Chapter 15:
1. Which of the following markets are oligopolistic?
a. corn
b. funeral services
c. airline travel
d. hamburgers
e. oil
f. breakfast cereals
2. Which of the following are characteristic of oligopolistic industries?
a. a large number of firms
b. few firms
c. a high degree of product differentiation
d. high barriers to entry
e. free entry and exit
f. mutual interdependence
3. Suppose Farmer Smith from Kansas and Farmer Jones from Missouri agree to restrict their combined
output of wheat in an attempt to increase the price and profits. How likely do you think the Smith Jones
cartel is to succeed? Explain.
4. Explain how the joint profit-maximizing price of colluding firms under oligopoly is determined? How
about output?
Answer: When firms collude and jointly maximize profits, output is chosen where the
5. Explain how the long-run equilibrium under oligopoly differs from that of perfect competition.
6. Important differences exist between perfect competition and oligopoly. Show your understanding of
these differences by listing
Perfect Competition Oligopoly
allocative efficiency large economies of scale many small firms mutual interdependence
7.
controls about three-
high by restricting supply. The CSO has also promoted the general consumption of diamonds through
advertising and marketing. New supplies of diamonds have been found in Canada and Russia. These
new mines, which are outside the direct control of the CSO, want to sell their diamonds on the open
market.
a. What would you predict will happen in the market for diamonds if these new mines do not cooperate
with the cartel?
Answer:
b. What do you think will happen to CSO diamond advertising?
Answer: CSO will no longer be willing to advertise to increase the demand for all
8. st air carriers Delta,
Northwest, American, and United use low prices to limit competition at the busiest airports. Predatory
pricing exists when the dominant carrier at an airport matches the low prices of any new low-fare
competitor and sells more low-fare seats. The major carrier holds these low prices until the new
competition folds. The dominant carrier recovers any short-term losses with increased fares once the
competition is eliminated. The government thinks that this pricing response is an anticompetitive strategy.
The dominant carriers claim that this response is simply a part of competition. Which is it? How would
each of the following pieces of information affect your decision as to whether it is an anticompetitive
strategy or a competitive response? Check the appropriate column.
Answer: When there are significant start-up costs for a new airline, predatory pricing will
Anticompetitive Competitive
Strategy Response
Large, unrecoverable start-up costs for new airlines. ___X____ ________
9. What would the Herfindahl-Hirshman Index (HHI) be in each of the following situations:
a. 10 firms, each with 10 percent of the market
b. 4 firms, each with 25 percent of the market
c. 2 firms, each with 50 percent of the market
d. 1 firm with a monopoly in the market
10. Why would someone consider how broadly or narrowly the relevant market is considered to be so
critical to the results when HHI values are used to evaluate mergers?
Answer: The broader the relevant market, the smaller will be the market shares of the
11. Assume there are initially 10 firms, each with a 10 percent market share.
a. What is the initial HHI?
b. What will the HHI become if two firms merge?
c. What will the HHI become of three firms merge?
12. Answer questions a-c on HHI.
a. What would the HHI be for an industry made up of one firm with 30 percent of the market, and 14 firms,
each with 5 percent of the market?
b. What would the HHI be if two of the firms with 5 percent of the market merge?
c. What would the HHI be if the large (30 percent share) firm merged with one of the smaller (5 percent
share) firms?
13. Are the following mergers horizontal, vertical, or conglomerate?
a. Newsweek magazine and Time magazine
c. CBS TV and Jerry Bruckheimer Productions (TV show producer)
e. Alcoa and an aluminum siding company
f. Sealy Mattress Company and Beautyrest Mattress Company
g. a bakery and a sandwich chain
14. Two firms compete in the breakfast cereal industry producing Rice Krinkles and Wheat Krinkles
cereal, respectively. Each manufacturer must decide whether to promote its product with a large or small
advertising budget. The potential profits for these firms are as follows (in millions of dollars):
Firm A
Wheat Krinkles Cereal
Small Large
Advertising Advertising
Budget Budget
Firm B
Rice Krinkles Cereal
Small
Advertising
Budget
Firm (A)
$50 M
Firm (B)
$50 M
Firm (A)
$30 M
Firm (B)
$100 M
Large
Advertising
Budget
Firm (A)
$140 M
Firm (B)
$20 M
Firm (A)
$150 M
Firm (B)
$150 M
Describe the nature of the mutual interdependence between the two firms. Is a Nash equilibrium evident?
Answer: If both firms employ small advertising budgets, then they both earn modest
15. Suppose Pepsi is considering an ad campaign aimed at rival Coca-Cola. What is the dominant
strategy if the payoff matrix is similar to the one shown in Exhibit 3 in Section 15.4?
16. Suppose your professor announces that each student in your large lecture class who receives the
highest score (no matter how high) on the take-home final exam will get an A in the course. The professor
points out that if the entire class colludes successfully everyone could get the same score. Is it likely that
everyone in the class will get an A?
Answer: It is possible for students to collude and all write down the same answers on the
The following payoff matrix shows the possible sentences that two suspects, who are arrested on
suspicion of car theft, could receive. The suspects are interrogated separately and are unable to
communicate with one another. Use the following information to answer the question below.
17. For the
information
given in the
payoff matrix
above:
a. If there is a dominant strategy?
b. What is the dominant strategy? How do you know?
c. Is there a Nash equilibrium? How do you know?
Answers: There is a dominant strategy, which is for both prisoners to confess.
Suspect 1
Confess
Confess
Suspect 2
Confess
1
6 years
2
6 years
1
1 year
2
10 years
1
10 years
2
1 year
1
2 years
2
2 years
18. Why are repeated games more likely to be cooperative than one-shot games?
Answer: The self-interests of players often prevent cooperative behavior in a one–shot
19. Why might shirking on a team project in school be a dominant strategy, but not shirking on a team
project at work?