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Oligopoly 4433
47. Ford and General Motors are considering expanding into the Vietnamese automobile market.
Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are
relevant to this decision.
48. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super
Bowl. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that
are relevant to this decision. Does the repeated game scenario differ from a single period game? Is
it possible that a repeated game (without collusive agreements) could lead to an outcome that is
better than a single-period game? Explain the circumstances in which this may be true.
4434 Oligopoly
49. Outline the purpose of antitrust laws. What do they accomplish?
50. Explain the practice of resale price maintenance and discuss why it is controversial.
Oligopoly 4435
51. Explain the practice of tying and discuss why it is controversial.
Problems
1. Why are the actions of firms interdependent in an oligopoly market but not in a monopolistically
competitive market?
2. Why are the actions of the firms in an oligopoly interdependent?
4436 Oligopoly
3. Economists use game theory to analyze .
4. Why do economists use game theory to study the actions of firms in oligopoly markets but not in
other markets?
5. As the number of firms in an oligopoly industry increases, the market
moves closer to a market.
Oligopoly 4437
6. Compare the equilibrium output in a duopoly to the monopoly output.
7. Suppose the market for home-grown peppers in the town of Smallville is comprised of two
farmers. Explain why they might try to collude.
4438 Oligopoly
8. Suppose the market for home-grown peppers in the town of Smallville is comprised of two
farmers. Suppose the two farmers try to collude. Explain why their collusion might not be
successful.
Oligopoly 4439
Table 17-30
Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe
drinking water. Each week Abby and Brad work together to decide how many gallons of water to
pump. They bring water to town and sell it at whatever price the market will bear. To keep things
simple, suppose that Abby and Brad can pump as much water as they want without cost so that the
marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is
shown in the table below:
Quantity
(in gallons)
Price
Total Revenue
(and Total Profit)
0
$12
$0
1
$11
$11
2
$10
$20
3
$9
$27
4
$8
$32
5
$7
$35
6
$6
$36
7
$5
$35
8
$4
$32
9
$3
$27
10
$2
$20
11
$1
$11
12
$0
$0
9. Refer to Table 17-30. Discuss the difference between the monopoly outcome and the Nash
equilibrium.
4440 Oligopoly
10. Refer to Table 17-30. Briefly explain why each duopolist earns a lower profit at the Nash
equilibrium than if they cooperated to produce the monopoly output.
Oligopoly 4441
Table 17-31
Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies
that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how
many gallons of milk to produce. They bring milk to town and sell it at whatever price the market
will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as
they want without cost so that the marginal cost is zero. The weekly town demand schedule and
total revenue schedule for milk is shown in the table below:
Quantity
(in gallons)
Price
Total Revenue
(and Total Profit)
0
$24
$0
1
$22
$22
2
$20
$40
3
$18
$54
4
$16
$64
5
$14
$70
6
$12
$72
7
$10
$70
8
$8
$64
9
$6
$54
10
$4
$40
11
$2
$22
12
$0
$0
11. Refer to Table 17-31. Discuss the difference between the monopoly outcome and the Nash
equilibrium.
4442 Oligopoly
12. Refer to Table 17-31. Briefly explain why each duopolist earns a lower profit at the Nash
equilibrium than if they cooperated to produce the monopoly output.
13. Define collusion.
14. If the members of an oligopoly could agree on a total quantity to produce and a price to charge,
what quantity and price would they choose? Will this choice represent a Nash equilibrium?
Oligopoly 4443
15. When a group of firms acts in unison to maximize profits as if they were a monopoly, they form a
.
16. Give an example of a famous cartel.
17. OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel in the output
market for petroleum. Major League Baseball could be considered a cartel in the market for
baseball players.
4444 Oligopoly
18. To function as a monopoly, OPEC and other cartels rely on among members.
19. Some people consider the NCAA (National Collegiate Athletic Association)
to be a in the market for college athletics.
20. If the output effect is larger than the price effect, an individual firm will production.
Oligopoly 4445
21. How does free trade relate to the theory of oligopoly?
22. Reaching and enforcing an agreement between members of a cartel becomes more difficult as
the size of the group __________.
23. As the number of firms in an oligopoly industry decreases, the market moves closer to a
_________ market.
