Exam 12: Oligopoly and Strategic Behavior

AACSB: Reflective Thinking Skills Learning Outcome: Micro-16 -Low-price guarantees mean lower prices for consumers.

Table 12.2 -Refer to Table 12.2.Jeri and Tom are arrested for having committed a crime.They are being interrogated individually and need to decide if they should confess or not confess.The police have enough information to put them in jail for 5 years.They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge.The first number in each cell refers to the number of years of prison time Jeri will receive if she takes that action and the second number in each cell refers to the number of years of prison time Tom will receive if he takes that action.If Jeri and Tom can decide jointly then the best strategy is for Jeri to ________ and Tom to ________.

In this article on airlines,when the firms experienced an increase in cost of production,their price ________.

If firm A and B do not have dominant strategies,the payoff matrix can be used to predict the Nash equilibrium between firms A and B.

The house slipper industry is an example of an oligopolistic industry.

What is a cartel?

-Refer to Figure 12.1.Six firms that produce chewing gum have formed a cartel.The cartel faces the market demand curve given by D.To maximize profits,the cartel should produce ________ packs of chewing gum and the price should be ________.

-Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If both firms follow their individual dominant strategy:

Consider a college that has only ever had one on-campus bookstore.Over the last two years you have observed that book prices are 20% lower.You conclude that:

Assume that firms in an oligopoly are currently colluding to set price and output to maximize total industry profit.If the oligopolies are forced to stop colluding,the price charged by the oligopolies would ________ and the total output produced will ________.

Suppose four firms in the airline industry have gotten together and formed a cartel.Which of the following is true?

Under tit-for-tat retaliation,a firm will mimic the other firm's choice from the preceding period.

Which of the following strategic behaviors do firms in an oligopoly market usually engage?

The beer industry is an example of a oligopolistic industry.

A dominant strategy is one that is the best choice regardless of other firms' decisions.

Deterring entry into an industry will be more profitable than sharing the market with another firm.

If a firm uses a grim trigger retaliation strategy,all firms could end up with zero economic profit.

-Refer to Figure 12.8.If both firms follow their dominant strategies,Firm A will earn profits equal to:

Additional Application Late in the day on August 7,2006 numerous U.S.airlines cut their fares on leisure travelers.These included American Airlines,Delta,Continental,and Southwest.This fare cut,which was approximately 4 to 8 percent,occurred during a period of rising fuel costs and a record number of seats being filled.If costs are up and demand is strong,why did these airlines reduce their prices on this class of passengers? The explanation is that they were following the lead of United.United Airlines is the implicit price leader in this industry and many other carriers watch closely what the leader does and base their decisions on the leader's actions.Such behavior is not uncommon in an industry dominated by a few large firms. "United Airlines sparks fare war," August 9,2006,retrieved November 3,2006 from http://money.cnn.com/2006/08/09/news/companies/airfares/index.htm. -What market structure does the airline industry most likely resemble?

A duopoly pricing strategy results in a(n)________ profitable outcome than cartel pricing.