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Chapter 10: Q.4 (page 252)

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner鈥檚 dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

Short Answer

Expert verified

Because of the prisoner鈥檚 dilemma, they will compete and cheat. When both firms cheat and lower their prices, firm A will earn $500 and firm B will get $20.

Step by step solution

01

Step 1. Definition

An oligopoly is a market with little competition in which a few producers control the majority of the market share and produce items that are identical or homogeneous.

02

Step 2. Explanation

According to the question both firm A and firm B are in duopoly so they are the only sellers and firm A is larger and firm B is small. Because of the prisoner鈥檚 dilemma, they will compete and cheat.

When both firms cheat and lower their prices, firm A will earn $500 and firm B will get $20

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Most popular questions from this chapter

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic

competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm鈥檚 profit, what will happen to the original firm鈥檚 profit-maximizing price and output levels?

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel

supply? How much profit will the cartel earn?

b. Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry?

c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a lighter sentence. If they both confess, they will be each be sentenced to 30years. If neither confesses, they will each receive a 20-year sentence. If only one confesses, the confessor will receive data-custom-editor="chemistry" 15years and the one who stayed silent will receive 35years. Table 10.7below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results entry lists Jane鈥檚 sentence first (in years), and Bill's sentence second.)

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm鈥檚 profit, what will happen to the original firm鈥檚 profit-maximizing price and output levels?
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