Chapter 18

Question 1

what is Concentration ratio

Answer 1

Percentage of total output in the market supplied by the four largest firms

Question 2

The higher the concentration ratio,

Answer 2

the less competition

Question 3

oligopoly

Answer 3

A market structure in which only a few sellers offer similar or identical products
(high concentration ratio)

Question 4

Strategic behavior in oligopoly:

Answer 4

• A firm’s decisions about P or Q can affect other firms and cause them to react
• The firm will consider these reactions when making decisions
• Oligopolistic firms are interdependent in a way that competitive firms are not.

Question 5

In making its production decision, each firm in an oligopoly should consider how…

Answer 5

how its decision might affect the production decisions of the other firms in the market

Question 6

duopoly:

Answer 6

an oligopoly with two firms

Question 7

One possible duopoly outcome is..

Answer 7

collusion

Question 8

Collusion is

Answer 8

Agreement among firms in a market about quantities to produce or prices to charge

Question 9

Cartel is

Answer 9

A group of firms acting in unison

Question 10

Cartel must agree not only on the total level of production but also …

Answer 10

on the amount produced by each member.

Question 11

a larger market share means

Answer 11

larger profit.

Question 12

Anti- trust laws prohibit..

Answer 12

explicit agreements among oligopolists as a matter of public policy.

Question 13

In the absence of a binding agreement,

Answer 13

monopoly outcome is unlikely

Question 14

By pursuing their individual self-interest when deciding how much to produce, the duopolists..

Answer 14

• Produce a total quantity greater than the monopoly quantity
• Charge a price lower than the monopoly price
• Earn total profit less than the monopoly profit

Question 15

Nash equilibrium

Answer 15

• Economic actors interacting with one another, each choose their best strategy
• Given the strategies that all the other actors have chosen

Question 16

When firms in an oligopoly individually choose production to maximize profit
(Q)

Answer 16

Produce Q
Greater than monopoly Q
Less than competitive Q

Question 17

When firms in an oligopoly individually choose production to maximize profit (P)

Answer 17

The price is
Less than the monopoly P
Greater than the competitive P = MC

Question 18

most profit will happen when duopoly..

Answer 18

acts as a monopoly

Question 19

Increasing output has two effects on a firm’s profits:

Answer 19

• Output effect
• Price effect

Question 20

Output effect:

Answer 20

If P > MC, increasing output raises profits

Question 21

Price effect:

Answer 21

Raising output increases market quantity, which reduces price and reduces profit on all units sold

Question 22

As the number of sellers in an oligopoly increases:

Answer 22

• The price effect becomes smaller
• The oligopoly looks more and more like a competitive market
• P approaches MC
• The market quantity approaches the socially efficient quantity
• Another benefit of international trade

Question 23

Prisoners’ dilemma

Answer 23

Particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Question 24

Dominant strategy

Answer 24

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

Cooperation between the prisoners is difficult to maintain because cooperation is individually irrational

Question 25

When oligopolies form a cartel
In hopes of reaching the monopoly outcome,

Answer 25

they become players in a prisoners’ dilemma.

Question 26

Oligopolies have trouble maintaining monopoly profits

Answer 26

Monopoly outcome is jointly rational, but each oligopolist has an incentive to cheat. Self-interest makes it hard for the oligopolists to maintain the cooperative outcome.

Question 27

Noncooperative oligopoly equilibrium May be bad for society

Answer 27

Examples: Arms race game, Common resource game

Question 27

Noncooperative oligopoly equilibrium
May be bad for oligopolists because

Answer 27

Prevents them from achieving monopoly profits

Question 28

Noncooperative oligopoly equilibrium
May be good for society

Answer 28

Quantity and price – closer to optimal level

Question 29

Policymakers try to induce firms in an oligopoly to

Answer 29

compete rather than cooperate
to
Move the allocation of resources closer to the social optimum

Question 30

Controversies over Antitrust Policy

Answer 30

Used to condemn some business practices whose effects are not obvious
Resale price maintenance
Predatory pricing
Bundling

Question 31

Resale price maintenance (fair trade)

Answer 31

Require retailers to charge customers a given price
Might seem anticompetitive
Prevents the retailers from competing on price

Question 32

Predatory Pricing

Answer 32

• Charge prices that are too low
• Anticompetitive
• Price cuts may be intended to drive other firms out of the market

Question 33

Skeptics

Answer 33

• Predatory pricing — not a profitable strategy
• Price war — to drive out a rival’ prices are driven below cost

Question 34

Bundling

Answer 34

• Offer two goods together at a single price
• Expand market power

Question 35

Skeptics

Answer 35

• Cannot increase market power by binding two goods together
• Form of price discrimination
• Bundling may increase profit