4) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960.
Since its formation, this cartel has suffered from a major problem with respect to the quota
(limit) of output it assigns each member nation. What is OPEC’s goal and what sort of quota do
you think the cartel assigns? How and why do nations cheat on their quota? What happens when
a nation cheats on its quota?
5) Why do oligopoly firms find it difficult to cooperate and not cheat on a cartel agreement?
6) In a cartel, how does the number of firms affect the likelihood that the cartel will be able to
successfully maintain a high price?
7) What is the dilemma faced by firms in oligopoly?
8) “The duopolists’ dilemma occurs when firms in a duopoly coordinate their decisions to
achieve the best possible outcome.” Is the previous statement correct or incorrect? Why?
9) What is game theory and what light does it shed on the duopolists’ dilemma?
10) Does an oligopoly produce the efficient quantity of output or does it create a deadweight
loss? Do the firms want to produce the efficient quantity of output? Explain your answer.
11) Sally’s Mom is pretty sure her twins, Tim and John, together cut the hair off Sally’s Barbie
doll. She talks to them separately and gives them the following options. If they both confess they
will have to pay Sally $10 each. If Tim confesses and John does not confess, Tim pays $15 and
John pays $8. If Tim does not confess and John confesses, Tim has to pay $8 and John $15. If
both do not confess, they both pay her $14. Sally’s Mom has them in separate rooms and they
cannot talk to each other.
a. Complete the payoff matrix below.
b. If they reach the Nash equilibrium, what will Tim and John do?
12) Two competing firms in a duopoly must decide whether or not to offer consumers a coupon
for their good. The payoff matrix above represents the daily profit available to the firms under
the different coupon strategies.
a. What strategies and payoffs are represented by quadrant A?
b. What strategy will Firm 1 pursue if it believes that Firm 2 is offering a coupon?
c. What quadrant represents the equilibrium that will result if the firms act independently
(compete)?
d. What quadrant represents the equilibrium that will result if the firms successfully collude?
13) Two firms are introducing an improved version of their toothpastes. They must decide
whether or not to advertise their products. The table above gives the payoff matrix in terms of the
economic profits they expect in each case. The payoffs are in terms of millions of dollars.
a. What is the Nash equilibrium for the game?
b. If they could cooperate, what strategy would they prefer? What would be the payoff?
14) Two firms are competing in a duopoly and are trying to decide which price to set. The two
prices under consideration are a high monopoly price and a low competitive level. If both seller
A and seller B chose the monopoly price, each will earn $20 million of economic profit.
However, if one picks the monopoly price while the other picks the competitive price, the high-
price firm will lose $1 million while the low-price firm will earn $32 million. If both sell at the
competitive level, they both earn a normal profit. Complete the payoff matrix below and
determine the Nash equilibrium.
15) Suppose two companies, Sony and Magnavox, are competing in a duopoly. If both
companies charge a high price, they each earn $700 million in economic profit. If both
companies charge a low price, they each earn $500 million in economic profit. If one company
charges a high price and the other a low price, the company charging the higher price earns $450
million in economic profit and the company charging the lower price earns $800 million in
economic profit.
a. Complete the payoff matrix below for Sony and Magnavox.
b. Find the Nash equilibrium.
17.10 Essay: Antitrust Law
1) Does section 2 of the Sherman Act make it a felony to “attempt” to monopolize an industry or
must the attempt succeed before it is a felony?
2) “The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force.” Is
the previous statement correct or incorrect?
3) What are the actions that are prohibited according to the Clayton Act and its amendments.
What conditions must be met for these actions to be prohibited?
4) Briefly explain resale price maintenance. Is it legal or illegal? Does it create efficiency or
inefficiency?
5) What is meant by the term “exclusive dealing”? Give an example of an exclusive deal. When
is it illegal?
6) If Sony required all its retailers not to sell televisions from other companies, Sony would be
engaging in what kind of activity? Is Sony’s requirement legal or does it violate the Clayton Act?
7) Explain how the courts have ruled on price fixing.
8) If price fixing is necessary because without it a firm will go bankrupt, is the price fixing legal?
9) Describe the Department of Justice’s claims against Microsoft.
10) What are the merger rules used by the Federal Trade Commission to help decide whether
firms are allowed to merge?
11) In a market with a Herfindahl-Hirschman Index of 2,000, according to their guidelines will
the Department of Justice challenge a merger that would increase the index by 50?
12) “If an industry’s Herfindahl-Hirschman Index is below 1,000, a merger between any two
firms in that industry will be disallowed.” Comment on the accuracy of the previous statement.
13) In 1911, Standard Oil Co. was declared a monopoly by the government under the Sherman
Act and the company was ordered to break itself up into competing companies. Two oil
companies, Exxon and Mobil, were the result of this breakup. A few years ago, Exxon and Mobil
merged again to form ExxonMobil Corporation. Why did the government allow this merger
now?
14) Suppose the industry for washing machines has only four firms. The market shares are: Firm
A, 40 percent; Firm B, 20 percent; Firm C 20, percent; and Firm D, 20 percent.
a. What is the Herfindahl-Hirschman Index (HHI)?
b. If Firms C and D were to announce a merger, would the Federal Trade Commission oppose
the merger?
15) A market has ten firms, whose market shares are given in the table above.
a. If firms I and J wanted to merge, according to the Department of Justice guidelines, would
the Federal Trade Commission challenge the merger?
b. If firms A and B wanted to merge, according to the Federal Trade Commission guidelines,
would the Federal Trade Commission challenge the merger?