Exam 14: Oligopoly: Firms in Less Competitive Markets

According to an article the Wall Street Journal, "The big car makers are pushing a wide array of new technology into production, responding to relentless competitive pressure, rising energy prices and consumer demand for better safety. Source: Joseph B. White, "Ford, GM Eye Shift in Buying Habits," Wall Street Journal, May 22, 2006. Which of Porter's competitive forces does this statement allude to?

Firms are more likely to find themselves in a prisoner's dilemma in sequential games as opposed to simultaneous games.

Which industry has the highest four-firm concentration ratio?

Explain why OPEC is caught in a prisoner's dilemma?

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. -In a subgame perfect equilibrium,

The fraction of an industry's sales that are accounted for by the largest firms is called

Collusion

One reason why, in the last four decades, the number of new auto makers in the world has been very small compared to the past is that

Table 14-1 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 14-1 shows the payoff matrix for this advertising game. -Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it?

Hewlett-Packard will not raise the prices of its personal computers without first considering how Dell might respond. This is evidence of

Figure 14-4 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 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?

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 spending 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?

Does the strength of each of the five competitive forces from Michael Porter's model remain constant over time? Briefly explain.

The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city) each sell an identical washer-dryer. The owner of each store considered offering the washer-dryer for $700, but decided on a price of $500. If this is a Nash equilibrium we can conclude that

Table 14-10 -Refer to Table 14-10. Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world's largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output. a. Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Yemen $25 million to produce a low output. b. What is the dominant strategy for each country in this new game? c. What is the new Nash equilibrium?

Which of the following is not a barrier to entry?

Figure 14-5 A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market. Figure 14-5 shows the decision tree for the Netflix-Blockbuster entry game. -In a sequential game, one firm will act first and then other firms will respond.

The bargaining power of buyers increases if

Most economists are concerned about entry barriers. Why is this so important to them?

A dominant strategy is