Exam 12: Oligopoly: Firms in Less Competitive Markets

Figure 12.6 -Refer to Figure 12.6.Uniguest, Inc.is a company that provides PCs with internet access and touch-sensitive screens to hotels.Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniguest that it is considering installing these systems in its hotel rooms.The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniguest's systems in its rooms.The two companies begin bargaining over what price the Hard Rock will pay Uniguest for its systems, and the decision tree shown above illustrates this bargaining game.Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniguest. a.Suppose the Hard Rock offers Uniguest $1,200 per system.Will Uniguest accept or reject this offer? Why? b.Suppose the Hard Rock offers Uniguest $800 per system.Will Uniguest accept or reject this offer? Why? c.Suppose Uniguest attempts to obtain a favorable outcome from the bargaining by telling the Hard Rock it will reject an $800-per-system offer.If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniguest do? Why? d.Is there a sub-game perfect equilibrium in this situation? Explain.

The larger the number of firms in an industry,

In an oligopoly market

Consider two single-malt whiskey distillers, Laphroaig and Knockando.If they advertise, they can both sell more whiskey and increase their revenue.However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise.On the other hand, if only one advertises, that distiller increases its market share and also its profit. a.Construct a payoff matrix using the following hypothetical information: If neither distiller advertises: each earns a profit of $35 million per year.If both advertise: each earns a profit of $20 million per year.If one advertises and the other does not: the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million. b.If the two distillers agree to coordinate their strategies, what is the outcome?

On August 21, 1995, the Canadian Radio-television Telecommunications Commission (CRTC)decided to end its ban on television and radio liquor advertisement.The ban on hard liquor advertising had been in effect since before the creation of the CRTC in 1968.Did the lifting of this ban likely increase or decrease the profits of hard liquor companies? Briefly explain.

A cartel is

Which of the following is not a reason why government officials are willing to impose entry barriers?

Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?

What happens to the profit a car company makes on each car sold if it offers cash rebates to customers? What happens to the company's profit per car if it offers zero percent financing? How might a car company decide which of these strategies to use?

Figure 12.4 Rainbow Writer (RW)is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 12.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 12.4.In a real world situation involving Rainbow Writer and Odeon, what scenario below might permit Rainbow Writer to rationally refuse an offer from Odeon of $40 per copy of the software package?

Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry?

Figure 12.3 Rainbow Writer (RW)is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14.3 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 12.3.How will Rainbow Writer respond to Odeon's two possible offers?

In an oligopoly, firms can increase their market power by

Table 12.1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 12.1 shows the payoff matrix for this advertising game. -Refer to Table 12.1.Is there a dominant strategy for Godrickporter and if so, what is it?

How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures?

In a sequential game, one firm will act first and then other firms will respond.

An example of a barrier to entry is

Table 12.3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 12.3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota. -Refer to Table 12.3.Is there a dominant strategy for Nigeria and, if so, what is it?

A cartel is

Table 12.2 Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000. -Refer to Table 12.2.Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium?