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A duopoly is an industry that consists of:
a) a single firm.
b) two firms.
c) a large number of small firms.
d) three or more firms.
 
Airlines are prone to price wars because:
a) airlines have the same costs.
b) airlines operate close to capacity.
c) airline pricing is easy to understand.
d) most fliers choose airlines on the basis of schedule and price.
 
An oligopoly may result from:
a) the standardization of a product.
b) low or no barriers to entry.
c) price-taking conditions for both buyers and sellers.
d) the existence of increasing returns to scale in the industry.
 
Cartels made up of a large number of firms are unstable because each firm in the cartel:
a) has a great incentive to cheat.
b) is producing a relatively homogeneous product in which entry barriers are also low.
c) does not have to worry about losses.
d) recognizes that the market is relatively stable in size.
 
Maximization of joint profits is most likely when firms are:
a) duopolists who collude.
b) perfect competitors.
c) natural monopolists.
d) monopolistic competitors.
 
Oligopoly is a market structure that is characterized by a:
a) small number of interdependent firms producing identical or differentiated products.
b) large number of relatively small independent firms producing identical products.
c) small number of independent firms producing identical or differentiated products.
d) large number of relatively small independent firms producing differentiated products.
 
Price leadership occurs if:
a) smaller firms in an industry silently agree to charge the same price as the largest firm.
b) competition among a large number of small firms generates similar, but slightly different, prices.
c) two or more firms in an industry agree to fix the price at a given level.
d) competition among a large number of small firms generates a stable market price.
 
The most important source of oligopoly is:
a) increasing returns to scale.
b) technological superiority.
c) government-created barriers.
d) ownership of resources.
 
How does the prisoner's dilemma compare to the outcome of a repeated game?
a) The equilibrium in both cases is identical
b) In a repeated game, two firms are more likely to charge the high price and receive high profits.
c) There are no comparisons that can be made between the two.
d) In a repeated game, two firms are less likely to charge the high price and receive high profits
 
Another measure of industry concentration:
a) LRAC Ratio
b)  Nash index
c)  Hefindahl-Hirschman Index
d) competition market price.
   
Scenario: Duopoly for Identical Firms in the Market for Surfboards. When the firms collude and produce the
profit-maximizing output, what is the profit earned by each firm if they split production equally?
Scenario: Duopoly for Identical Firms in the Market for Surfboards
Two identical firms compose the surfboard industry. The market demand curve is Q = 5,000 - 4P,
where Q is quantity demanded, and P is price per unit. Marginal cost is constant at $650, and fixed cost is zero.
$180,000
 
The effect of product differentiation is to:
reduce the intensity of competition among firms in an oligopoly.
 
An oligopolist can create a ______ through the establishment of exclusive dealing whereby the oligopolist
provides the good to buyers who agree to only buy its product
monopoly
 
Oligopolistic firms can distinguish their product through what?
Differentiation
 
What is the US law that marks the beginning of antitrust policy and the government's commitment to prevent
oligopolistic industries from becoming monopolies or behaving like a monopoly?
Sherman Antitrust Act (1890)
 
Although tacit collusion is common, it is difficult for firms to push prices up to monopoly level
True
 
Monopolistic prices are difficult to achieve for what four reasons?
many firms= less cooperation, difficult to tell when a firm is cheating on a tacit agreement, firms deviate
on tacit agreements, buyers bargain for lower prices
 
What breaks down tacit collusions?
price wars
 
When each firm reduces the price of its product below the cooperative level to drive the other sellers out of the business
Price War
 
When a firm acts to set the price tacitly for the whole industry; another form of oligopolistic behavior
Price Leadership
 
A market structure in which no firm is a monopolist, but producers nonetheless have market power they can
use to affect market prices
Imperfect Competition
 
Cooperation among producers to limit production and raise prices so as to raise one another's profits
Collusion
 
In game theory, the reward received by a player
Payoff (profit earned by an oligopolist)
 
In game theory, a diagram that shows how the payoffs to each of the participants in a two-player game depend
on the actions of both; a tool in analyzing interdependence
Payoff Matrix
 
Tacit collusion is relatively easy for oligopolists if:
there are only a few firms in the industry.
 
Oligopolistic firms are _________: one firm's profit depends on what its competitors do and vice versa
Interdependent
 
In which situation does overt collusion occur?
Coke and Pepsi openly agree on production and price in an effort to achieve monopoly profits.
 
OPEC is a(n) _____ cartel that includes _____ national governments.
legal; 17
 
What is the simplest type of oligopoly to analyze?
Duopoly
 
When a duopoly cooperates and the two firms work together to select the level of output that will maximize
their joint profit, it forms what?
Cartel
 
________ is used to model the interdependence between two firms
Game Theory
 
Economists often use a measure called the ______________ _____________ ____________, or ______, to
gauge the nature of competition in a given industry. The _________ for an industry is calculated as the square
of each firm's market share summed over the firms in the industry
Herfindahl-Hirschman Index (HHI); HHI; HHI
 
What is an example of game theory, in which each player in the game has an incentive to cheat or take an action that
benefits the player at the expense of the other player, the outcome of this behavior leaves both players worse off than they would have been if neither player cheated
Prisoner's Dilemma
 
An action that is a player's best action regardless of the action taken by the other player
Dominant strategy
 
The _________ is used by the Justice Department and the Federal Trade Commission to formulate antitrust policy.
Their mission is to support adequate competition in an industry by prosecuting price-fixing, breaking up economically
inefficient monopolies, and disallowing mergers between firms that will reduce competition.
HHI
 
When each player takes the strategy that is best for them, given the actions of the other players, this generates what?
A game equilibrium (Nash Equilibrium)
 
The Nash equilibrium is a ________ equilibrium, since none of the players take into account the effects of their actions on the other players
Noncooperative
 
an industry that is neither perfectly competitive nor purely monopolistic. ______________ is a type of market structure
in which there are only a few producers.
Oligopoly
 
a firm in an industry with only a small number of producers.
oligopolist
 
If the individual countries that are members of OPEC exceed their production quotas, the amount of oil supplied to
the world ___. And the price of oil ___.
Increases, decreases
 
Which of the following terms is defined as a market structure in which a small number of firms of interdependent firms compete?
Oligopoly
 
In 2002, the cheese manufacturing industry in the United States had a four-firm concentration ratio of 34%. This implies
that the cheese manufacturing industry is:
Not an oligopoly
 
The four-firm concentration ratio is the percentage of sales accounted for by the largest:
Four firms in the industry
 
A group of firms that collude by agreement to restrict output to increase the prices and profits is called a(n):
Cartel
 
According to Justice Department guidelines, an _______ below 1,500 indicates an un-concentrated industry—one that
is not dominated by a small number of firms and therefore operates competitively. An ________ between 1,500 and 2,500
indicates moderate concentration, and an __________ over 2,500 indicates a highly concentrated industry—in other words,
an oligopoly or monopoly.
HHI; HHI; HHI
 
a market structure in which no firm is a monopolist, but producers nonetheless have market power they can use to affect
market prices.
imperfect competition
 
Probably the most important source of oligopoly is the existence of _____________.
which give bigger producers a cost advantage over smaller ones. When these effects are very strong, they lead to
monopoly; when they are moderately strong, they lead to an industry with a small number of firms.
increasing returns to scale
 
When a firm deviates from cooperative behavior, the other firms may respond with a _______ strategy wherein they
repeat what the other firm did in the previous period
tit for tat
 
_______ strategy offers a reward to firms for cooperative behavior while punishing firms who opt to cheat
tit for tat
 
When firms recognize that they are better off cooperating with other firms rather than competing, it is referred
to as _____ collusion
tacit
 
When firms implicitly collude with each other, without the necessity of a formal, explicit agreement
Tacit Collusion
 
The United States legally restricts the behavior of oligopolistic firms and prohibits the creation of monopolies
True
 
Cartels are inherently _______, because each firm realizes that they have an incentive to produce more of
the good than was agreed
Unstable
 
In an oligopolistic industry that practices price leadership, the competition between firms is apt to be what
type of competition?
nonprice
 
The cost advantage that arises with increased output of a product.
economies of scale
 
Economist believe that the oligopoly market is a market with a four-firm concentration ratio that is
greater than or equal to:
40%
 
A strategy that is best for a firm, no matter what other strategies other firms use is known as:
Dominant Strategy
 
When a firm agrees to act as a monopoly and set prices they are called:
Cartel
 
In a repeated game, the losses associated with not cooperating are ___ the loses of cooperating.
Greater than
 
A situation where each firm chooses the best strategy, given the strategies chosen by other firms is known as:
Nash Equilibrium
 
A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off is called a:
Prisoner's dilemma
 
A cooperative equilibrium in which players ___ to increase their mutual payoffs, while a noncooperative
equilibrium is an equilibrium in which players ___.
Cooperate, do not cooperate
 
An oligopoly is a market structure with:
High barriers to entry
 
An agreement among firms to charge the same price or to otherwise not compete is known as:
Collusion
 
An oligopoly consisting of only two firms.
duopoly
 
One of the two firms in a duopoly.
duopolist
 
Cooperation among producers to limit production and raise prices so as to raise one another's profits.
collusion
 
A Nash Equilibrium is where each firm chooses the best strategy:
Given the best strategy chosen by other firms
 
Prisoner's dilemma is known as:
Non-cooperative equilibrium
 
In the broad sense , game theory studies the decisions of firms in industries where the profits of each firm depend on:
The firm's interactions with other firms
 
Which of the following is the definition of a business strategy?
Actions taken by firms to attain their objectives
 
When considering the effect of increasing production, a firm is concerned only with the _______ on its own units of
output, not those of its fellow oligopolists.
negative price effect; price effect
 
The strongest form of collusion is a ___________, an arrangement between producers that determines how much each is allowed
to produce. The world's most famous ____________ is the Organization of Petroleum Exporting Countries (OPEC), described in an
Economics in Action later in the chapter.
Cartel; cartel
 
In 2007, the U.S. government discovered a long-run formal conspiracy to fix the price of marine hose. This type of activity is known as:
Explicit Collusion
 
Price leadership is a form of ___ in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.
Implicit Collusion
 
The U.S. baseball glove industry is an oligopoly. This means that glove suppliers face a ________________ than a monopoly glove supplier would:
smaller price effect (larger total revenue)
 
In using a prisoners' dilemma game to model the behavior of firms within an oligopoly, we are assuming that each firms seeks to do what?
act in its best interest.
 
An individual firm in an ________________ industry faces a smaller price effect from an additional unit of output than does
a ______________; therefore, the marginal revenue that such a firm calculates is higher. So it will seem to be profitable for
any one company in an oligopoly to increase production, even if that increase reduces the profits of the industry as a whole.
But if everyone thinks that way, the result is that everyone earns a lower profit!
oligopolistic/monopolist
 
Actions by firms that ignore the effects of those actions on the profits of other firms. (420)
noncooperative behavior
 
A relationship among firms in which their decisions significantly affect one another's profits; characteristic of oligopolies.(420)
interdependence
 
The study of behavior in situations of interdependence. Used to explain the behavior of an oligopoly. It has many
applications, not just to economics but also to military strategy, politics, and other social sciences.
game theory
 
_____________ ___________ deals with any situation in which the reward to any one player—the payoff—depends
not only on his or her own actions but also on those of other players in the game. In the case of oligopolistic firms,
the payoff is simply the firm's profit.
Game theory
 
In game theory, a diagram that shows how the payoffs to each of the participants in a two-player game depend on the actions
of both; a tool in analyzing interdependence. (422)
payoff matrix
 
A game based on two premises: (1) each player has an incentive to choose an action that benefits itself at the other player's
expense; and (2) both players are then worse off than if they had acted cooperatively
prisoners' dilemma
 
A price war is evidence of a collapse of a what?
tacit collusion
 
Which word best characterizes the interaction among firms in any oligopoly?
interdependence
 
When shareholders of companies in an oligopolistic industry give over decision making to a board of trustees.
Trust
 
When General Motors announced its prices and Ford and Chrysler then matched, this was an example of ________ in the
domestic automobile industry.
price leadership
 
A group of producers that agree to restrict output in order to increase their joint profits
Cartel
 
A _____________  sets marginal cost equal to marginal revenue.
profit-maximizing monopolist
 
What is marginal revenue? Recall that producing an additional unit of a good has two effects: 1) A ___________ one more
unit is sold, increasing total revenue by the price at which that unit is sold. 2) A _____________ in order to sell one more unit,
the monopolist must cut the market price on all units sold.
positive quantity effect; negative price effect
 
In a cartel, each firm has the incentive to raise prices.
False
 
Tacit collusion will occur if firms expect to compete with each other over a ________ period of time, which results in the
firms _______ output to raise each other's profits.
long, decreasing
 
Oligopolies are characterized by __________: firms compete but possess market power.
imperfect competition
 
A particular strategy that seems to work well in maintaining tacit collusion is what?
tit for tat
 
_________ explains the behavior of an oligopoly
game theory
 
Like a monopolist, each firm in an oligopoly recognizes that selling a greater amount of output creates what two effects?
Price and quantity
 
The ______ effect is smaller oligopolists than for monopolists, which means that MR from selling an additional unit of a
good is higher for oligopolists
price
 
In an oligopoly, which is more profitable, collusion or noncooperative behavior?
Collusion (difficult to achieve, because formal agreements to collude are illegal in many nations)
 
An oligopolist would prefer to have no firms to compete against
True
 
In the classic Prisoners' Dilemma featuring two accomplices in crime, the equilibrium of the game is for both accomplices
to confess. In game theory, this is what would be called a:
Nash equilibrium.
 
In industries characterized by a few firms that dominate the market, product differentiation is MOST likely to occur when firms:
have tacit agreements not to engage in price wars.
 
When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called:
tacit collusion.
 
An HHI in between 1,000-1,800 indicates what?
a somewhat competitive market
 
Actions taken by a firm that attempt to influence the future behavior of other firms
strategic behavior
 
Competition in areas other than price to increase sales, such as new product features and advertising; especially engaged
in by firms that have a tacit understanding not to compete on price
nonprice competition
 
Suppose their is a duopoly and that the two firms in this duopoly collude. The firms have agreed to collude most likely as
a means to do what?
maximize their joint profits
 
When firms in an oligopoly pursue a _______ strategy, this implies that each firm will punish other firms if they cheat on
the tacit agreement that the firms have with one another
tit for tat
 
When a small number of firms realize that they will be competing for an extended period of time, they have a tendency
to elect to ________ with each other
cooperate
 
An HHI less than 1,000 indicates what?
strongly competitive market
 
In this type of economic market structure, there are few firms producing a product and either differentiated or homogenous goods
Oligopoly
 
What type of goods are homogenous goods?
Perfect substitutes
 
James is one of two producers of doodads in the city of Hooville. Because the industry consists of two firms, he is operating in:
a duopoly.
 
An oligopoly with two firms
Duopoly
 
In a oligopoly, each producer has some ________ that enables them to affect market prices, but each of these producers
also competes against other producers in the industry
Market Power
 
In an oligopoly, each firm's behavior affects who?
other firms
 
What is the key aspect of oligopoly?
tension between cooperation and competition (each firm must decide how to behave with other firms)
 
Oligopolies primarily exist, because each firm benefits from what?
increasing returns to scale (this results in a few producers in the industry rather than many small-scale producers
in the industry)
 
What allows economists to measure the degree of concentration in an industry?
HH Index
 
An HHI greater than 1,800 indicates what?
Oligopoly
 
Suppose that, after one month, the cable providers follow a tit-for-tat strategy. Eventually, they will achieve a
tacit collusive equilibrium at which:
both firms set a high price, and each earns $100,000.