Deck 17: Oligopoly

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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.

Question 7

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

Question 8

A group of firms that collude is called a cartel.

Question 9

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 10

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

Question 11

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

Question 12

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 13

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 14

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

Question 15

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

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

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 24

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 25

Resale price maintenance prevents retailers from competing on price.

Question 26

Tying is always profitable for a monopoly.

Question 27

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 28

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

Question 29

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

Question 30

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 31

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

Question 32

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 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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 38

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

Question 39

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 40

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

Question 41

The primary purpose of antitrust legislation is to

A)protect small businesses.
B)protect the competitiveness of U.S. markets.
C)protect the prices of American-made products.
D)ensure firms earn only a fair profit.

Question 42

Which government entity is charged with investigating and enforcing antitrust laws?

A)the U.S. Justice Department
B)the U.S. Commerce Department
C)the U.S. Treasury Department
D)the Bureau of Alcohol, Tobacco, and Firearms

Question 43

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

Question 44

As the number of firms in a cartel increases, the easier it is to enforce the cartel agreement.
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Question 45

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

Question 46

In a prisoner's dilemma, only one firm has a dominant strategy.
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Question 47

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

Question 48

In a prisoner's dilemma, the Nash Equilibrium might not have a dominant strategy for either player.
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Question 49

From society's standpoint, cooperation among oligopolists is

A)desirable, because it leads to less conflict among firms and a wider variety of products for consumers.
B)desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in the absence of cooperation.
C)undesirable, because it leads to output levels that are too low and prices that are too high.
D)undesirable, because it leads to output levels that are too high and prices that are too high.

Question 50

A Nash Equilibrium is a stable outcome for an oligopoly market situation.
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Question 51

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 52

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 53

The story of the prisoners' dilemma shows why

A)predatory pricing is clearly not in society's best interest.
B)economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition.
C)oligopolies can fail to act independently, even when independent decision-making is in their best interest.
D)oligopolies can fail to cooperate, even when cooperation is in their best interest.

Question 54

Which of the following is necessarily a problem with antitrust laws?

A)They may target a business whose practices appear to be anti-competitive but in fact have legitimate purposes.
B)They may encourage firms to collude and reduce social welfare compared to the unregulated market.
C)They reduce the effectiveness of the market to self-regulate.
D)They are enforced by agencies whose self-interest contradicts the interests of society as a whole.

Question 55

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

Question 56

Which of the following statements is true?

A)The proper scope of antitrust laws is well defined and definite.
B)Antitrust laws focus on granting certain firms the option to form a cartel.
C)Policymakers have the difficult task of determining whether some firms' decisions have legitimate purposes even though they appear anti-competitive.
D)There is always a need for policymakers to try to limit a firm's pricing power, regardless of whether the firm's market is competitive, a monopoly, or an oligopoly.

Question 57

Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws?

A)the U.S. Justice Department
B)private citizens
C)corporations
D)All of the above are correct.

Question 58

Suppose that antitrust laws were successful in moving the allocation of resources in the computer software industry closer to the social optimum. This situation would illustrate which of the following Ten Principles of Economics?

A)Trade can make everyone better off.
B)The cost of something is what you give up to get it.
C)Governments can sometimes improve market outcomes.
D)A country's standard of living depends on its ability to produce goods and services.

Question 59

A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is

A)a patent.
B)impossible to enforce.
C)an antitrust law.
D)an externality law.

Question 60

It is always the case that players in a prisoner's dilemma situation will choose the Nash Equilibrium.
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Question 61

Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public, or in some diversion to raise prices."?

A)Thomas Jefferson
B)Adam Smith
C)Bill Gates
D)Robert Axelrod

Question 62

The Sherman Antitrust Act

A)overturned centuries-old views of English and American judges on agreements among competitors.
B)had the effect of discouraging private lawsuits against conspiring oligopolists.
C)strengthened the Clayton Act.
D)elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal conspiracy.

Question 63

The Sherman Antitrust Act

A)was passed to encourage judicial leniency in the review of cooperative agreements.
B)was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games.
C)enhanced the ability to enforce cartel agreements.
D)restricted the ability of competitors to engage in cooperative agreements.

Question 64

The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called

A)fixed retail pricing.
B)resale price maintenance.
C)cost plus pricing.
D)unfair trade.

Question 65

The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to

A)sue for up to two times the damages they incurred.
B)sue for up to three times the damages they incurred.
C)sue for up to four times the damages they incurred.
D)sue for damages, but only for the actual amount of damages they incurred.

Question 66

The Clayton Act

A)preceded the Sherman Act.
B)replaced the Sherman Act.
C)strengthened the Sherman Act.
D)was specifically designed to reduce the ability of cartels to organize.

Question 67

Assume that Bart's Batteries has entered into a resale price maintenance agreement with Radio Shanty but not with Prime Purchase. In this case,

A)the wholesale price of Bart's Batteries will be different for Radio Shanty than it is for Prime Purchase.
B)Bart's Batteries will never increase profits by having a resale price maintenance agreement with all retail outlets that sell its products.
C)Prime Purchase might benefit from customers who go to Radio Shanty for information about different batteries.
D)Radio Shanty will sell Bart's Batteries at a lower price than Prime Purchase.

Question 68

The Sherman Act made cooperative agreements

A)unenforceable outside of established judicial review processes.
B)enforceable with proper judicial review.
C)a criminal conspiracy.
D)a crime, but did not give direction on possible penalties.

Question 69

Assume that Samorola has entered into an enforceable resale price maintenance agreement with Trint and U-Mobile. Which of the following will always be true?

A)The wholesale price of Samorolas will be different for Trint than it is for U-Mobile.
B)U-Mobile will benefit from customers who go to Trint for information about different mobile phones.
C)Trint will sell Samorolas at a lower price than U-Mobile.
D)U-Mobile and Trint will always sell Samorolas for exactly the same price.

Question 70

Which of the following statements is false?

A)The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against conspiring oligopolists.
B)Many economists defend the practice of resale price maintenance on the grounds that it may help solve a free-rider problem.
C)Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power.
D)The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market power is not generally supported by economic theory.

Question 71

The Sherman Antitrust Act was passed in

A)1836.
B)1890.
C)1914.
D)1946.

Question 72

The Sherman Antitrust Act prohibits price-fixing in the sense that

A)competing executives cannot even talk about fixing prices.
B)competing executives can talk about fixing prices, but they cannot take action to fix prices.
C)a price-fixing agreement can lead to prosecution provided the government can show that the public was not well-served by the agreement.
D)None of the above is correct. The Sherman Act did not address the matter of price-fixing.

Question 73

The Sherman Antitrust Act prohibits executives of competing companies from

A)fixing prices, but it does not prohibit them from talking about fixing prices.
B)even talking about fixing prices.
C)sharing with one another their knowledge of game theory.
D)failing to stand by agreements that they had made with one another.

Question 74

When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to pursue civil action and recover up to three times the damages sustained?

A)Trade Damage Act
B)Clayton Act
C)Sherman Act
D)No law allows individuals to pursue civil action and recover up to three times the damages sustained.

Question 75

Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the

A)Clayton Act of 1914.
B)Sherman Antitrust Act of 1890.
C)Crandall-Putnam ruling of 1983.
D)Jackson-Microsoft ruling of 2000.

Question 76

According to the Clayton Act,

A)lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
B)individuals can sue to recover damages from illegal cooperative agreements.
C)the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
D)private lawsuits are discouraged.

Question 77

Economists claim that a resale price maintenance agreement is not anti-competitive because

A)suppliers are never able to exercise noncompetitive market power.
B)if a supplier has market power, it will be likely to exert that power through wholesale price rather than retail price.
C)retail markets are inherently noncompetitive.
D)retail cartel agreements cannot increase retail profits.

Question 78

Antitrust laws in general are used to

A)prevent oligopolists from acting in ways that make markets less competitive.
B)encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
C)encourage frivolous lawsuits among competitive firms.
D)encourage all firms to cut production levels and cut prices.

Question 79

If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person can sue and recover

A)the damages she sustained, as provided for in the Sherman Act.
B)the damages she sustained, as provided for in the Clayton Act.
C)three times the damages she sustained, as provided for in the Sherman Act.
D)three times the damages she sustained, as provided for in the Clayton Act.

Question 80

Which of the following prohibits executives of competing firms from even talking about fixing prices?

A)Sherman Act
B)Clayton Act
C)Federal Trade Commission
D)U.S. Justice Department