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Exam 17: Business Strategy and Oligopoly

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Question 91

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Self-interest usually dictates what kind of outcome for the players in a prisoners' dilemma game?

A) sub-optimal
B) optimal
C) indeterminate
D) symmetrical

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Question 92

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When deciding whether the market is an oligopoly or not, there is no magical number of firms that defines an oligopoly.

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Question 93

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The collective action problem (where everyone is better off if action is coordinated, but free riding on the actions of others is possible) is an example of a prisoners' dilemma game.

When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate.

Table 16-4 In the following duopoly game, the two firms can either set the price of their product high or low.In this market, customers are very price sensitive: when one firm sets a low price it steals the majority of customers from its competitor.The game is represented in the table below. $\begin{array}{|c|c|c|c|}\hline&&\text { Firm B }\\&&\text { High Price }&\text { Low Price }\\\hline \text { Firm A }&\text { High Price }&\text { Firm A gets \$500 } & \text { Firm A get \$300 } \\&& \text { Firm B gets \$500 } & \text { Firm B gets \$600 } \\\hline &\text { Low Price }&\text { Firm A gets \$600 } & \text { Firm A gets \$400 } \\&&\text { Firm B gets \$300 } & \text { Firm B gets \$400 } \\\hline\end{array}$ -Refer to table 16-4.Profit for each firm would be maximised if:

Society will always be better off if the prisoners' dilemma game is repeated numerous times in an oligopoly market.

Table 16-1 The table below shows the total demand for viewing a rare penguin species at a local reserve.Ecotour companies have to build discreet viewing hides for tourists to view the penguins.Each ecotour company has to pay a fixed fee of $5000 for the right to build on the reserve.Assume that hides can be supplied to tourists at zero marginal cost.Tickets are sold to tourists to use the viewing hides. $\begin{array}{|c|c|}\hline \text { Quantity (Visits) } & \text { Price(\$ ticket) } \\\hline 0 & 48 \\\hline 2000 & 36 \\\hline 4000 & 24 \\\hline 6000 & 12 \\\hline 8000 & 8 \\\hline 10000 & 4 \\\hline 12000 & 0 \\\hline\end{array}$ $\begin{array}{|c|c|c|}\hline \text { Quantity (Visits) } & \text { Price(\$ ticket) } & \text { Revenue } \\\hline 0 & 12 & 0 \\\hline 1000 & 10 & 10 \mathrm{k} \\\hline 2000 & 8 & 16 \mathrm{k} \\\hline 3000 & 6 & 18 \mathrm{k} \\\hline 4000 & 4 & 16 \mathrm{k} \\\hline 5000 & 2 & 10 \mathrm{k} \\\hline 6000 & 0 & 0 \\\hline\end{array}$ Any firm can change tickets by steps of 500 only.Any 500 step of quantity is assumed to be sold at the midpoint of the two prices (eg.3500 tickets would be sold for $5) -Refer to Table 16-1.Assume that there are two profit-maximising ecotourist companies operating in this market.Further assume that they are able to collude on the price of the tickets they sell.As part of their collusive agreement, they decide to take an equal share of the market.How much profit will each company make?

The best way for oligopolists to increase their profits is to:

When an oligopoly grows very large, the:

As a group, oligopolists would always be better off if they would act collectively:

The prisoners' dilemma provides insights into how easy it is to maintain cooperation.

OPEC is able to raise the price of its product by:

Table 16.7 The USA and China are locked in negotiations to cut emissions.The following table represents the pay-offs from cutting emissions and continuing to pollute: -Refer to Table 16-7.The Nash equilibrium for this game is for:

A prisoners' dilemma game demonstrates how cooperative action is often not rational even though:

When oligopolists collude and act like a monopoly, they charge a price above marginal cost.When they act independently, they charge a price equal to marginal cost.

Suppose three firms are in an oligopoly and each firm has a dominant production strategy.Would it be possible to determine the Nash Equilibrium solely from knowledge about the firms' dominant strategies? Suppose one of the three firms is irrational and plays a strategy other than its dominant strategy.Is it possible to determine the best course of action of the other two firms?

The game that oligopolists play in trying to reach the monopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma.

Table 16-4 In the following duopoly game, the two firms can either set the price of their product high or low.In this market, customers are very price sensitive: when one firm sets a low price it steals the majority of customers from its competitor.The game is represented in the table below. $\begin{array}{|c|c|c|c|}\hline&&\text { Firm B }\\&&\text { High Price }&\text { Low Price }\\\hline \text { Firm A }&\text { High Price }&\text { Firm A gets \$500 } & \text { Firm A get \$300 } \\&& \text { Firm B gets \$500 } & \text { Firm B gets \$600 } \\\hline &\text { Low Price }&\text { Firm A gets \$600 } & \text { Firm A gets \$400 } \\&&\text { Firm B gets \$300 } & \text { Firm B gets \$400 } \\\hline\end{array}$ -Refer to table 16-4.The Nash-equilibrium in this market is:

Very often, the reason that players can solve the prisoners' dilemma game and reach the most profitable outcome is that: