Exam 14: Oligopoly: Firms in Less Competitive Markets

Collusion makes firms better off because if they act as a single entity (a cartel)they can reduce output and increase their prices and profits.But some cartels have failed and others are unstable.Which of the following is a reason why cartels often break down?

Table 14-1 LimoZeenz and AirPorter and are the only two airport shuttle and limousine rental service companies in the mid-sized town of Shady Shores. Each firm must decide on whether to offer its customers a mid-week discount for airport transportation. Table 14-1 shows the payoff matrix for profits earned by each company based on either offering or not offering the discount. -Refer to Table 14-1.What is the Nash equilibrium in this game?

Doctors and lawyers in every state need a license to practice.This is an example of

Natural resource cartels such as OPEC are inherently unstable because their members operate with excess capacity and have an incentive to cheat on their output quotas.

A characteristic found only in oligopolies is

Figure 14-4 Rainbow Writer (RW)is a small online company selling a highly rated software package for engraving words onto objects produced by 3D printers. The firm currently earns a profit of $2 million per year selling its package exclusively on its Website. Odeon, the producer of the most popular 3D printers has expressed interest in bundling Rainbow Writer's product with its printers. Odeon expects that bundling would further boost its sales and allow it to sell its printers at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 14-4.What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium?

What is the difference between explicit collusion and implicit collusion?

There are two firms in the residential paint industry, Cool Shades (C)and Warm Hues (W).They collude to share the market equally.They jointly set a monopoly price and split the quantity demanded at that price.Here are their options: i.They continue to collude (no cheating)and make $36 million each in profits. ii.One firm cheats and the other does not.The firm that cheats makes a profit of $42 million whereas the firm that doesn't makes a profit of $27 million. iii.They both cheat and each firm makes a profit of $21 million. a.Construct a payoff matrix for these two firms. b.How does this situation relate to the prisoner's dilemma? c.If each firm acted noncooperatively, how much profit would each make? d.Are the firms better off colluding (with no cheating)or competing? Explain.

Figure 14-2 The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed Internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game. -Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first, what is the likely outcome in the market?

List the competitive forces in the five competitive forces model.

What is meant by the term "government-imposed barrier to entry"? Why would a government be willing to impose barriers to entering an industry?

Which of the following is an example of implicit collusion?

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

Collusion is common in oligopoly and monopolistically competitive industries.

The five competitive forces model was developed by

The people firms hire to attempt to convince state legislators and members of Congress to pass laws that are favorable to the economic interests of the firms are called

When an oligopoly is in a Nash equilibrium

The four-firm concentration ratio of the aircraft industry is over 80 percent.Most economists would consider this industry an oligopoly.

An agreement among firms to charge the same price or otherwise not to compete is called

A prisoner's dilemma leads to a noncooperative equilibrium.