ECO100Y5 Lecture Notes - Lecture 11: Nash Equilibrium, Oligopoly

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Oligopoly: an industry that contains 2 or more firms, at least one of which produces a significant portion of the industry"s total output. Oligopolistic firms often make strategic choices; they consider how their rivals are likely to respond to their own actions. Strategic behavior: behavior designed to take account of the reactions of one"s rivals to one"s own behavior. Cooperative (collusive) outcome: a situation in which existing firms cooperate to maximize their joint profits. Non-cooperative outcome: an industry outcome reached when firms maximize their own profit without cooperating with other firms. Game theory: the theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions. When game theory is applied to oligopoly, the players are firms, their game is played in the market, their strategies are their price or output decisions, and the payoffs are their profits.

Related Questions

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

1) When a utility charges homeowners less on a per-unit basis than corporate users it is practicing:

a) first-degree price discrimination

b) second-degree price discrimination

c) third-degree price discrimination

d) markup pricing

e) tying

2) when an electrical utility charges higher prices during the day than at night it is practicing:

a) peak-load pricing

b) first-degree price discrimination

c) second-degree price discrimination

d) third-degree price discrimination

e) fourth-degree price discrimination

3) Gliberace's Fashion Accessories of Las Vegas produces gemstone-encrusted formal wear for sale in Los Angeles and San Francisco subject to total cost TC = 100 + 5(Q_LA + Q_SF). Demand for Gliberace's stones in the two cities is given by Q_LA = 70 - 2P_LA and Q_SF = 55 - P_SF. If Gliberace price discriminates between the two cities, how many stones will it sell in L?

a) 30

b) 36

c) 38

d) 43

e) 48

4) Game theory is useful for understanding oligopoly behavior because:

a) there are so many firms in an oligopoly that all are price takers

b) firms must differentiate their products if they are to remain in business

c) firms recognize that because there are only a few firms mutual interdependence is important

d) without it firms would not be able to maintain cartel agreements

e) it allows firms to develop greater monopoly power

5) A feasible strategy set is:

a) all actions with a nonzero probability of occurring

b) only actions that have a 50 percent or greater probability of occurring

c) actions that result in positive profits for the firm

d) actions hat a decision-maker is willing to take

e) the outcome that the decision-maker chooses

6) In a two-player game in which each player has four options how many outcomes can there be:

a) 1

b) 4

c) 8

d) 16

e) 64

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ECO100Y5 Lecture Notes - Lecture 11: Nash Equilibrium, Oligopoly

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