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13. Why is the economic analysis of oligopoly so difficult? What two generalizations can be made about the
pricing behavior of oligopolists?
14. Describe the essential features of the kinked-demand model of oligopoly pricing.
In the kinked-demand model, there is no collusion. The demand curve for the oligopolist is “kinked”
because when the firm lowers its price, its rivals will lower their prices, and its demand often will be
inelastic. When the firm increases its price, its rivals will not follow with price increases and its demand
will be elastic. The firm, therefore, hesitates to change its price for fear of decreasing its profits. Two
shortcomings of the kinked-demand model are that it does not explain how the going price gets set and
prices are not as inflexible as implied by the model.
15. The kinked-demand schedule that an oligopolist believes confronts the firm is given in the table below.
Compute the oligopolist’s total revenue at each of the nine prices, and enter these figures in the table. Also
16. The kinked-demand schedule that an oligopolist believes confronts the firm is given in the table below.
Compute the oligopolist’s total revenue at each of the nine prices, and enter these figures in the table. Also
19. Discuss the market for gasoline and the Organization of Petroleum Exporting Countries (OPEC) role in
determining price.
20. An oligopoly producing a homogeneous product is composed of three firms that act like a cartel. Assume
that these three firms have identical cost schedules. Assume also that if any one of these firms sets a price
for the product, the other two firms charge the same price. As long as they all charge the same price they
will share the market equally; and the quantity demanded of each will be the same.
Below are the total-cost schedule of one of these firms and the demand schedule that confronts it when the
other firms charge the same price as this firm. Complete the marginal-cost and marginal-revenue schedules
facing the firm.
Output
Total
cost
Marginal
cost
Price
Quantity
demanded
Marginal
revenue
0
$ 0
1
60
$_____
$260
1
$_____
2
100
_____
240
2
_____
3
160
_____
220
3
_____
4
240
_____
200
4
_____
5
340
_____
180
5
_____
6
460
_____
160
6
_____
7
600
_____
140
7
_____
8
760
_____
120
8
_____
Output
Total
cost
Marginal
cost
Price
Quantity
demanded
Marginal
revenue
0
$ 0
1
60
$ 60
$260
1
$ 260
2
100
40
240
2
220
3
160
60
220
3
180
4
240
80
200
4
140
5
340
100
180
5
100
6
460
120
160
6
60
7
600
140
140
7
20
8
760
160
120
8
−20
(a) The firm would charge a price of $180, set output at 5 units, and make a profit of $560 ($900 − $340).
(b) The three firms have identical costs and demand schedules. They would set price at $180 and produce
15 units (3 firms 5 units). Industry profits would be $1680 (3 $560).
21. An oligopoly producing a homogeneous product is comprised of three firms that act like a cartel. Assume
that these three firms have identical cost schedules. Assume also that if any one of these firms sets a price
for the product, the other two firms charge the same price. As long as they all charge the same price they
will share the market equally; and the quantity demanded of each will be the same.
Below are the total-cost schedule of one of these firms and the demand schedule that confronts it when the
other firms charge the same price as this firm. Complete the marginal-cost and marginal-revenue schedules
facing the firm.
Output
Total
cost
Marginal
cost
Price
Quantity
demanded
Marginal
revenue
0
$ 0
1
180
$_____
$780
1
$_____
2
300
_____
720
2
_____
3
180
_____
660
3
_____
4
720
_____
600
4
_____
5
1020
_____
540
5
_____
6
1380
_____
480
6
_____
7
1800
_____
420
7
_____
8
2280
_____
360
8
_____
23. Explain why there is an incentive to cheat in collusive oligopoly. How does such behavior threaten
collusive oligopoly over time?
24. What is the price leadership model of oligopoly pricing and what are its tactics?
25. Why is there emphasis on nonprice competition in oligopoly?
26. Describe the positive and negative views of the economics of advertising.
29. What are three qualifications to the view that allocative and productive efficiency are not realized in
oligopoly?
30. Compare pure competition, pure monopoly, monopolistic competition, and oligopoly on each of the
31. Define a simultaneous one-time game.
A simultaneous one-time game is one where firms select their optimal strategies at the same time and in a
32. What are the differences among positive-sum, negative-sum, and zero-sum games?
33. Describe and give an example of a dominant strategy.
34. Is a Nash equilibrium stable? Explain.
35. How does the use of credible threats or empty threats by firms affect outcomes and the Nash equilibrium in
one-period games?
36. Answer the following questions based on the payoff matrix for a single-period, two-firm game for firms,
Capoc and Caroc. The numbers in the matrix indicate the profit in billions of dollars for a national of
regional strategy. The profit outcome cells are A, B, C, and D.
Capoc Strategy
Caroc Strategy
National
Regional
National
Caroc = $12
Capoc = $12
Caroc = $6
Capoc = $21
Regional
Caroc = $21
Capoc = $6
Caroc = $18
Capoc = $18
37. Answer the following questions based on the payoff matrix for a single-period, two-firm game for firms,
Six, Inc. and Seven Corp. The numbers in the matrix indicate the profit in billions of dollars for a large and
small advertising strategy. The profit outcome cells are A, B, C, and D.
Six Inc Strategy
38. Answer the following questions based on the payoff matrix for a single-period, two-firm game for firms,
Firm X and Firm Z. The numbers in the matrix indicate the profit in billions of dollars for a traditional or
innovative strategy. The profit outcome cells are A, B, C, and D.
Firm Y Strategy
39. What are the effects of a reciprocity strategy on game outcomes?
Seven Corp. Strategy
Small
Large
Small
Seven = $20
Six = $20
Seven = $25
Six = $0
Large
Seven = $0
Six = $25
Seven = $15
Six = $15
Firm X Strategy
Traditional
Innovative
Traditional
Firm X = $0
Firm Y= $0
Firm X = $25
Firm Y= $0
Innovative
Firm X = $0
Firm Y= $25
Firm X = $50
Firm Y= $-50
40. Define a sequential game.
42. Discuss the difference between displaying a game using a strategic form and an extensive form. Do they
provide you with different outcomes?
43. See the extensive form “game tree” between Firm 1 (F1) and Firm 2 (F2) below. Each firm must make the
decision to advertise or not advertise. Their profits associated with each decision are listed. What will be
the resulting outcome? Explain.
44. Discuss the Stackelberg Duopoly. How can an extensive form game tree be used to determine the outcome
of the production decisions?
45. Using the game information on a Stackelberg duopoly to create an extended form game tree. Suppose Firm
A is the leader.
Firm A
High-price
Low-price
High-price
A = $350
B = $350
A = $500
B = $100
Firm B
Low-price
A = $100
B = $500
A = $250
B = $250
Firm A is the leader, this means they will make the first decision, Firm B will then be the follower.
46. (Last Word) What would you expect the concentration ratio and Herfindahl index of the internet search
industry to look like?
47. (Last Word) Describe how near-monopoly behavior in internet industries has fostered aggressive
competition.
