Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY
MARKETS
Multiple Choice
13-1 What is the most important characteristic of oligopoly?
a. firms have market power
b. product differentiation
c. low barriers to entry
d. interdependence of profits
e. none of the above
13-2 In an oligopoly market,
a. a firm must lower price in order to sell more output.
b. each firm faces a demand curve that depends on how the firm’s rivals behave.
c. a few firms account for a large portion of industry sales.
d. both a and b
e. all of the above
13-3 Oligopolists face interdependent profits because
a. there are few firms in the market.
b. the product is differentiated.
c. industry sales are large.
d. all of the above
13-4 Actions taken by oligopolists to plan for and react to actions of rival firms represent
a. strategic behavior.
b. interdependence.
c. cooperative behavior.
d. game theory.
e. all of the above.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
Learning Objective: 13-01
13-5 In game theory, a dominant strategy is
a. a strategy used by a large firm to compete against smaller firms.
b. a strategy followed by the price leader.
c. a strategy involving a high risk but also a high return.
d. a strategy that leads to the best outcome no matter what a rival does.
e. none of the above
13-6 In game theory, what is a dominant strategy?
a. A strategy that leads to the best possible outcome for both firms.
b. Any strategy that leads to a Nash equilibrium.
c. A strategy that yields a minimax outcome.
d. A strategy that leads to the best outcome for a firm no matter what strategy the other
chooses.
e. none of the above
13-7 When participants in a game choose to take actions that result in a Nash equilibrium,
a. no single participant has an incentive to change its action.
b. each participant has chosen the best action possible, given what the others have chosen.
c. no other set of actions could make ALL participants better off.
d. both a and b
e. all of the above
13-8 Interdependence occurs when
a. firms consider the actions of other firms when making price and output decisions.
b. all firms in an industry are affected by the same general economic conditions, like
consumer incomes and the unemployment rate.
c. firms cooperate to increase profit.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
d. both a and b
e. all of the above
13-9 Which of the following is an example of strategic entry deterrence?
a. price reductions
b. building excess capacity
c. economies of scale
d. both b and c
e. both a and b
13-10 In a duopoly situation with two firms A and B, A’s best-response curve
a. gives A’s profit-maximizing price given B’s anticipated price.
b. gives A’s minimax solution.
c. is derived based upon the underlying interdependence of firms A and B.
d. both a and c
e. all of the above
13-11 A form of strategic entry deterrence is
a. forming a cartel.
b. maintaining excess capacity.
c. limit pricing.
d. both b and c
e. all of the above
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-12 One reason a firm or firms might charge a price lower than its profit-maximizing price is
a. to discourage the entry of new firms.
b. to follow a tit-for-tat strategy.
c. to erect multiproduct barriers to entry.
d. both a and c
e. all of the above
13-13 Refer to the following figure showing the reaction functions of oligopoly firms A and B.
If firm B expects firm A will run 2 ads, then firm B should run _____ ads in order to maximize its
own profit.
a. 1
b. 3
c. 5
d. 6
e. 7
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-14 Refer to the following figure showing the reaction functions of oligopoly firms A and B.
If firm A anticipates that firm B will run 3 ads, then firm A should run _____ ads in order to
maximize its own profit.
a. 1
b. 2
c. 4
d. 5
e. 6.5
13-15 Refer to the following figure showing the reaction functions of oligopoly firms A and B.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
In Nash equilibrium,
a. firm A runs 4 ads and firm B runs 7 ads.
b. firm A runs 7 ads and firm B runs 4 ads.
c. firm A runs 2 ads and firm B runs 2 ads.
d. firm A runs 3 ads and firm B runs 5 ads.
e. none of the above.
13-16 Refer to the following figure showing the reaction functions of oligopoly firms A and B.
In Nash equilibrium,
a. both firms are maximizing their own profits given the level of advertising expected to be
undertaken by the other firm.
b. firm A can increase its profit by unilaterally increasing its level of advertising.
c. firm B can increase its profit by unilaterally increasing its level of advertising.
d. both b and c.
e. all of the above.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-17 Refer to the following figure. Two firms, A and B, produce similar, but not identical, products.
BRA and BRB are, respectively, the reaction functions for firms A and B, which compete primarily
by price.
A’s best-response curve shows
a. all the Nash equilibrium prices that firm A can charge.
b. how firm B should react to any price set by A.
c. the price A should charge to maximize A’s profits given each possible price that B might
charge.
d. the price A should charge to maximize joint profits.
e. both c and d
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-18 Refer to the following figure. Two firms, A and B, produce similar, but not identical, products.
BRA and BRB are, respectively, the reaction functions for firms A and B, which compete primarily
by price.
If firm A is expected to charge a price of $6, B should charge a price of $______ to maximize B’s
profit.
a. $4
b. $7
c. $12
d. $16
13-19 Refer to the following figure. Two firms, A and B, produce similar, but not identical, products.
BRA and BRB are, respectively, the reaction functions for firms A and B, which compete primarily
by price.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
If firm A predicts B will set a price of $12, then firm A should charge a price of $______ to
maximize A’s profit.
a. $6
b. $8
c. $10
d. $12
13-20 Refer to the following figure. Two firms, A and B, produce similar, but not identical, products.
BRA and BRB are, respectively, the reaction functions for firms A and B, which compete primarily
by price.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
In Nash equilibrium,
a. each firm has an incentive to increase price unilaterally.
b. the two firms are maximizing joint profit.
c. firm A charges $12 and firm B charges $16.
d. each firm is maximizing its profit, given what the other is doing.
13-21 Profits are interdependent in oligopoly markets because
a. products are differentiated.
b. managers are trying to set prices cooperatively in order to maximize total industry profit.
c. entry into the market is not restricted by some form of entry barrier.
d. each firm in the market is relatively large.
13-22 Which of the following is not evidence of oligopoly interdependence?:
a. strategic behavior
b. the need to get into the heads of rival managers
c. making decisions that result in the equating of marginal revenue and marginal cost
d. thinking ahead in sequential decisions to anticipate rivals’ future actions
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-23 At the point of intersection of two best-response curves, each manager is
a. unable to achieve a higher payoff through any unilateral change of strategy.
b. doing its part to reach a Nash equilibrium.
c. total industry profit is maximized.
d. each firm is making the greatest possible individual profit.
e. both a and b.
13-24 Use the following payoff table for Hardaway Corporation and Paxton Industries. These two firms
must make simultaneous pricing decisions. They can choose low, medium, or high prices.
Paxton Industries
Low
Medium
High
Low
A
$30, $30
B
$45, $20
C
$32, $20
Medium
D
$20, $45
E
$40, $40
F
$45, $35
High
G
$15, $48
H
$38, $52
I
$50, $50
Payoffs in thousands of dollars of monthly profits.
Following the procedure of successive elimination of dominated strategies, the manager of
Hardaway Corporation will eliminate in the first round the strategy of setting
a. a low price.
b. a medium price.
c. a high price.
d. None of the above; Hardaway does not have a dominated strategy.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-25 Use the following payoff table for Hardaway Corporation and Paxton Industries. These two firms
must make simultaneous pricing decisions. They can choose low, medium, or high prices.
Paxton Industries
Low
Medium
High
Low
A
$30, $30
B
$45, $20
C
$32, $20
Medium
D
$20, $45
E
$40, $40
F
$45, $35
High
G
$15, $48
H
$38, $52
I
$50, $50
Payoffs in thousands of dollars of monthly profits.
Following the procedure of successive elimination of dominated strategies, the manager of
Paxton Industries will eliminate in the first round the strategy of setting
a. a low price.
b. a medium price.
c. a high price.
d. None of the above; Paxton Industries does not have a dominated strategy.
13-26 Use the following payoff table for Hardaway Corporation and Paxton Industries. These two firms
must make simultaneous pricing decisions. They can choose low, medium, or high prices.
Paxton Industries
Low
Medium
High
Low
A
$30, $30
B
$45, $20
C
$32, $20
Medium
D
$20, $45
E
$40, $40
F
$45, $35
High
G
$15, $48
H
$38, $52
I
$50, $50
Payoffs in thousands of dollars of monthly profits.
After the first round of eliminating dominated strategies for both firms,
a. Hardaway Corporation has a dominant strategy, which is to price low.
b. Hardaway Corporation has a dominant strategy, which is to price medium.
c. Paxton Industries has a dominant strategy, which is to price low.
d. Paxton Industries has a dominant strategy, which is to price medium.
e. both b and d.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-27 Use the following payoff table for Hardaway Corporation and Paxton Industries. These two firms
must make simultaneous pricing decisions. They can choose low, medium, or high prices.
Paxton Industries
Low
Medium
High
Low
A
$30, $30
B
$45, $20
C
$32, $20
Medium
D
$20, $45
E
$40, $40
F
$45, $35
High
G
$15, $48
H
$38, $52
I
$50, $50
Payoffs in thousands of dollars of monthly profits.
After the first round of eliminating dominated strategies for both firms,
a. no more dominated strategies remain for further elimination.
b. setting a medium price for Hardaway Corporation can next be eliminated in a second
round.
c. setting a high price for Hardaway Corporation can next be eliminated in a second round.
d. no other dominated strategies can be eliminated for Paxton Industries.
e. both c and d.
13-28 Use the following payoff table for Hardaway Corporation and Paxton Industries. These two firms
must make simultaneous pricing decisions. They can choose low, medium, or high prices.
Paxton Industries
Low
Medium
High
Low
A
$30, $30
B
$45, $20
C
$32, $20
Medium
D
$20, $45
E
$40, $40
F
$45, $35
High
G
$15, $48
H
$38, $52
I
$50, $50
Payoffs in thousands of dollars of monthly profits.
For the simultaneous pricing decision facing Hardaway Corporation and Paxton Industries,
a. cell I is a strategically stable pricing outcome.
b. cell A is the likely outcome of the pricing decision.
c. cell E is the equilibrium pricing decision.
d. both firms pricing low is a Nash equilibrium.
e. both b and d.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-29 A second-mover advantage
a. exists when a firm can earn greater profit by reacting to earlier decisions made by rivals.
b. always arises when there is not a first-mover advantage in a sequential decision.
c. arises because rivals have imperfect information about payoffs.
d. none of the above
13-30 Two men’s clothing stores that compete for most of the market in a small town in Ohio must
choose their advertising levels simultaneously. The following payoff table facing the two firms,
Arbuckle & Son and Mr. B’s, shows the weekly profit outcomes for the various advertising level
combinations.
Mr. B’s advertising level
High
Low
Arbuckle & Son
advertising level
High
A
$4,000, $4,000
B
$3,000, $5,000
Low
C
$5,000, $3,000
D
$3,500, $3,500
Arbuckle and Son
a. has a dominant strategy: choose a high level of advertising.
b. has a dominant strategy: choose a low level of advertising.
c. has a dominated strategy: choose a high level of advertising.
d. has a dominated strategy: choose a low level of advertising.
e. both b and c.
13-31 Two men’s clothing stores that compete for most of the market in a small town in Ohio must
choose their advertising levels simultaneously. The following payoff table facing the two firms,
Arbuckle & Son and Mr. B’s, shows the weekly profit outcomes for the various advertising
decision combinations.
Mr. B’s advertising level
High
Low
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
Arbuckle & Son
advertising level
High
A
$4,000, $4,000
B
$3,000, $5,000
Low
C
$5,000, $3,000
D
$3,500, $3,500
Mr. B’s
a. has a dominant strategy: choose a high level of advertising.
b. has a dominant strategy: choose a low level of advertising.
c. has a dominated strategy: choose a low level of advertising.
d. has no dominated strategy
e. both a and c.
13-32 Two men’s clothing stores that compete for most of the market in a small town in Ohio must
choose their advertising levels simultaneously. The following payoff table facing the two firms,
Arbuckle & Son and Mr. B’s, shows the weekly profit outcomes for the various advertising level
combinations.
Mr. B’s advertising level
High
Low
Arbuckle & Son
advertising level
High
A
$4,000, $4,000
B
$3,000, $5,000
Low
C
$5,000, $3,000
D
$3,500, $3,500
Which of the following statements is NOT true for the advertising decision facing Arbuckle &
Son and Mr. B?
a. When both firms choose a high level of advertising, they are in Nash equilibrium.
b. When both firm choose a low level of advertising, they are in Nash equilibrium.
c. This is a prisoners’ dilemma decision situation.
d. Cell’s B and C are not strategically stable.
e. A dominant strategy equilibrium exists for Arbuckle and Mr. B.
13-33 A credible commitment is
a. always irreversible.
b. a way of becoming the first-mover in sequential decision situation.
c. an unconditional strategic move.
d. both a and c
e. all of the above
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-34 A conditional strategic move, such as a threat or promise, can be credible only if
a. rivals believe the manager making the threat or promise can be trusted to follow through
on any commitment, threat, or promise that he or she makes.
b. the strategic move harms rivals.
c. it can increase each firm’s payoff.
d. when the time comes to carry out the threat or promise, fulfilling the threat or promise is
in the best interest of the firm making the threat or promise.
13-35 If incumbent firm Dell threatens potential new entrant Rising Star with the threat, “If you enter
this market, we will lower our price and keep it low until you are driven out of the market,” then
a. Rising Star would never go ahead and enter if Dell has a cost advantage over Rising Star.
b. Rising Star’s decision to enter will be unaffected by the threat if the threat is not credible.
c. Dell is making a strategic move designed to increase its profits at the expense of Rising
Star.
d. both b and c.
e. all of the above
13-36 In sequential decision making situations, using the roll-back method
a. results in a Nash equilibrium.
b. allows the decision maker going second to predict what the decision maker going first
will do.
c. allows predictions about what the decision maker going second will do to be used by the
decision maker going first.
d. both a and b
e. both a and c