Exam 14: Oligopoly

What is the output level predicted by the Cournot model? Discuss this in terms of the different market models that have been surveyed so far.

Assume two locally owned used car dealerships that have been in direct competition for many decades. They have a choice of selling high-quality cars at a high price but also high costs because of the repairs that have to be made. The other choice is to sell low-quality cars at a low cost but market them as high quality cars. Explain using game theory why it is in the interest of both of these companies to continue to sell high-quality cars but it may not necessarily be in the interest of a new out-of-town dealership that has recently moved into town to do the same.

How do you think the theory of contestable markets has been used as a means of arguing for weaker enforcement of antitrust laws? Explain.

What is an oligopoly?

Suppose that the widget industry contains only four firms. The table below shows the market share of each firm in the market. Calculate the Herfindahl-Hirschman index for the widget industry.

Comment on the following statement: "In an oligopoly, the behavior of any one firm depends on the reaction it expects of all the others in the industry."

Comment on the following statement: "If one player in the game does not have a dominant strategy, it is impossible to predict the outcome of the game."

Explain what a "perfectly contestable" market means. Give an example of a perfectly contestable market. Explain why the outcome in a perfectly contestable market is that firms produce efficiently.

In choosing the optimal output, the monopolist had only to consider its own costs and the demand curve that it faced. How do things change under duopoly and what does the Cournot model argue about how firms will behave?

Assuming that firms do not collude, compare the market outcome under oligopoly with the outcome under perfect competition.

In a game theory model, how is Nash equilibrium achieved?

When an oligopolist chooses a maximin strategy, how is that helpful and what is being assumed about the other players?

Explain how the outcome of the Cournot model is achieved.

AirTran, JetBlue, Southwest Airlines and Sun Country Airlines are generally referred to as low-cost airlines. Why might this type of industry be used as an example of a contestable market? Can you think of any reasons why this might not be a good example of a contestable market?

The prisoners' dilemma shows that the players' dominant strategies often lead them to less than optimal outcomes. Is there any way in which this will not be the case?

Do firms in a perfectly contestable market earn positive economic profit in the long run? Explain.

What evidence exists that industrial concentration increases the rate of technological advance?

What is the Herfindahl-Hirschman index?

What is a Nash equilibrium?

What is predatory pricing?