chapter 12

Question 1

Competition policies

Answer 1

forbid agreements between competitors that reduce

quantities or raise prices (for example cartels, price fixing).

Question 2

Resale price maintenance

Answer 2

A manufacturer imposes lower limits on the prices retailers can charge.

Question 3

Predatory pricing

Answer 3

A firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later.

Question 4

Tying

Answer 4

A manufacturer bundles two products together and sells them for one price.

Question 5

An oligopoly

Answer 5

is a market structure in which only a few sellers offer similar or identical products.

Question 6

In oligopolistic markets,

Answer 6

there might be many firms, but sales are dominated

by a small number of firms.

Question 7

The market share is

Answer 7

the percent of total sales in an industry generated by a particular company, calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period

Question 8

The concentration ratio

Answer 8

is the proportion of total market share accounted for

by a particular number of firms.

Question 9

The Herfindahl-Hirschman Index (HHI) is

Answer 9

a measure of market concentration to estimate the degree of competition within an industry.

Question 10

Oligopolistic firms are interdependent

Answer 10

• The actions of any one seller in the market can have a large impact on the profits of all the other sellers.
• Firms also consider actions and reactions of rivals.

Question 11

A duopoly is

Answer 11

an oligopoly with only 2 members.

Question 12

Collusion is

Answer 12

an agreement among firms in a market about quantities to produce or prices to charge.

Question 13

A cartel is

Answer 13

a group of firms acting in unison.

Question 14

a Nash equilibrium. (when two firms produce the same quantity + higher profit)

Answer 14

• A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen.
• No economic actor has an incentive to make a different decision

Question 15

Game theory is

Answer 15

the study of how people behave in strategic situations.

Question 16

Strategic decisions are

Answer 16

those in which each person, in deciding what actions to take, must consider how others might respond to that action.

Question 17

A payoff matrix is

Answer 17

a table showing the possible combination of outcomes (payoffs) depending on the strategy chosen by each player.

Question 18

A dominant strategy is

Answer 18

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Question 19

The prisoner’s dilemma is a type of ”game” in which:

Answer 19

1. Each player has an incentive to choose an action that benefits itself at the other player’s expense.
2. When both players act in this way, both are worse off than if they had acted cooperatively.

(illustrates why cooperation is difficult to maintain even when it is mutually beneficial.)

Question 20

examples of the prisoner’s dilemma

Answer 20

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Question 21

Tacit collusion:

Answer 21

when firm behavior results in a market outcome that appears to be anti-competitive but has arisen because firms acknowledge they are interdependent

Question 22

Simultaneous move games:

Answer 22

Games where players make decisions independently and must determine their strategies without knowledge of what 3the other has chosen

Question 23

Sequential move games:

Answer 23

Games where players make decisions in sequence with some players able to observe the strategic choices of others.

Question 24

Firm X has a first-mover advantage:

Answer 24

By launching the liquid version, firm Y will be forced to choose the powder version and firm
X will have the highest profits.

Question 25

Entry barriers

Answer 25

limit new competitors from entering the market.