Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-37 In simultaneous decision making situations, common knowledge means that
a. at least one of the decision makers knows what is going to happen.
b. all of the decision makers know what the outcome of the decision will be.
c. even people not involved in making the decision will be able predict the outcome.
d. the managers of the firms failed to keep all of the information about their decision plans
secret.
e. none of the above
13-38 Firms make credible commitments by taking _________________ , _______________ actions.
a. irreversible, unconditional
b. reversible, uncontrollable
c. reversible, believable
d. costly, but believable
e. costly, reversible
13-39 Two men’s clothing stores that compete for most of the market in a small town in Ohio and will
choose their weekly advertising levels sequentially. The newspaper advertising department calls
the clothing stores in alphabetical order to find out how much advertising each firm wishes to
buy. Somehow — and nobody at the newspaper knows exactly how this happens — Arbuckle’s
advertising decision “leaks out” to Mr. B’s, which then knows Arbuckle’s advertising decision
when it makes its advertising decision for the week.
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. The payoff table is common
knowledge. Use this payoff table to construct the appropriate sequential decision on the blank
game tree provided below.
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
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
When Arbuckle and Son makes its advertising decision first,
a. it need not consider what Mr. B’s advertising decision will be since Arbuckle and Son
cannot know what decision Mr. B will make.
b. the common knowledge that both managers have about the payoff table insures that
Arbuckle will earn $5,000 of weekly profit.
c. it should use the roll-back method to insure that it will earn $5,000 of weekly profit.
d. all of the above.
e. none of the above
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-40 Two men’s clothing stores that compete for most of the market in a small town in Ohio and will
choose their weekly advertising levels sequentially. The newspaper advertising department calls
the clothing stores in alphabetical order to find out how much advertising each firm wishes to
buy. Somehow — and nobody at the newspaper knows exactly how this happens — Arbuckle’s
advertising decision “leaks out” to Mr. B’s, which then knows Arbuckle’s advertising decision
when it makes its advertising decision for the week.
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. The payoff table is common
knowledge. Use this payoff table to construct the appropriate sequential decision on the blank
game tree provided below.
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
If the manager at Arbuckle and Son employs the roll-back method to make the advertising
decision for Arbuckle, the likely outcome will be$3,500 of weekly profit for Arbuckle and $3,500
of weekly profit for Mr. B’s.
a. $5,000 of weekly profit for Arbuckle and $5,000 of weekly profit for Mr. B’s.
b. $5,000 of weekly profit for Arbuckle and $3,000 of weekly profit for Mr. B’s.
c. $3,000 of weekly profit for Arbuckle and $5,000 of weekly profit for Mr. B’s.
d. $4,000 of weekly profit for Arbuckle and $4,000 of weekly profit for Mr. B’s.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-41 Two men’s clothing stores that compete for most of the market in a small town in Ohio and will
choose their weekly advertising levels sequentially. The newspaper advertising department calls
the clothing stores in alphabetical order to find out how much advertising each firm wishes to
buy. Somehow — and nobody at the newspaper knows exactly how this happens — Arbuckle’s
advertising decision “leaks out” to Mr. B’s, which then knows Arbuckle’s advertising decision
when it makes its advertising decision for the week.
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. The payoff table is common
knowledge. Use this payoff table to construct the appropriate sequential decision on the blank
game tree provided below.
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
By making its advertising decision after Arbuckle and Son, Mr. B’s
a. enjoys a first-mover advantage.
b. enjoys a second-mover advantage.
c. does not end up any better off than if it made its advertising decision first.
d. can secure a $5,000 profit payoff for itself.
e. both b and d.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-42 Credible commitments give committing firms
a. the first moves in sequential games.
b. a second-mover advantage in sequential games.
c. a way to improve their payoffs.
d. both a and c
e. both b and c
13-43 Which of the following are trigger strategies?
a. eye-for-an-eye
b. tit-for-tat
c. grim
d. both b and c
e. all of the above
13-44 Which strategy for punishing cheating has consistently been the winning strategy in tournaments
pitting decision strategies against one another?
a. grim
b. eye-for-an-eye
c. tit-for-tat
d. Nash strategy
13-45 In every prisoners’ dilemma situation, cooperation
a. is possible.
b. reduces the payoff to at least one of the firms.
c. reduces the payoff to all players.
d. is likely.
e. both c and d.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-46 In a one-time prisoners’ dilemma decision,
a. all firms expect the other firms to cheat.
b. cheating is usually not a value-maximizing decision.
c. cheating is less likely when the discount rate is low.
d. cheating is less likely when the discount rate is high.
13-47 In a prisoners’ dilemma decision that is made only one time,
a. the Nash equilibrium is a non-cooperative outcome.
b. a set of decisions exists that is better than the Nash decisions for each and every
oligopoly firm.
c. the discount rate is irrelevant for decision making.
d. rivals have no way to punish cheaters.
e. all of the above.
13-48 In a repeated decision for which the present value of the benefits of cheating is less than the
present value of the costs of cheating,
a. deciding not to cheat is a value-maximizing decision.
b. deciding to cooperate is a value-maximizing decision.
c. deciding to cheat is a value-maximizing decision.
d. both a and b
13-49 In a repeated decision for which the present value of the benefits of cheating is greater than the
present value of the costs of cheating,
a. deciding not to cheat is a value-maximizing decision.
b. deciding to cooperate is a value-maximizing decision.
c. deciding to cheat is a value-maximizing decision.
d. both a and b
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-50 In the U.S., firms that engage in cooperative efforts to coordinate pricing
a. are always in violation of antitrust laws.
b. may face federal charges of illegal collusion if they cannot provide evidence that the
coordination of prices was in the best interest of consumers.
c. are simply trying to reach a Nash equilibrium and are not viewed by courts as necessarily
breaking any laws.
d. both b and c.
13-51 In a repeated prisoners’ dilemma decision, both managers can make credible threats to punish
cheating because
a. if either manager cheats, the other manager can increase its profit by also cheating.
b. both of the cheating cells in the payoff table are strategically stable cells.
c. when both firms cheat, they both avoid the Nash equilibrium cell.
d. both a and c.
Learning Objective: 13-03
13-52 Punishment for cheating on pricing agreements usually takes the form of
a. a retaliatory advertising campaign.
b. a retaliatory price cut.
c. a legal suit.
d. a monetary fine.
13-53 Cooperation is achieved in an oligopoly market when
a. most of the firms in the market decide not to cheat.
b. some of the firms in the market decide not to cheat.
c. at least one of the firms in the market decide not to cheat.
d. all of the firms in the market decide not to cheat.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-54 Price matching is a strategic move that
a. seeks to make cheating unprofitable.
b. must generally be announced publicly in order to have the desired effect.
c. has no usefulness to managers if a simultaneous pricing decision is going to be made only
one time.
d. both a and b
e. all of the above
13-55 Price matching
a. is a strategic commitment.
b. is a flexible pledge to match any lower prices offered by rivals.
c. must be irreversible in order to have the desired effect.
d. both a and c.
e. both b and c
13-56 Tacit collusion
a. is a form of cooperation that occurs without explicit communication.
b. is illegal per se in the U.S.
c. involves strict adherence to quotas.
d. seems to rare, especially among manufacturers of consumer durables.
13-57 Price leadership
a. is rather uncommon today.
b. is a pricing arrangement in which one firm in an oligopoly agrees to act as a cartel
manager and set a price that will maximize the profits of all the firms in the oligopoly
market.
c. would not be useful to a dominant firm if it could eliminate all its rivals through a price
war.
d. none of the above
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-58 Tacit collusion in a market represents a method for
a. collusion to discourage entry into the market.
b. a price-fixing agreement when such agreements are legal.
c. agreeing on price without explicit communication among firms.
d. cheating on a cartel price.
e. none of the above
13-59 Which of the following will NOT make cooperation more likely?
a. any action that reduces the benefit of cheating
b. a strategy of price matching
c. posting prices on the internet
d. any action that makes it more costly to monitor rival’s prices.
e. developing a reputation for harshly punishing cheating
13-60 The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the
beginning of every month. They choose either low or high levels of advertising expenditure.
They both employ a discount rate of 2.5 percent per month.
Beta’s advertising
High
Low
Alpha’s
advertising
High
A
$7,000, $3,500
B
$2,000, $6,500
Low
C
$8,000, $1,000
D
$4,000, $2,000
Payoffs in dollars of monthly profits.
If both firms cooperate, Alpha will choose a _________ level of advertising and Beta will choose
a _________ level of advertising.
a. high; high
b. high; low
c. low; high
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
d. low; low
13-61 The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the
beginning of every month. They choose either low or high levels of advertising expenditure. They
both employ a discount rate of 2.5 percent per month.
Beta’s advertising
High
Low
Alpha’s
Advertising
High
A
$7,000, $3,500
B
$2,000, $6,500
Low
C
$8,000, $1,000
D
$4,000, $2,000
Payoffs in dollars of monthly profits.
If Beta decides not to cooperate, its undiscounted benefit from cheating for one month is
a. $1,500
b. $2,000
c. $3,000
d. $4,000
e. $5,000
13-62 The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the
beginning of every month. They choose either low or high levels of advertising expenditure.
They both employ a discount rate of 2.5 percent per month.
Beta’s advertising
High
Low
Alpha’s
Advertising
High
A
$7,000, $3,500
B
$2,000, $6,500
Low
C
$8,000, $1,000
D
$4,000, $2,000
Payoffs in dollars of monthly profits.
If Beta expects to get caught the first month it cheats, the present value of the benefits of cheating
is
a. $1,234
b. $2,927
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
c. $6,500/(1.025)
d. $6,500/(1.025)2
13-63 The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the
beginning of every month. They choose either low or high levels of advertising expenditure.
They both employ a discount rate of 2.5 percent per month.
Beta’s advertising
High
Low
Alpha’s
advertising
High
A
$7,000, $3,500
B
$2,000, $6,500
Low
C
$8,000, $1,000
D
$4,000, $2,000
Payoffs in dollars of monthly profits.
When Alpha punishes Beta with a retaliatory adjustment in its advertising expenditures, Beta will
suffer an undiscounted penalty of $_________ for each month that punishment continues.
a. $1,500
b. $2,000
c. $3,000
d. $4,000
e. $5,000
13-64 The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the
beginning of every month. They choose either low or high levels of advertising expenditure.
They both employ a discount rate of 2.5 percent per month.
Beta’s advertising
High
Low
Alpha’s
Advertising
High
A
$7,000, $3,500
B
$2,000, $6,500
Low
C
$8,000, $1,000
D
$4,000, $2,000
Payoffs in dollars of monthly profits.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
Beta expects punishment to last for two months after being caught (i.e., to be penalized in months
2 and 3). What would be the value-maximizing decision for Beta?
a. Cooperate since $3,000 > PVBenefits of cheating.
b. Cooperate since $6,500/(1.025) > PVBenefits of cheating.
c. Cheat since PVBenefits of cheating > $2,820.
d. Cheat since PVBenefits of cheating < $5,641.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-65 Burger Doodle, the incumbent firm, wishes to set a limit price of $8 (rather than the profit-
maximizing price of $12) to prevent Designer Burger from entering its profitable market. The
game tree above shows the payoffs for various decisions. Burger Doodle makes its pricing
decision, then Designer Burger decides whether to enter or stay out of the market. If Designer
Burger chooses to enter the market, then Burger Doodle may or may not decide to accommodate
Designer’s entry by changing its initial price to the Nash equilibrium price of $10.
In order for Burger Doodle to successfully implement a limit pricing strategy for entry deterrence,
it must be able to
a. convince Designer Burger that it will set the Nash price of $10 should Designer Burger
decide to stay out of the market.
b. convince Designer Burger that it will set the Nash price of $10 should Designer Burger
decide to enter the market.
c. make a credible commitment to maintain its initial price should Designer Burger decide
to enter the market.
d. make a credible promise to price its burgers at $12.
e. make a credible threat to lower its price to $8 should Designer Burger choose to enter it
market.
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-66 Burger Doodle, the incumbent firm, wishes to set a limit price of $8 (rather than the profit-
maximizing price of $12) to prevent Designer Burger from entering its profitable market. The
game tree above shows the payoffs for various decisions. Burger Doodle makes its pricing
decision, then Designer Burger decides whether to enter or stay out of the market. If Designer
Burger chooses to enter the market, then Burger Doodle may or may not decide to accommodate
Designer’s entry by changing its initial price to the Nash equilibrium price of $10.
If the condition in the question above is met, Burger Doodle will set price equal to $________
and it will earn $__________ of profit while Designer Burger will earn $__________ of profit.
a. 8; 125,000; 0
b. 8; 75,000; –40,000
c. 10; 101,000; 25,000
d. 10: 96,000; 25,000
e. 12; 165,000; 0
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-67 Burger Doodle, the incumbent firm, wishes to set a limit price of $8 (rather than the profit-
maximizing price of $12) to prevent Designer Burger from entering its profitable market. The
game tree above shows the payoffs for various decisions. Burger Doodle makes its pricing
decision, then Designer Burger decides whether to enter or stay out of the market. If Designer
Burger chooses to enter the market, then Burger Doodle may or may not decide to accommodate
Designer’s entry by changing its initial price to the Nash equilibrium price of $10.
If the condition in the question 13-67 is NOT met, Burger Doodle will set price equal to
$________ at decision node 3 and it will earn $__________ of profit while Designer Burger will
earn $__________ of profit.
a. 8; 125,000; 0
b. 8; 75,000; –40,000
c. 10; 101,000; 25,000
d. 10: 96,000; 25,000
e. 12; 165,000; 0
Chapter 13: STRATEGIC DECISION MAKING IN OLIGOPOLY MARKETS
13-68 Burger Doodle, the incumbent firm, wishes to set a limit price of $8 (rather than the profit-
maximizing price of $12) to prevent Designer Burger from entering its profitable market. The game tree
above shows the payoffs for various decisions. Burger Doodle makes its pricing decision, then Designer
Burger decides whether to enter or stay out of the market. If Designer Burger chooses to enter the market,
then Burger Doodle may or may not decide to accommodate Designer’s entry by changing its initial price
to the Nash equilibrium price of $10.
If the condition in the question above is NOT met, Burger Doodle will set price equal to $________ at
decision node 1 and the outcome _____________(is, is not) a Nash equilibrium.
a. 8; is
b. 8; is not
c. 12; is
d. 12; is not
Learning Objective: 13-04