4446 Oligopoly
Table 17–32
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
Brad
Low price
Angelina’s profit = $20,000
Brad’s profit = $20,000
Angelina’s profit = $4,000
Brad’s profit = $23,000
High price
Angelina’s profit = $25,000
Brad’s profit = $5,000
Angelina’s profit = $22,000
Brad’s profit = $22,000
24. Refer to Table 17–32. Does Angelina have a dominant strategy? If so, describe it.
25. Refer to Table 17-32. Does Brad have a dominant strategy? If so, describe it.
Oligopoly 4447
26. Refer to Table 17–32. Is there a Nash equilibrium? If so, describe it.
Table 17–33
Suppose that Robert and Howard own the only two movie studios in California. Each producer
must choose between a low budget and a high budget strategy for his next film. The economic
profit from each strategy is indicated in the table below:
Howard
Low budget High budget
Robert
Low budget
Howard’s profit = $19,000
Robert’s profit = $19,000
Howard’s profit = $4,000
Robert’s profit = $24,000
High budget
Howard’s profit = $25,000
Robert’s profit = $5,000
Howard’s profit = $21,000
Robert’s profit = $21,000
27. Refer to Table 17–33. Does Howard have a dominant strategy? If so, describe it.
4448 Oligopoly
28. Refer to Table 17–33. Does Robert have a dominant strategy? If so, describe it.
29. Refer to Table 17–33. Is there a Nash equilibrium? If so, describe it.
Table 17–34
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
BP
Drill one well
Exxon’s profit = $10 million
BP’s profit = $10 million
Drill two wells
Exxon’s profit = $6 million
BP’s profit = $12 million
Oligopoly 4449
30. Refer to Table 17–34. Does Exxon have a dominant strategy? If so, describe it.
31. Refer to Table 17–34. Does BP have a dominant strategy? If so, describe it.
4450 Oligopoly
32. Refer to Table 17–34. Is there a Nash equilibrium? If so, describe it.
Table 17–35
Suppose that two coal mining companies – Allied and Barclay – own adjacent land suitable for
excavating coal mines. The profits that each firm earns depends on both the number of mines it
excavates and the number of mines excavated by the other firm. The table below lists each firm’s
individual profits:
Allied
Excavate one mine Excavate two mines
Barclay
Excavate one
mine
Allied’s profit = $9 million
Barclay’s profit = $9 million
Allied’s profit = $11 million
Barclay’s profit = $6 million
Excavate two
mines
Allied’s profit = $6 million
Barclay’s profit = $11 million
Allied’s profit = $7 million
Barclay’s profit = $7 million
33. Refer to Table 17–35. Does Allied have a dominant strategy? If so, describe it.
Oligopoly 4451
34. Refer to Table 17–35. Does Barclay have a dominant strategy? If so, describe it.
35. Refer to Table 17–35. Is there a Nash equilibrium? If so, describe it.
36. Cooperation is easier to achieve in .
4452 Oligopoly
37. Which strategy was the most successful in the prisoners’ dilemma tournament?
38. How does the prisoners’ dilemma game apply to real-life situations?
39. Antitrust laws tend to target restraint of trade as characterized by .
Oligopoly 4453
40. Before the , agreements between oligopolists were unenforceable contracts;
afterwards, such agreements were criminal conspiracies.
41. How did the Clayton Act of 1914 differ from the Sherman Antitrust Act of 1890?
42. The Clayton Act of 1914 allowed a person who successfully sued a company for damages caused
by an illegal arrangement to restrain trade to recover damages.
4454 Oligopoly
43. What are the three examples of controversial business practices that antitrust laws often prohibit?
44. Briefly describe the practice of resale price maintenance.
45. Briefly describe the two arguments that economists make to defend the practice of resale price
maintenance.
Oligopoly 4455
46. Which potentially anti-competitive business practice is often justified on the grounds that it
corrects for the free rider problem?
47. Briefly describe the business practice of tying.
Scenario 17-6
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.
48. Refer to Scenario 17-6. If the telecommunications company is unable to use tying, what is the
profit–maximizing price to charge for high speed internet access?
4456 Oligopoly
49. Refer to Scenario 17-6. If the telecommunications company is unable to use tying, what is the
profit–maximizing price to charge for cable television?
50. Refer to Scenario 17-6. If the telecommunications provider is able to use tying to price high
speed internet access and cable television, what is the profit-maximizing price to charge for the
“tied” good?
51. Refer to Scenario 17-6. How much additional profit can the telecommunications company earn
by switching to the use of a tying strategy to price high speed internet access and cable television
rather than pricing these goods separately?
Oligopoly 4457
52. Briefly describe the practice of predatory pricing.
53. Government regulators might suspect a firm of engaging in predatory pricing if it charges prices
that seem to be too
__________.
54. Which of the controversial business practices, resale price maintenance, predatory pricing, or
tying, was a part of a long–running antitrust lawsuit against Microsoft and why?