Exam 14: Oligopoly: Firms in Less Competitive Markets

Figure 14-1 Assume that Lexus (L)is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years.BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche. -Refer to Figure 14-1.Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market?

In an oligopoly, minimum efficient scale is likely to occur at a level of output that is a large fraction of industry sales.

Figure 14-3 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 14.3 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 14-3.What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium?

Economists use game theory to analyze oligopolies because

Table 14-4 Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito.Each firm must decide on whether to increase its advertising budget to compete for customers.If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit.Table 14-4 shows the payoff matrix for this advertising game. -Refer to Table 14-4.What is the Nash equilibrium in this game?

An example of a government-imposed barrier to entry gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.This entry barrier is known as

A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called

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 Laphroaig wants to maximize profit, will it advertise? Briefly explain. c.If Knockando wants to maximize profit, will it advertise? Briefly explain. d.Is there a dominant strategy for each distiller? Briefly explain.

The "Discount Department Stores" industry is highly concentrated.What does this mean?

A set of actions that a firm takes to achieve a goal is the definition of a

What is a sequential game? How are decision trees used to analyze sequential games?

A fundamental assumption in game theory is that players do not interact with each other.

A supplier of an input is unlikely to have bargaining power if

If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a ________ fraction of total industry sales.The industry will be ________.

All of the following are examples of oligopolistic markets except

What is a prisoner's dilemma?

Prices of PlayStation 4 game systems are similar at almost every large retailer and little price competition occurs among these retailers.An explanation for this is

What is a subgame?

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, is a threat by Gigacom that it will provide DSL service if Xenophone provides cable service a credible threat?

Table 14-8 Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy.Each can choose either a high price or a low price.Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. -Refer to Table 14-8.If the two firms collude, is there an incentive for either to cheat on the collusion agreement?