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Oligopoly Pricing and Strategic Behavior
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1
Question
What characterizes barrier to entry in oligopolies?
Answer
There are high barriers to entry.
2
Question
Define oligopoly in one sentence?
Answer
A market structure with a few large firms interdependent in pricing and output.
3
Question
What is the outcome when firms in a collusive agreement face incentives to cheat to increase profits at the expense of partners?
Answer
Cheating incentives undermine collusion
4
Question
What term describes incentives to collude that reduce competition?
Answer
Incentives to collude that discourage output reduction; price-fixing collusion
5
Question
What factor leads oligopolistic firms to spend heavily on product differentiation and advertising?
Answer
High entry costs by new firms necessitate differentiation and advertising.
6
Question
What effect does interdependence have on firm behavior in oligopolistic markets?
Answer
Firms consider rivals' actions, influencing their own production decisions.
7
Question
How does the number of firms affect mutual interdependence in oligopolistic industries?
Answer
Fewer firms increase interdependence; more firms reduce it.
8
Question
What drives product differentiation in oligopolies?
Answer
High barriers to entry and rivalry incentives compel differentiation and advertising
9
Question
How does interdependence shape oligopolistic pricing?
Answer
Firms anticipate rivals' reactions, adjusting output and prices accordingly
10
Question
How does the number of firms influence interdependence?
Answer
Fewer firms strengthen strategic interdependence; more firms dilute it
11
Question
What is a typical strategic behavior in oligopolies?
Answer
Strategic actions based on potential moves of rivals
12
Question
What outcome occurs when both firms choose the low-price strategy?
Answer
Each earns 70 million Zs in profit.
13
Question
What outcome occurs when IST chooses high-price and USL chooses low-price?
Answer
IST 10 million Zs and USL 70 million Zs.
14
Question
What outcome occurs when IST chooses low-price and USL chooses high-price?
Answer
IST 40 million Zs and USL 10 million Zs.
15
Question
Why does the low-price firm achieve higher profits according to the text?
Answer
Because it captures a large portion of the rival’s sales by charging a low price.
16
Question
What is the Nash equilibrium in this pricing game?
Answer
A profile where neither firm benefits from unilateral deviation.
17
Question
What do the firms aim to maximize in this scenario?
Answer
Profits from their pricing strategies for space travel services.
18
Question
How many pricing outcomes are in the payoff matrix?
Answer
Four possible strategy combinations.
19
Question
Outcome when both charge high prices?
Answer
Both earn 40 million Zs in profit.
20
Question
Outcome when IST charges high and USL charges low?
Answer
IST 10 million Zs; USL 70 million Zs.
21
Question
Outcome when IST charges low and USL charges high?
Answer
IST 40 million Zs; USL 10 million Zs.
22
Question
Why does the low-price firm gain more profit?
Answer
It captures a large share of the rival’s sales by undercutting.
23
Question
What does the Nash equilibrium imply about self-interest versus collective firm interests in oligopolistic competition?
Answer
Mutual worse-off outcome due to conflict and strategic dependence
24
Question
What dilemma does the Nash equilibrium illustrate in the context of oligopolistic firms?
Answer
Prisoner’s dilemma between individual self-interest and collective best interest
25
Question
What is the consequence for both firms if they pursue outguessing and undercut each other in price?
Answer
End up in worse-off equilibrium with low prices and profits
26
Question
What real-world aspects does the game illustrate about oligopolistic firms?
Answer
Interdependence, strategic behavior, conflicting incentives, and price competition dynamics
27
Question
What does Nash equilibrium imply in oligopoly pricing?
Answer
Mutual suboptimal outcome due to strategic interdependence and self-interest
28
Question
What is a Nash equilibrium in the context of the pricing game between IST and USL?
Answer
A stable outcome where neither firm benefits from changing its pricing strategy.
29
Question
Why might a low-price strategy yield higher profits for a firm in the Nash equilibrium?
Answer
Because charging a low price captures a large share of rival’s customers.
30
Question
In the payoff matrix described, what is the profit for USL with a low-price strategy when IST chooses a high-price strategy?
Answer
70 million Zs.