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Exam 17: Oligopoly

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Question 101

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Table 17-14 Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits: Exxon Drill one well Drill two wells -Refer to Table 17-14. Does Exxon have a dominant strategy? If so, describe it.

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Yes, regardless of BP's strate...

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Question 102

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How does free trade relate to the theory of oligopoly?

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Free trade increases the number of produ...

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Question 103

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Table 17-10 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: $\begin{array}{|l|l|l|}\hline \begin{array}{l}\text { Quantity } \\\text { (in gallons) }\end{array} & \text { Price } & \begin{array}{l}\text { Total Revenue } \\\text { (and Total Profit) }\end{array} \\\hline 0 & \$ 12 & \$ 0 \\\hline 1 & \$ 11 & \$ 11 \\\hline 2 & \$ 10 & \$ 20 \\\hline 3 & \$ 9 & \$ 27 \\\hline 4 & \$ 8 & \$ 32 \\\hline 5 & \$ 7 & \$ 35 \\\hline 6 & \$ 6 & \$ 36 \\\hline 7 & \$ 5 & \$ 35 \\\hline 8 & \$ 4 & \$ 32 \\\hline 9 & \$ 3 & \$ 27 \\\hline 10 & \$ 2 & \$ 20 \\\hline 11 & \$ 1 & \$ 11 \\\hline 12 & \$ 0 & \$ 0 \\\hline\end{array}$ -Refer to Table 17-10. Discuss the difference between the monopoly outcome and the Nash equilibrium.

Table 17-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure. ​ -Refer to Table 17-6. If both stores follow a dominant strategy, Lopes's annual profit will grow by

Tying can be thought of as a form of price discrimination.

Any market that is served by an oligopoly is in effect served by a monopoly.

One way that public policy encourages cooperation among oligopolists is through antitrust law.

Table 17-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure. ​ -Refer to Table 17-6. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to

Table 17-1 Imagine a small town in which only two residents, Sydney and Matthew, own wells that produce safe drinking water. Each week Sydney and Matthew work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Sydney and Matthew can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue and Total Profit } \\\text { (Dollars) }\end{array} \\\hline 0 & 48 & 0 \\\hline 90 & 44 & 3,960 \\\hline 180 & 40 & 7,200 \\\hline 270 & 36 & 9,720 \\\hline 360 & 32 & 11,520 \\\hline 450 & 28 & 12,600 \\\hline 540 & 24 & 12,960 \\\hline 630 & 20 & 12,600 \\\hline 720 & 16 & 11,520 \\\hline 810 & 12 & 9,720 \\\hline 900 & 8 & 7,200 \\\hline 990 & 4 & 3,960 \\\hline 1,080 & 0 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Sydney and Matthew from operating as a monopoly. How many gallons of water will be produced and sold once Sydney and Matthew reach a Nash equilibrium?

Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the

A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the bulbs to customers for $2 per bulb. This practice is known as tying.

Table 17-7 Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies. -Refer to Table 17-7. If this game is played only once, then the most likely outcome is that

Outline the purpose of antitrust laws. What do they accomplish?

To function as a monopoly, OPEC and other cartels rely on __________ among members.

If duopoly firms that are not colluding were able to successfully collude, then

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.

The decisions of the US and Soviet Union to build nuclear weapons is much like the prisoners' dilemma.

Define collusion.

Table 17-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure. ​ -Refer to Table 17-6. Pursuing its own best interest, Lopes will

Table 17-10 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: $\begin{array}{|l|l|l|}\hline \begin{array}{l}\text { Quantity } \\\text { (in gallons) }\end{array} & \text { Price } & \begin{array}{l}\text { Total Revenue } \\\text { (and Total Profit) }\end{array} \\\hline 0 & \$ 12 & \$ 0 \\\hline 1 & \$ 11 & \$ 11 \\\hline 2 & \$ 10 & \$ 20 \\\hline 3 & \$ 9 & \$ 27 \\\hline 4 & \$ 8 & \$ 32 \\\hline 5 & \$ 7 & \$ 35 \\\hline 6 & \$ 6 & \$ 36 \\\hline 7 & \$ 5 & \$ 35 \\\hline 8 & \$ 4 & \$ 32 \\\hline 9 & \$ 3 & \$ 27 \\\hline 10 & \$ 2 & \$ 20 \\\hline 11 & \$ 1 & \$ 11 \\\hline 12 & \$ 0 & \$ 0 \\\hline\end{array}$ -Refer to Table 17-10. Briefly explain why each duopolist earns a lower profit at the Nash equilibrium than if they cooperated to produce the monopoly output.