ECON10004 Study Guide - Final Guide: Game Theory, Oligopoly

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orangemole587

25 May 2018

School

University of Melbourne

Department

Economics

Course

ECON10004

Professor

John Freebairn, Eik Swee

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Each firm in an oligopolistic market must act strategically

Markets with only a few sellers:

Key feature of oligopoly is tension between cooperation and self

interest

Oligopolists are best off when they cooperate and act like a monopolist, but each oligopolist cares

about only its own profit

Collusion = agreement among firms over production and price

Cartel = group of firms acting in unison

Once a cartel is formed, the market is in effect served by a monopoly

Cartel must also agree on amount produced by each member

Equilibrium for an oligopoly:

Total quantity greater than monopoly quantity, less than competitive quantity

Price lower than monopoly price, greater than competitive price

Earn total profit less than monopoly price

If duopolists individually pursue their self

interest, they produce:

Effect of oligopoly size:

Output effect

price > MC so selling more will raise price

Price effect

increasing output will increase total amount sold which will lower price and profit

At any time, each firm weighs two effects:

If output effect > price effect, firm will increase production

If output effect < price effect, firm should reduce production

As oligopoly grows in size and becomes more similar to a competitive market, magnitude of price

effect falls so price approaches MC and quantity produced approaches socially efficient level

Game theory and the economics of cooperation:

Oligopolists play a game similar to prisoners' dilemma

Self

interest makes it difficult for oligopolists to maintain cooperative outcome

Application to Oligopoly

Monday, 22 May 2017 11:24 PM

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Document Summary

Key featu(cid:396)e of oligopoly is te(cid:374)sio(cid:374) (cid:271)et(cid:449)ee(cid:374) (cid:272)oope(cid:396)atio(cid:374) a(cid:374)d self-i(cid:374)te(cid:396)est. Oligopolists a(cid:396)e (cid:271)est off (cid:449)he(cid:374) they (cid:272)oope(cid:396)ate a(cid:374)d a(cid:272)t like a (cid:373)o(cid:374)opolist, (cid:271)ut ea(cid:272)h oligopolist (cid:272)a(cid:396)es a(cid:271)out o(cid:374)ly its o(cid:449)(cid:374) p(cid:396)ofit. Collusio(cid:374) = ag(cid:396)ee(cid:373)e(cid:374)t a(cid:373)o(cid:374)g fi(cid:396)(cid:373)s o(cid:448)e(cid:396) p(cid:396)odu(cid:272)tio(cid:374) a(cid:374)d p(cid:396)i(cid:272)e. Ca(cid:396)tel = g(cid:396)oup of fi(cid:396)(cid:373)s a(cid:272)ti(cid:374)g i(cid:374) u(cid:374)iso(cid:374) O(cid:374)(cid:272)e a (cid:272)a(cid:396)tel is fo(cid:396)(cid:373)ed, the (cid:373)a(cid:396)ket is i(cid:374) effe(cid:272)t se(cid:396)(cid:448)ed (cid:271)y a (cid:373)o(cid:374)opoly. Ca(cid:396)tel (cid:373)ust also ag(cid:396)ee o(cid:374) a(cid:373)ou(cid:374)t p(cid:396)odu(cid:272)ed (cid:271)y ea(cid:272)h (cid:373)e(cid:373)(cid:271)e(cid:396) If duopolists i(cid:374)di(cid:448)idually pu(cid:396)sue thei(cid:396) self-i(cid:374)te(cid:396)est, they p(cid:396)odu(cid:272)e: Total (cid:395)ua(cid:374)tity g(cid:396)eate(cid:396) tha(cid:374) (cid:373)o(cid:374)opoly (cid:395)ua(cid:374)tity, less tha(cid:374) (cid:272)o(cid:373)petiti(cid:448)e (cid:395)ua(cid:374)tity. P(cid:396)i(cid:272)e lo(cid:449)e(cid:396) tha(cid:374) (cid:373)o(cid:374)opoly p(cid:396)i(cid:272)e, g(cid:396)eate(cid:396) tha(cid:374) (cid:272)o(cid:373)petiti(cid:448)e p(cid:396)i(cid:272)e. At a(cid:374)y ti(cid:373)e, ea(cid:272)h fi(cid:396)(cid:373) (cid:449)eighs t(cid:449)o effe(cid:272)ts: Output effe(cid:272)t - p(cid:396)i(cid:272)e > mc so selli(cid:374)g (cid:373)o(cid:396)e (cid:449)ill (cid:396)aise p(cid:396)i(cid:272)e. P(cid:396)i(cid:272)e effe(cid:272)t - i(cid:374)(cid:272)(cid:396)easi(cid:374)g output (cid:449)ill i(cid:374)(cid:272)(cid:396)ease total a(cid:373)ou(cid:374)t sold (cid:449)hi(cid:272)h (cid:449)ill lo(cid:449)e(cid:396) p(cid:396)i(cid:272)e a(cid:374)d p(cid:396)ofit. If output effe(cid:272)t > p(cid:396)i(cid:272)e effe(cid:272)t, fi(cid:396)(cid:373) (cid:449)ill i(cid:374)(cid:272)(cid:396)ease p(cid:396)odu(cid:272)tio(cid:374) If output effe(cid:272)t < p(cid:396)i(cid:272)e effe(cid:272)t, fi(cid:396)(cid:373) should (cid:396)edu(cid:272)e p(cid:396)odu(cid:272)tio(cid:374)

Related Questions

2. Deviating from the collusive outcome

Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm.

Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.)

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together.

Monopoly Outcome PRICE (Dollars per can)QUANTITY (Thousands of cans of beer)DemandMRMC = ATC

When they act as a profit-maximizing cartel, each company will producecans and chargeper can. Given this information, each firm earns a daily profit of, so the daily total industry profit in the beer market is.

Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement.

Maysâs deviation from the collusive agreement causes the price of a can of beer to toper can. Mays's profit is now, while McCoveyâs profit is now. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.

limedog21

1. In the market structure called monopolistic competition (Points : 1.25)

a) Very little advertising will occur
b) There are only a few companies in the industry
c) These industries offer only few products
d) None of the above

Question 2.2. In a purely competitive industry (Points : 1.25)

a) Products are differentiated
b) A large amount of advertising occurs
c) Price will be higher than in other market structure
d) None of the above

Question 3.3. A used lawn mower is an example of (Points : 1.25)

a) a search good
b) an experience good
c) a homogenous good
d) None of the above

Question 4.4. The problem of asymmetric can be overcome by (Points : 1.25)

a) Reputation
b) Brand name
c) Warranties
d) All of the above
e) None of the above

Question 5.5. A monopolist will always charge a higher price than a purely competitive industry (Points : 1.25)

True
False

Question 6.6. Given TC = 10 + 5Q, Ed = -2, what price will be a monopolist charge? (Points : 1.25)

a) 5
b) 12
c) 8
d) 10
e) None of the above

Question 7.7. The monopolist determines optimal output the same way as does a purely competitive industry (Points : 1.25)

True
False

Question 8.8. Given a company with some monopoly power and Ed=3, the optimal markup is (Points : 1.25)

a) 33%
b) 50%
c) 72%
d) None of the above

Question 9.9. Given the information given in 8 above and MC=6, gross margin is (Points : 1.25)

a) 50%
b) 42%
c) 33%
d) 38%
e) None of the above

Question 10.10. You would expect gross margin in a store brand to be higher than gross margin in a brand name product (Points : 1.25)

True
False

Question 11.11. You expect products that are less price elastic to have lower gross margins than products with greater price elasticity (Points : 1.25)

True
False

Question 12.12. A company with large gross margins will have large profits (Points : 1.25)

True
False

Question 13.13. If a company is incurring losses, it should stop operating (Points : 1.25)

a) Yes
b) No
c) Not enough information

Question 14.14. A monopolist may not charge the highest price they could get (at MR=MC) in the short run (Points : 1.25)

True
False

Question 15.15. All price discrimination is illegal (Points : 1.25)

True
False

Question 16.16. A company that faces different levels of demand (different price elasticities) (Points : 1.25)

a) Must charge the same price to all customers
b) is violating the law
c) Can charge different price to customers

Question 17.17. Patents allow a company the exclusive right to act as a monopolist (Points : 1.25)

a) This is not justified economically
b) It is justified economically

Question 18.18. The kinked demand curve model was developed to help explain: (Points : 1.25)

a) fluctuations of prices in pure competition
b) rigidities observed in prices in oligopolistic industries
c) fluctuations observed in prices in oligopolistic industries
d) all of the above
e) none of the above

Question 19.19. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the _____ of all firms is identical. (Points : 1.25)

a) average total cost
b) average profit
c) marginal profit
d) marginal cost
e)marginal revenue

Question 20.20. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include_________________. (Points : 1.25)

a) number and size distribution of sellers
b) size and frequency of orders
c) product heterogeneity
d) a and b only
e) a, b, and c

skydolphin584

A consultant has advised Consolidated Fish, Inc., a perfectly competitive firm, that it should cut back its production in order to increase its profits. We can conclude from this that

CF's total costs must be greater than its total revenues.

CF's marginal cost must be greater than the price of its product.

CF's costs are increasing at a rate less than its revenues.

fixed costs are not being covered and CF should shut down.

If marginal cost is equal to marginal revenue

the firm should hold output constant.

the firm should expand output.

there is no way to determine if the firm should expand output, contract output, or hold output constant.

the firm should contract output.

Which statement is true?

The minimum point on the firm's marginal cost curve is the shutdown point.

The minimum point on the firm's average variable cost curve is the shutdown point.

The minimum point on the firm's average total cost curve is the shutdown point.

The minimum point on the firm's marginal cost curve is the break-even point.

As output expands beyond the break-even point, the vertical distance between the AVC and ATC will

remain constant.

get smaller.

get larger.

Total revenue divided by output equals

average variable cost.

marginal cost.

price.

average total cost.

A monopoly firm selling mustache wax to vain men in a small town is currently maximizing profits by charging a price of $5. It follows that the marginal cost of mustache wax

is equal to $5.

is greater than $5.

is less than $5.

None of these choices are true.

A firm can sell 14 units at $18, but to sell 15 units, the firm must cut the price to $17. The marginal revenue derived from selling the 15th unit is

-$18

$17

If total revenue is increasing as output is rising, then

marginal revenue must be greater than zero.

marginal revenue must be less than zero.

marginal revenue must be equal to zero.

price must be increasing.

Firms that had virtual monopolies, that is control over at least 80 percent of industry production, because of control over an essential resource include all of the following except

the DeBeers Diamond Company.

the Standard Oil Company.

the Ford Motor Company.

the International Nickel Company.

10.

Which statement is true?

None of these statements are true.

Most natural monopolies are government regulated or government owned.

All monopolies are bad.

All monopolies are good.

11.

Which is the most accurate statement?

There are virtually no oligopolies in the U.S.

The most important aspect of oligopoly is product differentiation.

There are a whole range of oligopolistic models, from a cartel to cutthroat competition.

An oligopolistic industry cannot have more than five firms

12.

Oligopolists have more control over prices than monopolistic competitors because

their prices are always set by the government.

since an oligopolist is the only competitor in the market, setting prices is no problem.

they can legally collude whereas monopolistic competitors may not.

with fewer competitors, they are able to monitor and determine their own prices much easier.

13.

The definition of monopolistic competition differs from that of perfect competition

in neither the number of firms nor the type of product.

in both the number of firms and the type of product.

with respect to the type of product.

with respect to the number of firms in the industry.

14.

The typical monopolistic competitor

may compete on the basis of physical differences, convenience, service, and ambience.

always competes on the basis of producing a product that is physically different from those of its competitors.

never uses price discrimination.

is a large firm.

15.

Which statement is true?

The monopolistic competitor may make a profit in the long run.

The monopolistic competitor has a perfectly elastic demand curve.

None of these statements are true.

The monopolistic competitor operates at the minimum point of her ATC curve.

16.

Which statement is true about the monopolistic competitor in the long run?

It will be breaking even.

It will be making a profit.

It may be making a profit or taking a loss.

It will be taking a loss.

17.

Which statement is true?

Most monopolistic competitors are large firms.

Monopolistic competitors produce goods or services for which there are no close substitutes.

None of these statements are true.

Monopolistic competitors usually operate at the minimum point of their average total cost curves.

18.

Which statement is false?

As the price of a good rises the consumer surplus decreases.

A person would maximize her total utility when she had no consumer surplus.

We will consume a service when its marginal utility is equal to its price.

A product's utility to a buyer is measured by how much the buyer is willing to pay for it.

ECON10004 Study Guide - Final Guide: Game Theory, Oligopoly

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