Which of the following statements is true regarding profit-maximizing markup for a Cournot oligopoly with N identical firms?

The graph below illustrates two demand curves for a firm operating in a differentiated product oligopoly. Initially, the firm charges a price of $60 and produces 10 units of output. One of the demand curves is relevant when rivals match the firm's price changes; the other demand curve is relevant when rivals do not match price changes.

a. Which demand curve is relevant when rivals will match any price change?

b. Which demand curve is relevant when rivals will not match any price change?

c. Suppose the manager believes that rivals will match price cuts but will not match price increases.

(1) What price will the firm be able to charge if it produces 20 units?

(2) How many units will the firm sell if it charges a price of $70?

(3) For what range in marginal cost will the firm continue to charge a price of $60?

b. D1 (the flatter curve)

c(1). 20

c(2). 0

c(3). $20 to $50. At a price of $60, MR = $20 for D2 and MR = $50 for D1. Therefore, $60 will be optimal for MC anywhere in this range.

a. Determine the reaction function for each firm.

Firm 1: Q1= [33.5] - [0.5]Q2

Firm 2: Q2=[31] - [0.5]Q1

b. Calculate each firm's equilibrium output.

Firm 1:

Firm 2:

c. Calculate the equilibrium market price.

$[. ]

d. Calculate the profit each firm earns in equilibrium.

Firm 1:

Firm 2:

b. Q1 = 24; Q2 = 19.

c. P = 150 −2(43) = $64.

d. Π1 = $1,152; Π2 = $722.

a. What is the follower's reaction function?

b. Determine the equilibrium output level for both the leader and the follower.

c. Determine the equilibrium market price.

d. Determine the profits of the leader and the follower.

b. QL = 1,800; QF = 500.

c. P = 18,000 −5(2,300) = $6,500.

d. ΠL = $8,100,000; ΠF = $1,250,000.

a. Determine the equilibrium level of output in the market.

b. Determine the equilibrium market price.

c. Determine the profits of each firm.

b. P = MC = $100.

c. Each firm earns zero economic profits.

a. Oil production. Each firm produces output independently and the market price is determined by the total amount produced.

b. Diamond production. DeBeers is the leader that sets diamond production, and smaller firms follow with their own levels of production.

c. Competitive bidding by identical landscaping contractors. The landscaping contractors bidding the lowest fee wins the contract.

b. Stackelberg oligopoly

c. Bertrand oligopoly

a. Cournot duopoly.

b. Sweezy oligopoly.

b. There likely would be no change in output or profits.

To achieve its goal of stable and fair oil prices, what must OPEC do to maintain the price of oil at its desired level?

Why might this be difficult for OPEC to do?

b. Member profits will be lower, so each member may be more willing to cheat on the collusive production levels.

If this legislation is passed, by how much should you expect your profits to change?

Absent the legislation, this homogeneous product Bertrand oligopoly will result in marginal cost pricing and zero profits. Under the legislation, you will earn a profit of $70 − $50 = $20 on each unit sold. Your 20 percent of the contract amounts to 20 units, so your total profits under the congresswoman's plan is $400 compared to the $0 you will earn under cutthroat Bertrand competition. Therefore, you should support the legislation.

Use the following, one shot, normal-form game to answer the accompanying questions.

a. Find each player's dominant strategy.

Player 1's dominant strategy: [ Player 1 has no dominant strategy ]

Player 2's dominant strategy: [ Player 2 has no dominant strategy ]

b. Find each player's secure strategy.

Player 1's secure strategy: [ B ]

Player 2's secure strategy: [ E ]

c. Find the Nash equilibrium for each player.

Player 1's Nash equilibrium: [ B ]

Player 2's Nash equilibrium: [ E ]

b. Given the worst possible scenario, the highest guaranteed payoff for Player 1 is strategy B and the highest guaranteed payoff for Player 2 is strategy E.

c. Nash equilibrium states, given the strategies of other players, no player can improve their payoff by unilaterally changing their own strategy. Therefore, Nash equilibrium for Player 1 is strategy B and Nash equilibrium for Player 2 is strategy E.

Player 2 StrategyCDEFPlayer 1 - A - 6, 147, 1118, 2010, 19

B - 12, 515, 17, 2516, 17

a. What is player 1's optimal strategy? strategy A

b. Determine player 1's equilibrium payoff. 18

b. Player 1's equilibrium payoff is 18.

Player 2 StrategyCDEFPlayer 1 - A - 23, 2114, 519, 158, 14

B - 7, 2324, 1012, 1419, 17

a. What is player 1's optimal strategy? strategy A

b. Determine player 1's equilibrium payoff. 23

b. Player 1's equilibrium payoff is 23.

Player 2 StrategyCDPlayer 1

A - 10, 1060, -5

B - -5, 6050, 50

a. Identify the one-shot Nash equilibrium. (A,C)

b. Suppose the players know this game will be repeated exactly three times. Can they achieve payoffs that are better than the one-shot Nash equilibrium? (NO)

c. Suppose this game is infinitely repeated and the interest rate is 5 percent. Can the players achieve payoffs that are better than the one-shot Nash equilibrium? (YES)

d. Suppose the players do not know exactly how many times this game will be repeated, but they do know that the probability the game will end after a given play is θ. If θ is sufficiently low, can players earn more than they could in the one-shot Nash equilibrium? (YES)

b. No. This is a finitely played game with 3 rounds. Players know that round 3 is the last round, so they will treat that as a one shot game (or as if there is no tomorrow). Therefore, they both cheat in round 3. Because they know they will both cheat in round 3 and that they can't punish them for it in a future round, they cheat in round 2. This continues to unravel and they cheat in every round.

c. If firms adopt the trigger strategies outlined in the text, higher payoffs can be achieved if (πCheat − πCoop)/(πCoop − πN) ≤ (1/i) . Here, πCheat = 60, πCoop = 50, πN = 10, and the interest rate is i = .05. Since (πCheat − πCoop)/(πCoop − πN) = (60 − 50)/(50 − 10) = 0.25 < (1/i) = 20.00, each firm can indeed earn a payoff of 50 via the trigger strategies.

d. Yes. With θ sufficiently low, this resembles the infinitely repeated game.

a. Find the Nash equilibrium outcomes to this game. ($0, $25) and ($20, $20)

b. Which of the equilibrium outcomes is most reasonable? ($20, $20)

b. ($20, $20) is the only subgame perfect equilibrium; the only reason ($0, $25) is a Nash equilibrium is because Player 2 threatens to play left if 1 plays left. This threat isn't credible.

Two combinations of pricing strategies are equilibria of the pricing game described above when played once. What are they?

Which of the following mechanisms might solve the dilemma of choosing a pricing strategy?

Albertsons and Kroger charge the regular price.Correct

Albertsons charges the sale price and Kroger charges the regular price.Correct

Albertsons charges the regular price and Kroger charges the sale price. Correct

B. Guarantee Everyday low prices

The savings from letting the union use its own pen and ink to craft the document are most likely small compared to the advantage you would gain by making a take-it-or-leave-it offer.

If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a $6 million profit. Determine your optimal pricing strategy if you and your rival believe that the new Highlander is a "special edition" that will be sold only for one year. (Price low)

Would your answer differ if you and your rival were required to resubmit price quotes year after year and if, in any given year, there was a 70 percent chance that Toyota would discontinue the Highlander? (No - a collusive outcome cannot be sustained as a Nash equilibrium.)

b. No - a collusive outcome cannot be sustained as a Nash equilibrium.

1. If neither country imposes a new tariff, social welfare in Japan's economy will remain at $10 billion and social welfare in the United States will remain at $50 billion.

2. If both countries impose a new tariff, welfare in the United States declines to $49.1 billion and welfare in Japan declines to $9.5 billion.

3. If Japan does not impose a tariff but the United States does, projected welfare in Japan is $8.9 billion while welfare in the United States is $52.5 billion.

4. Finally, if the U.S. does not impose a tariff but Japan does, welfare is projected at $48.2 billion in the United States and $11.4 billion in Japan.

Determine the Nash equilibrium outcome when policy makers in the two countries simultaneously but independently make tariff decisions in a myopic (one-shot) setting. - (49.1, 9.5)

Is it possible for the two countries to improve their social welfare if they are able to "agree" to different strategies? (Yes - they could both be better off if they are able to "agree" on their strategies.)

b. Yes - they could both be better off if they are able to "agree" on their strategies.

a. It is an equilibrium for your company to pay the $5 million in lobbying expenses and your rivals pay nothing? (T or F)

b. It is an equilibrium for your company to pay nothing and your rivals to collectively pay the $5 million in lobbying expenses? (T or F)

c. It is an equilibrium for each company to pay $1 million in lobbying expenses? (T or F)

d. Which of the following is the natural "focal point" of this game?

b. T

c. T

d. Each company pays $1 million in lobbying expenses.

If Congress passes the tariff, each firms gains $6 million in "extra" profit (= $30/5). If your firm commits to not spending any money on lobbying, one or more of the other firms in the industry would have an incentive to collectively spend $5 million on lobbying. Under this scenario, your "optimal" profits are $6, compared to profits of $1 million when you pay $5 million on lobbying. However, if your rivals knew that you were willing to pay the entire lobbying bill, your threat is not credible and your competitors would not be inclined to spend any money on lobbying. More formally, this is a coordination game with multiple Nash equilibria. In one of the equilibria, your firm spends nothing on lobbying and one or more competitors collectively spend $5 million on lobbying such that the proposed tariff passes. Another equilibrium occurs when your rival firms spend nothing on lobbying activities and you pay the entire $5 million in lobbying expenses. The natural "focal point" is for each firm to agree to spend $1 million on lobbying. This results in each of the five firms earning a profit (net of lobbying costs) of $5 million.

**Sweezy oligopoly**

**contestable market**

**Bertrand oligopoly**

An industry in which (1) there are few firms serving many consumers, (2) firms produce identical products at a constant marginal cost, (3) firms compete in price and react optimally to competitors’ prices, (4) consumers have perfect information and there are no transaction costs, and (5) barriers to entry exist.

**Stackelberg oligopoly`**

An industry in which (1) there are few firms serving many consumers, (2) firms produce either differentiated or homogeneous products, (3) a single firm (the leader) chooses an output before rivals select their outputs, (4) all other firms (the followers) take the leader’s output as given and select outputs that maximize profits given the leader’s output, and (5) barriers to entry exist.

**Isoprofit curve**

**simultaneous-move game**

Game in which each player makes decisions without knowledge of the other players’ decisions.

**sequential-move game**

Game in which one player makes a move after observing the other player’s move.

**one-shot game**

**repeated game**

Amber and Tom own the only two dry cleaning businesses. Although they have different constant marginal costs, they both survive continued competition. Amber and Tom do *not* constitute a:

A market is *not* contestable if

Which of the following is *not* true?

In the accompanying game, firms 1 and 2 must independently decide whether to charge high or low prices.

Firm 1Firm 2 High PriceLow PriceHigh Price(10,10)(5,−5)Low Price(5,−5)(0,0)

The accompanying figure presents information for a one-shot game.

Firm AFirm B Low PriceHigh PriceLow Price(2,2)(10,−8)High Price(−8,10)(6,6)

If this one-shot game is repeated 100 times, the Nash equilibrium payoffs of the players will be ________________ in each period.

Refer to the accompanying normal-form game of price competition.

Firm AFirm B CDA50, 50500−x, 200B100, 500−x50, 50

For what values of x is strategy D strictly dominant for firm B?

Refer to the normal-form game of price competition shown below.

Firm AFirm B CDA0,75,2B5,10,8

Which of the following represents firm B's strategies?

The accompanying graph depicts a normal-form game of price competition.

Firm AFirm B Low PriceHigh PriceLow Price0,0(10, −2)High Price(−10, 10)(8, 8)

Suppose both firms agreed to charge a high price, but firm A deviates and charges a low price. What is the present value of A's payoff from cheating?

The accompanying graph depicts a normal-form game of price competition.

Firm AFirm B Low PriceHigh PriceLow Price0,025,-5High Price-5,2510,10

Suppose the game is infinitely repeated, and the interest rate is 5 percent. Both firms agree to charge a high price, provided no player has charged a low price in the past. If both firms stick to this agreement, then the present value of firm B's payoffs is

Which of the following is *not* an important determinant of collusion in pricing games?

Refer to the accompanying normal-form game of advertising depicted here.

Firm AFirm B AdvertiseDo Not AdvertiseAdvertise$0, $0$175, −$100Do Not Advertise−$100, $175$125, $125

Suppose there is a 90 percent chance that the advertising game shown above will end in the next period. The collusive agreement {(not advertise, not advertise)} is