Econ 102 — Chapter 17: Oligopoly & Game Theory

Which of the following statements about oligopolies is not correct? a. An oligopolistic market has only a few sellers. b. The actions of any one seller can have a large impact on the profits of all other sellers. c. Oligopolistic firms are interdependent in a way that competitive firms are not. d. Unlike monopolies and monopolistically competitive markets, oligopolies' prices do not exceed their marginal revenues.

Unlike monopolies and monopolistically competitive markets, oligopolies' prices do not exceed their marginal revenues.

In the language of game theory, a situation in which each person must consider how others might respond to their actions is called a a. quantifiable situation b. cooperative situation c. strategic situation d. tactical situation

strategic situation

In general, game theory is the study of a. how people behave in strategic situations b. how people behave when others' actions are irrelevant c. oligopolistic markets only d. all market types equally

how people behave in strategic situations

Which statement is correct? a. Strategic situations arise more with many decision-makers than few b. They are more common in monopolistic competition than in oligopoly c. Game theory isn't applicable to chess or tic-tac-toe d. Game theory is not necessary for understanding competitive or monopoly markets

Game theory is not necessary for understanding competitive or monopoly markets

Strategic interactions among firms are most likely in the market for a. patented drugs b. piano lessons c. tennis balls d. corn

tennis balls

Game theory is important for understanding a. perfectly competitive and oligopolistic markets b. perfectly competitive but not oligopolistic markets c. oligopolistic but not perfectly competitive markets d. neither

oligopolistic but not perfectly competitive markets

Raj must consider how others will respond to his action. He must think a. openly b. strategically c. dominantly d. cooperatively

strategically

To understand which markets must we study strategic behavior? a. perfectly competitive b. monopolistically competitive c. oligopolistic d. all of the above

oligopolistic markets

In an oligopoly, each firm knows its profits a. depend only on its own output b. depend only on rivals' output c. depend on both its own and rivals' output d. will be zero in the long run

depend on both its own and rivals' output

A distinguishing feature of an oligopolistic industry is the tension between a. profit maximization and cost minimization b. cooperation and self-interest c. small output with P>MC d. short-run and long-run decisions

cooperation and self-interest

In studying oligopoly, economists assume a. no conflict between cooperation and self-interest b. collusion is easy and sustainable c. each firm cares only about its own profit d. strategic decisions don't matter

each firm cares only about its own profit

The simplest type of oligopoly is a. monopoly b. duopoly c. monopolistic competition d. oligopolistic competition

duopoly

A special kind of imperfectly competitive market with only two firms is called a. two-tier structure b. doublet c. twinopoly d. duopoly

duopoly

A duopoly cartel agreement usually breaks down because a. they can't agree on monopoly price b. they can't agree on monopoly output c. each wants a larger share to capture more profit d. each wants to charge above the monopoly price

each wants a larger share to capture more profit

An agreement among firms about quantities or prices is called a. collusion b. a strategic situation c. excess capacity d. tying

collusion

Which is correct for duopolists? a. Successful collusion yields monopoly output b. Self-interest lowers price below monopoly but not to competitive c. Self-interest raises output above monopoly but not to competitive d. All of the above

All of the above

Two singers collude on monopoly price/quantity. Each considers cheating. What happens? a. both keep agreement b. both cheat; Q rises, P falls c. both cheat; Q falls, P rises d. both cheat; Q rises, P rises

both cheat; Q rises, P falls

As the number of firms in an oligopoly grows, a. price → MC and quantity → efficient level b. price and quantity → monopoly levels c. price effect > output effect d. each firm's profits increase

price → MC and quantity → efficient level

If monopoly would produce 1,000 units, a likely colluding-duopoly split is a. each 1,000 b. each 600 c. 400 & 600 d. 800 & 400

400 & 600

When firms make strategic choices, economists typically use a. monopoly theory b. aggressive competition theory c. game theory d. cartel theory

game theory

When strategic interactions matter for price/output, a firm will a. set P=MC b. consider rivals' responses c. act as a monopolist d. exit

consider rivals' responses

Game theory is important for understanding a. competitive markets b. monopolies c. oligopolies d. all structures

oligopolies

Game theory is necessary for understanding a. all structures b. competition and oligopoly, not monopoly c. monopoly and oligopoly, not competition d. oligopoly, not monopoly or competition

oligopoly, not monopoly or competition

The prisoners' dilemma gives insight into the a. difficulty of maintaining cooperation b. benefits of avoiding cooperation c. benefits of public ownership d. ease of keeping prices high

difficulty of maintaining cooperation

In the prisoners' dilemma, self-interest leads a. each prisoner to confess b. to breakdowns of prior agreements c. to outcomes not good for either d. all of the above

all of the above

Likely outcome of the standard prisoners' dilemma: a. neither confesses b. exactly one confesses c. both confess d. can't tell

both confess

The prisoners' dilemma is important because it a. shows most games are zero-sum b. reveals the core difficulty of sustaining cooperation c. makes prisoner choices identical to competitive markets d. represents all firm interactions

reveals the core difficulty of sustaining cooperation

The prisoners' dilemma a. shows cooperation is individually rational b. shows why cooperation is difficult c. has no dominant strategies d. has exactly one player with a dominant strategy

shows why cooperation is difficult

With Bonnie and Clyde as players, the likely outcome is a. neither confesses b. both confess c. neither pursues a dominant strategy d. ideal for both

both confess

With Bonnie and Clyde, the outcome is a. very good for both b. very good for Bonnie, bad for Clyde c. very good for Clyde, bad for Bonnie d. bad for both

bad for both

In a game, a dominant strategy is a. best only if others cooperate b. best regardless of others' strategies c. required in every game d. one that dominates others' interests

best regardless of others' strategies

A dominant strategy is one that a. makes every player better off b. helps at least one without hurting others c. increases a player's payoff d. is best regardless of what others do

is best regardless of what others do

From society's standpoint, cooperation among oligopolists is a. desirable: less conflict/more variety b. desirable: closer to competition c. undesirable: output too low, prices too high d. undesirable: output too high, prices too high

undesirable: output too low, prices too high

A law that encourages competition by prohibiting excessive market power is a. a patent b. impossible to enforce c. an antitrust law d. an externality law

an antitrust law

The primary purpose of antitrust legislation is to a. protect small businesses b. protect the competitiveness of U.S. markets c. protect prices of American goods d. ensure only "fair" profits

protect the competitiveness of U.S. markets

To move allocation toward the social optimum, policymakers should induce oligopolists to a. collude b. form cartels c. compete rather than cooperate d. cooperate rather than compete

compete rather than cooperate

Which is true about antitrust? a. Scope is perfectly defined b. Laws grant firms the option to cartelize c. Policymakers must judge if seemingly anti-competitive acts have legitimate purposes d. Pricing power must always be limited

Policymakers must judge if seemingly anti-competitive acts have legitimate purposes

A potential problem with antitrust laws is that they a. may target acts that look anti-competitive but have legitimate purposes b. promote competition c. limit monopoly power d. ban entry/exit

may target acts that look anti-competitive but have legitimate purposes

Who can initiate suits to enforce antitrust laws? a. U.S. Justice Department b. private citizens c. corporations d. all of the above

all of the above

Which entity investigates and enforces antitrust laws? a. U.S. Justice Department b. U.S. Commerce Department c. U.S. Treasury Department d. ATF

U.S. Justice Department

Who wrote, "People of the same trade seldom meet together... in a conspiracy against the public... to raise prices"? a. Thomas Jefferson b. Adam Smith c. Bill Gates d. Robert Axelrod

Adam Smith

The Sherman Antitrust Act a. encouraged judicial leniency for cooperative agreements b. focused on Nash equilibria c. enhanced cartel enforcement d. restricted competitors' ability to engage in cooperative agreements

restricted competitors' ability to engage in cooperative agreements

The Sherman Act made cooperative agreements a. unenforceable civil contracts b. enforceable with proper review c. a criminal conspiracy d. a crime with no penalties listed

a criminal conspiracy

The Sherman Antitrust Act was passed in a. 1836 b. 1890 c. 1914 d. 1946

1890

The Sherman Act prohibits price-fixing so that a. executives cannot even talk about fixing prices b. they may talk but not act c. prosecution requires proof the public wasn't served d. it doesn't address price-fixing

executives cannot even talk about fixing prices

Two CEOs collude to fix prices. This violates the a. Clayton Act of 1914 b. Sherman Antitrust Act of 1890 c. Crandall-Putnam ruling of 1983 d. Jackson-Microsoft ruling of 2000

Sherman Antitrust Act of 1890

The Clayton Act a. preceded the Sherman Act b. replaced the Sherman Act c. strengthened the Sherman Act d. reduced cartels' ability to organize (as its main purpose)

strengthened the Sherman Act

According to the Clayton Act, a. lawyers are incentivized to reduce cases b. individuals can sue to recover damages from illegal cooperative agreements c. CEOs can be incarcerated for illegal pricing d. private lawsuits are discouraged

individuals can sue to recover damages from illegal cooperative agreements

If harmed by an illegal restraint of trade, one can recover a. actual damages (Sherman) b. actual damages (Clayton) c. triple damages (Sherman) d. triple damages (Clayton)

triple damages (Clayton)

Which statement is false? a. The Clayton Act allows triple damages to encourage suits b. Resale price maintenance may solve a free-rider problem c. Predatory pricing is a profitable strategy that usually preserves market power d. The Court's view that tying extends market power isn't generally supported by theory

Predatory pricing is a profitable strategy that usually preserves market power

The practice of selling to retailers and requiring them to charge a specific retail price is called a. fixed retail pricing b. resale price maintenance c. cost-plus pricing d. unfair trade

resale price maintenance

Economists say resale price maintenance isn't necessarily anti-competitive because a. suppliers can't exercise market power b. a supplier with market power would more likely exert it via wholesale price than retail price c. retail markets are inherently noncompetitive d. retail cartels can't raise profits

a supplier would more likely exert power via wholesale price than retail price

Under RPM with one retailer but not another, the non-RPM store may benefit because a. wholesale prices must differ b. RPM can't ever raise profits with all outlets c. it can free-ride on the RPM retailer's information/service d. the RPM retailer will charge less

it can free-ride on the RPM retailer's information/service

If two retailers both have RPM with a manufacturer, which must be true? a. wholesale prices differ b. one retailer benefits from the other's info services c. one sells at a lower price d. they sell at exactly the same price

they sell at exactly the same price

A firm that practices RPM a. has no incentive to reduce retailer competition; RPM can lead to more service b. has incentive to reduce retailer competition; RPM cannot lead to more service c. has no incentive to reduce retailer competition; RPM cannot lead to more service d. has incentive to reduce retailer competition; RPM can't lead to more service

has no incentive to reduce retailer competition; RPM can lead to more service

Resale price maintenance involves a firm a. colluding to restrict output and raise prices b. selling two products together for one price c. temporarily cutting price to drive out a rival d. requiring resellers to charge a specified price

requiring resellers to charge a specified price

A manufacturer sells to retailers at $500 and requires a $550 retail price. This is a. predatory pricing b. resale price maintenance c. tying d. leverage

resale price maintenance

If a brand required all retailers to charge exactly $42 per pair of jeans, that would be a. resale price maintenance b. fixed retail pricing c. tying d. cost-plus pricing

resale price maintenance

Selling to retailers for $400 while requiring a $500 retail price is a. resale price maintenance b. predatory pricing c. tying d. monopolistic competition

resale price maintenance

Predatory pricing refers to a. selling products only as a bundle b. a monopoly lowering price to maintain monopoly power c. firms colluding to set prices d. all of the above

a monopoly lowering price to maintain monopoly power

Predatory pricing occurs when a firm a. raises price via cartel power b. raises price via monopoly power c. cuts price to be more competitive d. cuts price temporarily to drive out competitors

cuts price temporarily to drive out competitors

Economists are skeptical of predatory pricing claims because a. evidence is impossible to collect b. predatory pricing is not a profitable strategy c. it is profitable but socially beneficial d. it attracts new entrants

predatory pricing is not a profitable strategy

A monopolist lowers price to drive out a new entrant. This is a. resale price maintenance b. predatory tying c. tying d. predatory pricing

predatory pricing

The practice of requiring purchase of two or more items together is called a. resale maintenance b. product fixing c. tying d. free-riding

tying

Tying is often deemed illegal because it a. allows firms to expand market power b. allows firms to form cartels c. prevents collusion d. is explicitly permitted by the Sherman Act

allows firms to expand market power

Tying involves a firm a. colluding to restrict output and raise prices b. selling two products together for one price instead of separately c. temporarily cutting price to drive out a rival d. requiring resellers to charge a specified price

selling two products together for one price instead of separately

Arguing that buyers won't pay more for a bundle than for items separately helps justify the legality of a. resale price maintenance b. tying c. predatory pricing d. free-riding

tying

Tying can be used to a. enhance antitrust enforcement b. enforce collusion c. control retail prices of related products d. package products to price closer to buyers' total willingness to pay

package products to price closer to buyers' total willingness to pay

A cable company requires Internet if you subscribe to TV (and vice versa). This practice a. is tying b. can be viewed as price discrimination c. is controversial among economists d. all of the above

all of the above

Offering two movies only as a bundle to theaters is a. predatory pricing b. resale price maintenance c. tying d. leverage

tying

OPEC can raise the price of oil by a. tying b. setting production quotas for members c. increasing supply above competitive d. imposing RPM on members

setting production quotas for members

All cartels rely on a. a horizontal demand curve b. inelastic demand c. cooperation among members d. antitrust enforcement

cooperation among members

After the 1971 ban on cigarette TV ads, it is most likely that a. profits increased b. profits and prices increased c. prices and costs increased d. profits, prices, and costs all increased

profits increased

A central issue in the Microsoft antitrust case was integrating the browser into Windows and selling as one unit. This practice is a. tying b. predation c. wholesale maintenance d. retail maintenance

tying

Oligopoly

Only a few sellers offering similar or identical products; firms are interdependent.

Game theory

Model of how people behave and possible outcomes in strategic situations.

A small group of sellers

Tension between cooperation and perceived self-interest; they are best off cooperating, however, each group only cares about its own profit.

Why should they cooperate?

Acting as a group like a monopolist can produce a small quantity of output, charge P>MC, and share the monopoly profits.

Duopoly

A form of Oligopoly with only two members.

Firms in an Oligopoly

Can collude and form a cartel (to act as a monopoly) or not collude, and pursue a narrowly perceived self-interest (cheat).

Collusion

Implicit agreement among firms in a market regarding quantities to produce, or price to change.

Cartel

Formal group of firms acting in unison (ultimate collusion).

Nash Equilibrium

Economic actors reacting to behavior of competitors; each chooses their best strategy given the strategies that all the other actors have already chosen and are assumed to keep choosing.

If oligopolists pursue their own self-interest

They do not end up reaching the monopoly outcome and maximizing their joint profit; each is tempted to raise production and capture a larger share of the market.

When firms in an oligopoly individually choose production to maximize profit

They produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition.

If more sellers form a cartel or perfectly collude

They maximize total profit, produce monopoly quantity, and charge monopoly price.

The size of an oligopoly affects the market outcome

As the number of sellers in an oligopoly grows larger, collusion is more difficult.

The prisoners dilemma

Particular 'game' between two captured prisoners illustrating why cooperation is difficult to attain and maintain even when it is mutually beneficial.

Dominant strategy

Strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Prisoners' Dilemma (Economics of Cooperation)

Each pursue their own interests; thus, they give up the dominant strategy for each and are worse off.

Economics of Cooperation

Game oligopolists play in trying to reach the monopoly outcome; firms pursue their own narrowly perceived self-interest and do not cooperate.

Public Policy toward Oligopolies

Policymakers use antitrust laws to induce firms in an oligopoly to compete rather than cooperate.

Policymakers

Try to induce firms in an oligopoly to compete (outlaw cooperation) rather than cooperate.

Antitrust laws

The Sherman Antitrust Act, 1890, and The Clayton Act, 1914, used to prevent mergers and collusion among oligopolists.

Controversies over antitrust policies

Used to condemn some business practices whose effects are not obviously bad for consumers.

Resale price maintenance (fair trade)

Require retailers to charge customers a given price; might seem anticompetitive.

Predatory pricing

Charges prices that are too low; skeptics argue it is not a profitable strategy.

Tying

Offer two goods together at a single price; skeptics argue it cannot increase market power.