Question 1

Joe and Steve are duopolists who each can follow two strategies: cooperate and jointly act like a monopolist, or don't cooperate (cheat) and act like duopolists. Their profits are as follows:
If both cooperate: both receive $1 million
If one cooperates: cooperator receives $200,000, cheater receives $1.2 million
If both cheat: both receive $500,000
What will they do?

Accepted Answer

The answer of Joe and Steve are duopolists who each...

Question 2

Which one of the following is NOT a retaliation strategy that firms would apply to one that cheated on a price-fixing scheme by selling at a price below the agreed-upon fixed price?

Accepted Answer

Retaliation strategies in a price-fixing scheme typically involve adjusting prices to punish the cheater, not reducing output. Reducing output would not directly address the issue of undercutting prices and could potentially harm the retaliating firms more than the cheater. Strategies A, B, and C involve price adjustments to either match the cheater's price or ensure no firm profits excessively, directly countering the cheating firm's actions.

Question 3

If firms follow a low-price guarantee strategy, the price that will prevail in the market will be closest to

Accepted Answer

A low-price guarantee strategy discourages price competition and can lead to prices similar to those set by a monopolist, as firms are assured that competitors will not undercut them.

Question 4

One method firms can use to solve the duopolists' dilemma is to engage in

Accepted Answer

Guaranteed price matching can help firms avoid the duopolists' dilemma by discouraging price undercutting, as it assures customers that they will not find a lower price elsewhere, thus stabilizing prices between competitors.

Question 5

A firm that faces the duopolists' dilemma can avoid the dilemma by

Accepted Answer

The answer of A firm that faces the duopolists' dilemma...

Question 6

Suppose Kevin offers to match his competitors' prices in an oligopoly market. This will have the effect of

Accepted Answer

If Kevin offers to match his competitors' prices, his competitors may not have an incentive to reduce prices further as they know Kevin will match. This can lead to a situation where prices do not fall to the lowest possible level for consumers. However, it is not likely to drive out competition or trigger an antitrust investigation.

Question 7

When one firm uses the same strategy as the other firm used in the previous time period, this is known as a

Accepted Answer

When one firm uses the same strategy as the other firm used in the previous time period, it is referred to as a tit-for-tat strategy. This strategy involves mirroring the other firm's behavior from the previous period. It is a popular strategy in game theory and is often used to promote cooperation between firms. The other options, namely grim trigger strategy, dominant strategy, and predatory strategy, are not relevant to the context and are therefore incorrect.

Question 8

If a firm engages in guaranteed price matching, that firm picks a

Accepted Answer

Guaranteed price matching means a firm commits to matching lower prices offered by competitors. Thus, if a firm starts with a high price, it will switch to a lower price to match competitors if they choose to set their prices low, ensuring customers always get the best deal from them.

Question 9

Price-fixing by firms in an oligopoly is

Accepted Answer

Price-fixing is more likely in an oligopoly when firms interact repeatedly over time. This repeated interaction allows firms to establish trust and monitor each other's behavior, making it easier to sustain a price-fixing agreement.

Question 10

If two firms use a tit-for-tat scheme to maintain cartel pricing and one firm chooses a high price in the current time period then

Accepted Answer

In a tit-for-tat strategy, each firm mimics the other firm's previous action. If one firm chooses a high price, the other firm will respond by choosing a high price in the next time period to maintain the cartel pricing.

Question 11

Consider two people involved in a marriage or relationship. If, when one person is caught cheating on their agreement, the other cheats once or goes on a one time spending spree, then they are using a

Accepted Answer

The tit-for-tat strategy involves mirroring the actions of the other person in a relationship. In this scenario, if one person cheats, the other person may retaliate by cheating once or acting out in some other way. This strategy can be effective in maintaining balance and fairness in the relationship. The grim trigger strategy involves punishing the other person indefinitely for a single transgression, which is not necessary in this scenario. The dominant strategy is a concept in game theory and not applicable in this scenario. The predatory strategy involves taking advantage of the other person, which is not evident in the scenario provided.

Question 12

The duopoly price strategy provides ________ incentive to maintain cartel pricing as compared to the grim trigger strategy.

Accepted Answer

The duopoly price strategy involves collusion between two firms to maintain higher prices in the market. However, since there are only two firms involved, there is a greater likelihood that one or both of the firms will defect from the agreement and engage in price competition. This risk of defection reduces the incentive to maintain cartel pricing. On the other hand, the grim trigger strategy involves a credible threat of punishment for defection, which can help to maintain cartel pricing. Therefore, the grim trigger strategy provides a greater incentive to maintain cartel pricing.

Question 13

The rational outcome of a guaranteed price matching or "meet-the-competition" policy is that

Accepted Answer

A "meet-the-competition" policy discourages price cutting because firms know that any price reduction will be matched by competitors, leading to both firms maintaining higher prices.

Question 14

Duopoly pricing, grim trigger strategy, and tit-for-tat all promote cartel pricing by

Accepted Answer

Duopoly pricing and tit-for-tat involve punishing the underpricer, while the grim trigger strategy involves permanently punishing any deviation from cartel pricing. Therefore, all three strategies aim to discourage underpricing and promote cartel pricing by penalizing those who deviate from the agreed-upon price. Option B is incorrect as none of these strategies make underpricing impossible, and option C is not necessarily true for all three strategies. Option D is not relevant to the question as it does not relate to promoting cartel pricing.

Question 15

If two firms use a tit-for-tat scheme to maintain cartel pricing and one firm chooses a low price in the current time period then

Accepted Answer

According to the tit-for-tat scheme, if one firm chooses a low price in the current period, the other firm will choose a low price in the next period. This is because the other firm will respond in kind to maintain the cartel pricing.

Question 16

In a duopoly, one firm's low-price guarantee

Accepted Answer

A low-price guarantee by one firm in a duopoly discourages the other firm from undercutting the first firm's price, as it signals the first firm's commitment to match or beat lower prices, making it less attractive for the competitor to lower prices.

Question 17

What is meant by a dominant strategy?

Accepted Answer

The answer of What is meant by a dominant strategy?...

Question 18

A firm announces that it will refund the difference between its price and any price of a competitor that is lower. This is an example of

Accepted Answer

The firm's announcement to refund the difference between its price and any price of a competitor that is lower is an example of guaranteed price matching. The firm is essentially promising to match any lower price in the market, which is seen as a way to ensure that customers choose to buy from them instead of their competitors. This is a common practice in many retail businesses, and it can help to build customer loyalty and improve sales.

Question 19

Which one of the following statements is NOT true?

Accepted Answer

The duopoly-pricing strategy can lead to positive economic profits if the two firms effectively coordinate their pricing strategy.

Question 20

What makes a grim trigger strategy "grim" is

Accepted Answer

A grim trigger strategy is "grim" because if one player underprices, the other retaliates by dropping prices to a level where both firms earn zero profits, effectively punishing the initial defector indefinitely.

Quiz 8: Market Entry, Monopolistic Competition, and Oligopoly