Exam 14: Oligopoly

When a firm responds to a rival's cheating by cheating and to a rival's cooperation by cooperating, that firm is practicing a _____ strategy.

Until 1890, trusts in which firms in an industry agreed to limit production and raise prices were legal in the United States.

The government agency in the United States that reviews proposed mergers of firms in the same industry and prohibits mergers that it believes will reduce competition is the Office of Management and Budget.

Tacit collusion is likely to occur when firms have different market shares.

Suppose all of the firms in an industry form a cartel and succeed in raising the price to the monopoly level by reducing output. Any single firm will find that it can increase its profits by cheating on the cartel agreement.

Use the following to answer questions: Figure: Monopoly Profits in Duopoly -(Figure: Monopoly Profits in Duopoly) The figure Monopoly Profits in Duopoly shows how an industry consisting of two firms that face identical demand curves (D₁) can collude to increase profits. The market demand curve is D_2. Which of the following assumptions is part of the analysis illustrated by the model?

The Sherman Antitrust Act:

_____ occurs if Ford offers rebates on its most popular truck and Chevrolet follows

Use the following to answer questions: -(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's price effect will be a(n) _____ in profit of _____.

The law enacted in 1890 to break up existing monopolies and prevent the formation of new ones was the Glass-Steagall Act.

Use the following to answer questions: Figure: Collusion -(Figure: Collusion) Look at the figure Collusion. The quantity of output produced by the industry with collusion is shown by:

Use the following to answer questions: -(Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi Advertising Game. The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising. Suppose each firm is considering a costly television commercial during halftime of the Super Bowl. The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival. Profits in each cell of the payoff matrix are given as (Coke, Pepsi). If both firms expect to play this game every year for the foreseeable future, in the outcome Coke _____ and Pepsi _____.

The practice of one company tacitly setting prices for the industry as a whole is:

Use the following to answer question: -(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. For simplicity, assume that the marginal cost of producing crude oil is zero. There are only two producers of crude oil, and they cannot cooperate. But they play this game every week, each player has a tit-for-tat strategy, and the other player knows this. When both firms use a tit-for-tat strategy, firm 1 will produce _____ barrels, and firm 2 will produce _____ barrels.

A dominant strategy equilibrium exists in a game when:

Use the following to answer questions: -(Table: Two Rival Gas Stations) Look at the table Two Rival Gas Stations, which shows a payoff matrix for two gas stations in a small town. Each firm can set either a high price or a low price, and customers view these two firms as nearly perfect substitutes. Profits in each cell of the payoff matrix are given as (Swifty, Speedy). If each firm sets the price independently, the Nash equilibrium outcome will be:

Tacit collusion is most likely to occur if there are only a few firms in the industry.

Suppose an oligopoly is composed of four firms. One firm has a 50% market share; another firm, 35%; another, 10%; and the fourth, 5%. It will be easier for this industry to engage in tacit collusion than for an oligopoly each of whose four firms has 25% of the market.

Use the following to answer questions: Scenario: Payoff Matrix for Firms X and Y The following payoff matrix depicts the profits for the only two firms in this oligopolistic industry. -(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm Y were to choose its dominant strategy, it would:

If there are two gas stations in a very small town, then the gas station business there is probably best characterized as: