Exam 14: Oligopoly: Firms in Less Competitive Markets

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?

A game in which pursuing dominant strategies results in noncooperation that leaves all parties worse off is a

A table that shows the possible payoffs each firm earns from every combination of strategies by all firms is called

Which of the following is not necessarily a consequence of occupational licensing laws?

Assume that two interior design companies,Alistair and Baine,are competing for customers and if they both advertise,they would each earn $30 million in profits.If neither advertises,they each earn $50 million in profits.If one advertises and the other doesn't,the firm that advertises earns $40 million in profit while the other earns $20 million in profit. a.Present the information above in the form of a payoff matrix.Let Baine be the row player and Alistair the column player. b.Does each firm have a dominant strategy and if so what is it? c.What is the Nash equilibrium?

Explain why selling output at a price below that at which marginal revenue equals marginal cost (MR = MC)might serve to deter entry of a potential competitor.

There is much evidence to suggest that airlines are more likely to match price cuts than price increases.Which of the following best explains this evidence?

Table 14-7 The payoff matrix shown above assumes that Perfect Plants and Florabunda Florist must decide whether to offer same-day delivery for their products.The matrix shows how much profit each firm will earn if it does or does not offer same-day delivery.The amount of profit for one firm depends on whether the other firm offers same-day delivery. -Refer to Table 14-7.Which of the following statements is true?

Economies of scale will create a barrier to entry in an oligopoly industry when

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 Brawny Juice selects a high price,what is Power Fuel's best strategy and what will Power Fuel earn as a result of this strategy?

Explain how collusion makes firms better off.Given the incentives to collude,briefly explain why every industry does not become a cartel.

Figure 14-9 -Refer to Figure 14-9.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 subgame-perfect equilibrium in this situation? Explain.

In a subgame-perfect equilibrium

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

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 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.

What is an oligopoly? Give two examples of oligopolistic industries in the United States.

Because of the flaws of the concentration ratio as a measure of the extent of competition in an industry,some economists prefer another measure of competition,the Herfindahl-Hirschman Index.

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

We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries,but not for oligopoly firms.The reason for this is