72 ❖ Chapter 17/Oligopoly
41. The practice of requiring someone to buy two or more items together, rather than separately, is called
a.
resale maintenance.
b.
product fixing.
c.
tying.
d.
free-riding.
42. The practice of tying is illegal on the grounds that
a.
it allows firms to expand their market power.
b.
it allows firms to form collusive arrangements.
c.
it prevents firms from forming collusive agreements.
d.
the Sherman Act explicitly prohibited such agreements.
43. Tying involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product
individually at separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
44. The argument that consumers will not be willing to pay any more for two items sold as one than they would
for the two items sold separately is used to justify the legality of which of the following?
a.
resale price maintenance
b.
tying
c.
predatory pricing
d.
free-riding
45. The practice of tying is used to
a.
enhance the enforcement of antitrust laws.
b.
encourage the enforcement of collusive agreements.
c.
control the retail price of a collection of related products.
d.
package products to sell at a combined price closer to a buyer’s total willingness to pay.
Chapter 17/Oligopoly ❖ 73
Scenario 17-5
Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two
customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to
service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to
pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that
the bank can provide each of these services at zero marginal cost.
46. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit–maximizing price to charge for a
checking account?
a.
$13
b.
$9
c.
$8
d.
$5
47. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit–maximizing price to charge for
unlimited use of an ATM card?
a.
$14
b.
$11
c.
$9
d.
$2
48. Refer to Scenario 17-5. If the bank is able to use tying to price checking account and ATM services, what is
the profit-maximizing price to charge for the “tied” good?
a.
$14
b.
$10
c.
$9
d.
$8
49. Refer to Scenario 17-5. How much additional profit can the bank earn by switching to the use of a tying strat-
egy to price checking accounts and ATM service rather than pricing these services separately?
a.
$14
b.
$11
c.
$7
d.
$1
50. A particular cable TV company requires a household to subscribe to its high-speed Internet service if it sub-
scribes to cable TV, and vice versa. This practice
a.
is referred to as tying.
b.
is regarded by some economists as a form of price discrimination.
c.
is controversial among economists because they disagree on whether it has adverse effects for
society as a whole.
d.
All of the above are correct.
74 ❖ Chapter 17/Oligopoly
51. Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney offers
theaters the two films together at a single price but will not supply the movies separately. What do economists
call this business practice?
a.
predatory pricing
b.
resale price maintenance
c.
tying
d.
leverage
52. OPEC is able to raise the price of its product by
a.
tying.
b.
setting production levels for each of its members.
c.
increasing the supply of oil above the competitive level.
d.
imposing resale price maintenance agreements on members.
53. All cartels are inherently reliant on
a.
a horizontal demand curve.
b.
an inelastic demand for their product.
c.
the cooperation of their members.
d.
enforcement of antitrust laws.
54. In 1971, Congress passed a law that banned cigarette advertising on television. After the ban it is most likely
that the
(i)
profits of cigarette companies increased.
(ii)
prices of cigarettes increased.
(iii)
total costs incurred by cigarette companies increased.
a.
(i) only
b.
(i) and (ii)
c.
(ii) and (iii)
d.
(i), (ii), and (iii)
55. A central issue in the Microsoft antitrust lawsuit involved Microsoft’s integration of its Internet browser into
its Windows operating system, to be sold as one unit. This practice is known as
a.
tying.
b.
predation.
c.
wholesale maintenance.
d.
retail maintenance.
Chapter 17/Oligopoly ❖ 75
56. In the U.S. government’s 1998 suit against the Microsoft Corporation, a central issue was whether Microsoft
should be allowed to integrate its Internet browser into its Windows operating system. Microsoft responded
that
a.
this integration of products is an example of tying, and the U.S. Supreme Court has consistently
ruled that tying is a perfectly acceptable and legal business practice.
b.
this integration of products is an example of resale price maintenance, and the U.S. Supreme Court
has consistently ruled that fair trade is a perfectly acceptable and legal business practice.
c.
putting new features into old products is a natural part of technological practice.
d.
it would discontinue this integration of products, provided a speedy resolution of the government’s
case could be reached.
CONCLUSION
1. The story of the prisoners’ dilemma shows why
a.
predatory pricing is clearly not in society’s best interest.
b.
economists are unanimous in condemning resale price maintenance, since it inevitably reduces
competition.
c.
oligopolies can fail to act independently, even when independent decision-making is in their best
interest.
oligopolies can fail to cooperate, even when cooperation is in their best interest.
TRUE/FALSE
1. The essence of an oligopolistic market is that there are only a few sellers.
2. Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding
oligopolistic markets.
3. In a competitive market, strategic interactions among the firms are not important.
4. For a firm, strategic interactions with other firms in the market become more important as the number of firms
in the market becomes larger.
5. Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm
has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under the
cartel arrangement.
76 ❖ Chapter 17/Oligopoly
6. When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is
a Nash equilibrium.
7. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level
of output as they would produce in a Nash equilibrium.
8. Any market that is served by an oligopoly is in effect served by a monopoly.
9. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.
10. A group of firms that collude is called a cartel.
11. Oligopolies produce more when they collude then when they do not.
12. Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do
cartels with a larger number of firms.
13. As the number of firms in an oligopoly becomes very large, the price effect disappears.
14. The problems faced by oligopolies with three or more members are entirely different from the problems faced
by duopolies.
15. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal
to what it would be if the market were a monopoly.
16. In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current profits
by producing more.
17. As the number of firms in an oligopoly increases, the magnitude of the price effect increases.
Chapter 17/Oligopoly ❖ 77
18. If the output effect from increased production is larger than the price effect, then an oligopolist would increase
production.
19. All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium.
20. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to co-
operate than if they play the game only once.
21. The story of the prisoners’ dilemma contains a general lesson that applies to any group trying to maintain co-
operation among its members.
22. In the prisoners’ dilemma game, one prisoner is always better off confessing, no matter what the other prisoner
does.
23. A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the
other players.
24. In the prisoners’ dilemma game, confessing is a dominant strategy for each of the two prisoners.
25. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two
prisoners play in the prisoners’ dilemma.
26. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesira-
ble outcome for the firms that are involved.
27. The decisions of the US and Soviet Union to build nuclear weapons is much like the prisoners’ dilemma.
78 ❖ Chapter 17/Oligopoly
28. In some games, the noncooperative equilibrium is bad for the players and bad for society.
29. When prisoners’ dilemma games are repeated over and over, sometimes the threat of penalty causes both par-
ties to cooperate.
30. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever
the other player did last time.
31. The notion of a tit-for-tat strategy applies to a prisoners’ dilemma game that is played repeatedly, but it does
not apply if the game is played only once.
32. One way that public policy encourages cooperation among oligopolists is through antitrust law.
33. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.
34. The Sherman Antitrust Act states that if a person can prove that he was damaged by an illegal arrangement to
restrain trade, he could sue and recover three times the damages he sustained.
35. Resale price maintenance prevents retailers from competing on price.
36. A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the bulbs to cus-
tomers for $2 per bulb. This practice is known as tying.
37. Some business practices that appear to reduce competition, such as resale price maintenance, may have legiti-
mate economic purposes.
Chapter 17/Oligopoly ❖ 79
38. Tying can be thought of as a form of price discrimination.
39. Tying is always profitable for a monopoly.
40. Regardless of the firm’s behavior, Google should face antitrust legislation because it generates a dominant
share of the revenue in its market.
41. Policymakers should be aggressive in using their powers to place limits on firm behavior, because business
practices that appear to reduce competition never have any legitimate purposes.
SHORT ANSWER
1. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of
the cartel. Why?
2. What effect does the number of firms in an oligopoly have on the characteristics of the market?
3. Assume that demand for a product that is produced at zero marginal cost is reflected in the table below.
Quantity
Price
0
$36
200
$33
400
$30
600
$27
800
$24
1000
$21
1200
$18
1400
$15
1600
$12
1800
$ 9
2000
$ 6
2200
$ 3
2400
$ 0
a.
What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a
cartel?
b.
Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What
market price and quantity will be associated with a Nash equilibrium?
80 ❖ Chapter 17/Oligopoly
4. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly.
Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.
5. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oli-
gopoly market. How does this differ from output and price effects in a monopoly market?
6. Explain how the output effect and the price effect influence the production decision of the individual oligopo-
list.
7. 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.
8. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super Bowl. De-
vise a simple prisoners’ dilemma game to demonstrate the strategic considerations that are relevant to this de-
cision. 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.
Chapter 17/Oligopoly ❖ 81
9. Outline the purpose of antitrust laws. What do they accomplish?
10. Explain the practice of resale price maintenance and discuss why it is controversial.
11. Explain the practice of tying and discuss why it is controversial.