl index takes into account the market shares of all firms in the industry. Therefore, even though two industries may have the same four-firm concentration ratio, they could differ significantly in the distribution of market shares among all firms, resulting in different Herfindahl indexes.

Question 7

If neither player has an incentive to deviate from the outcome of a game, the outcome is a Nash equilibrium.

Accepted Answer

In a Nash equilibrium, no player can improve their outcome by unilaterally changing their strategy, given the strategies chosen by the other players. Thus, if neither player has an incentive to deviate from the outcome, the strategy profile is a Nash equilibrium.

Question 8

The highest possible value of the Herfindahl index is 1,000.

Accepted Answer

The highest possible value of the Herfindahl index is 10,000, which occurs when a market is a monopoly (100% market share squared).

Question 9

A Nash equilibrium can only occur in repeated games.

Accepted Answer

A Nash equilibrium can occur in both one-shot or repeated games.

Question 10

As it relates to oligopoly, game theory focuses on the strategic behavior of rival firms.

Accepted Answer

Game theory is used to analyze the interactions and decisions of competing firms in an oligopoly market. It considers the actions and reactions of each player to develop strategies and predict outcomes.

Question 11

Homogeneous oligopolists tend to advertise more than do differentiated oligopolists.

Accepted Answer

Differentiated oligopolists have products that are differentiated from their competitors, making their products stand out without the need for extensive advertising. Homogeneous oligopolists, on the other hand, have products that are very similar or identical to their competitors, making advertising necessary to differentiate their product and attract customers. Therefore, homogeneous oligopolists tend to advertise more.

Question 12

Oligopolists use limit pricing to maximize short-run profits.

Accepted Answer

Oligopolists use limit pricing to deter entry into the market by making it unprofitable for potential competitors, rather than to maximize short-run profits.

Question 13

In a zero-sum game, the gains by one player will be exactly offset by the losses of the other.

Accepted Answer

In a zero-sum game, there is a fixed amount of value or resources that the players are competing for, so any gain by one player must come at the expense of the other player(s). Therefore, the gains of one player are exactly offset by the losses of others, making it a zero-sum game.

Question 14

Collusion among firms always involves formal agreements.

Accepted Answer

Collusion among firms can involve both formal and informal agreements. Informal agreements may include things like tacit understandings, signaling, or even simple observation of market behavior.

Question 15

The U.S.breakfast cereal industry is an example of differentiated oligopoly.

Accepted Answer

The U.S. breakfast cereal industry is dominated by a few large firms such as Kellogg's, General Mills, and Post. These firms produce differentiated products, such as different flavors and packaging, which allows them to have some control over pricing and market share. This is an example of differentiated oligopoly, where a few firms in the market produce products that are differentiated from one another.

Question 16

A player is said to have a dominant strategy when one of the options available is superior, regardless of what strategy the other player chooses.

Accepted Answer

A dominant strategy exists when one option is always better than the other, regardless of what the other player does.

Question 17

One characteristic of sequential games is that they all have first-mover advantages.

Accepted Answer

Sequential games do not necessarily have first-mover advantages, as it depends on the specific game and its rules. In some cases, being the first mover may actually be a disadvantage.

Question 18

If one player in a game has a dominant strategy, the other player must also have a dominant strategy.

Accepted Answer

It is possible for only one player to have a dominant strategy, while the other player has multiple or no dominant strategies. In such cases, the player without a dominant strategy will have to use other methods to determine their best move.

Question 19

Repeated games may involve either simultaneous or sequential decision making.

Accepted Answer

Repeated games can involve both simultaneous and sequential decision making. In simultaneous games, players make their decisions simultaneously without knowledge of their opponent's decision, while in sequential games, players take turns making decisions based on the previous player's decision.

Question 20

Negative-sum games do not exist, because neither player has an incentive to play the game.

Accepted Answer

Negative-sum games do exist, where the total sum of losses exceeds the total sum of gains. In these games, both players have an incentive to play, even though both may end up worse off than when they started.

Quiz 14: Oligopoly and Strategic Behavior