Chapter 26: Q. 1 - For Critical Thinking (page 595)
In what sense is there oligopolistic interdependence in the basic dominant-firm model, in which there truly is just one single dominant firm? Explain your reasoning.
The large corporation can set a price that maximizes its profit.
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Explain alternative methods of measuring industry concentration
Understand how to apply game theory to evaluate the pricing strategies of oligopolistic firms
Consider two strategically dependent firms in an oligopolistic industry, Firm A and Firm B. Firm A knows that if it offers extended warranties on its products but Firm B does not, it will earn million in profits, and Firm B will earn million. Likewise, Firm B knows that if it offers extended warranties but Firm A does not, it will earn million in profits, and Firm A will earn million. The two firms know that if they both offer extended warranties on their products, each will earn million in profits. Finally, the two firms know that if neither offers extended warranties, each will earn million in profits.
a. Set up a payoff matrix that fits the situation faced by these two firms.
b. What is the dominant strategy for each firm in this situation? Explain.
The table below shows recent worldwide market shares of producers of inkjet printers.
a. In this year, what was the four-firm concentration ratio in the inkjet-printer industry?
b. In this year, what was the seven-firm concentration ratio in the inkjet-printer industry?
Why do you suppose that a handful of large firms have become predominant in the market for multiplayer electronic games, in which network effects are particularly important?
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