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Exam 17: Oligopoly

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Question 1

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Table 17-8 This table shows the payoffs for a game played between two players, A and B. -In a prisoners' dilemma game,

A) the solution when playing the game once will be the same as the solution when the players play the game repeatedly, since agreements cannot be maintained in a prisoners' dilemma.
B) if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once.
C) repeated play will result in a worse outcome for both players than when the game is played only once.
D) the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as their opponent.

E) A) and D)
F) A) and B)

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Question 2

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When firms form a cartel in an oligopoly market, the total output is always the same as if the market were perfectly competitive. ​

A) True
B) False

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Question 3

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When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is a Nash equilibrium.

As the number of firms in an oligopoly industry decreases, the market moves closer to a __________ market.

If the output effect is larger than the price effect, an individual firm will __________ production.

An oligopolist will increase production if the output effect is

In a competitive market, strategic interactions among the firms are not important.

Table 17-14 Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits: Exxon Drill one well Drill two wells -Refer to Table 17-14. Does BP have a dominant strategy? If so, describe it.

Table 17-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. ​ ​ $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Quantity Demanded } \\\text { (Internet radio } \\\text { sub scriptions) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per subscription } \\\text { per year) }\end{array} \\\hline 0 & 64 \\\hline 500 & 60 \\\hline 1,000 & 56 \\\hline 1,500 & 52 \\\hline 2,000 & 48 \\\hline 2,500 & 44 \\\hline 3,000 & 40 \\\hline 3,500 & 36 \\\hline 4,000 & 32 \\\hline 4,500 & 28 \\\hline 5,000 & 24 \\\hline 5,500 & 20 \\\hline 6,000 & 16 \\\hline 6,500 & 12 \\\hline 7,000 & 8 \\\hline 7,500 & 4 \\\hline 8,000 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-2. The socially efficient level of output supplied to this market is

In a prisoner's dilemma situation where firms are setting prices, the dominant strategy is always to charge the price that leads to maximum profits for all firms. ​

Scenario 17-2 ​ Assume that a local telecommunications company sells high speed internet access and cable television. The company's only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost. -Refer to Scenario 17-2. If the telecommunications company is unable to use tying, what is the profit-maximizing price to charge for high speed internet access?

Give an example of a famous cartel.

A group of firms that collude is called a cartel.

If two players engaged in a prisoner's dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once.

Antitrust laws tend to target restraint of trade as characterized by __________.

Table 17-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. ​ ​ $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Quantity Demanded } \\\text { (Internet radio } \\\text { sub scriptions) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per subscription } \\\text { per year) }\end{array} \\\hline 0 & 64 \\\hline 500 & 60 \\\hline 1,000 & 56 \\\hline 1,500 & 52 \\\hline 2,000 & 48 \\\hline 2,500 & 44 \\\hline 3,000 & 40 \\\hline 3,500 & 36 \\\hline 4,000 & 32 \\\hline 4,500 & 28 \\\hline 5,000 & 24 \\\hline 5,500 & 20 \\\hline 6,000 & 16 \\\hline 6,500 & 12 \\\hline 7,000 & 8 \\\hline 7,500 & 4 \\\hline 8,000 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-2. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. If the firms divide the market evenly, how much profit will each company earn?

Assume that demand for a product that is produced at zero marginal cost is reflected in the table below. $\begin{array} { | l | l | } \hline \text { Quantity } & \text { Price } \\\hline 0 & \$ 36 \\\hline 200 & \$ 33 \\\hline 400 & \$ 30 \\\hline 600 & \$ 27 \\\hline 800 & \$ 24 \\\hline 1000 & \$ 21 \\\hline 1200 & \$ 18 \\\hline 1400 & \$ 15 \\\hline 1600 & \$ 12 \\\hline 1800 & \$ 9 \\\hline 2000 & \$ 6 \\\hline 2200 & \$ 3 \\\hline 2400 & \$ 0 \\\hline\end{array}$ a.What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel? b.Assume that this market is characterized by a duopoly in which collusive agreements are illegal.What market price and quantity will be associated with a Nash equilibrium?

As the number of firms in an oligopoly increases,

The problems faced by oligopolies with three or more members are entirely different from the problems faced by duopolies.

Table 17-12 Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below: Angelina Low price High price $\begin{array}{c}\begin{array}{|l}\hline\\\text { Brad }\\\\\\\hline\end{array}\begin{array} { | l | l | l | } \hline \text { Low price } & \begin{array} { l } \text { Angelina's profit } = \$ 20,000 \\\text { Brad's profit } = \$ 20,000\end{array} & \begin{array} { l } \text { Angelina's profit } = \$ 4,000 \\\text { Brad's profit } = \$ 23,000\end{array} \\\hline { \text { High price } } & \text { Angelina's profit } = \$ 25,000 & \text { Angelina's pro fit } = \$ 22,000 \\& \text { Brad's profit } = \$ 5,000 & \text { Brad's profit } = \$ 22,000 \\\hline\end{array}\end{array}$ -Refer to Table 17-12. Does Brad have a dominant strategy? If so, describe it.