Exam 14: Oligopoly

Use the following to answer questions: -(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. Assume that the crude oil industry is a duopoly and the marginal cost of producing crude oil is zero. Suppose that the two firms are maximizing industry profit and splitting the profit evenly. If firm 1 decides to cheat and increase production by 10 more barrels, total industry output will be _____ barrels.

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 X and firm Y wish to maximize joint profits:

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 Coke 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 its advertising decision, given the advertising decision of their rival. Profits in each cell of the payoff matrix are given as (Coke, Pepsi). If each firm makes the decision whether to advertise on the Super Bowl independently, the Nash equilibrium is for Coke _____ and Pepsi _____ during the Super Bowl.

A trust is formed when shareholders of the major companies in an industry place their shares in the hands of a board of trustees who control the companies and act as a single firm that can engage in monopoly pricing.

Which of the following is a form of strategic behavior intended to influence the future actions of other players?

Use the following to answer questions: Scenario: Two Identical Firms Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P, where Q is the quantity demanded and P is price per unit. The marginal cost of producing the good in this industry is constant and equal to $650. Fixed cost is zero. -(Scenario: Two Identical Firms) If one firm in the scenario Two Identical Firms decides to cheat, the cheating firm will:

The effect of product differentiation is to decrease each firm's market share.

A major application of the Sherman Antitrust Act was in _____ against _____.

Use the following to answer question: -(Table: Demand Schedule for Gadgets) Look at the table The Market for Gadgets. Two producers, Margaret and Ray, dominate the market. Each firm can produce gadgets at marginal costs of approximately zero and has no fixed cost. A) If these firms form a cartel to maximize joint profits, what output level will be produced and at what price? If the output is shared evenly, how much profit will each firm earn? B) Suppose that Margaret decides to increase production by 100 gadgets and Ray leaves output constant. What will be the new market price and output? How much profit will each firm earn?

Use the following to answer questions: Figure: Pricing Strategy in Cable TV Market I -(Figure: Pricing Strategy in Cable TV Market I) Look at the figure Pricing Strategy in Cable TV Market I. If the two firms in the cable TV market collude:

A strategy of tit-for-tat involves playing cooperatively at first, then doing whatever the other player did the previous period.

An analytical approach through which strategic choices can be assessed is called:

Use the following to answer questions: -(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. If they agree to collude, what price will the cartel charge and how many water heaters will the cartel sell?

Dell and Gateway are close competitors in the personal computer market. Suppose that each year Dell and Gateway have to decide whether to spend money on costly research and development (R&D). If both spend money on R&D, each firm will earn $30 million. If neither spends money on R&D, each firm will earn $40 million. If one firm spends money on R&D and the other does not, the firm that engaged in R&D would earn $45 million and the firm that did not would earn $25 million. A) Use a payoff matrix to depict this problem. B) What is the noncooperative solution to this game?

In oligopoly, a firm must realize that:

Oligopolists will earn zero profits unless they can collude.

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

The breakup of Microsoft in 2005 was one of the first applications of antitrust policy in the United States.

To calculate the Herfindahl-Hirschman index (HHI), one must _____ market share(s) of _____ in the industry.

Advertising is an example of: