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Chapter 26: Q. 26.3 - Learning Objectives (page 578)

Understand how to apply game theory to evaluate the pricing strategies of oligopolistic firms

Short Answer

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  • Despite the fact that they both collaborated, they would both be sentenced to years in jail.
  • If one confessed, the confessor would be freed, while the other would be sentenced to 10 years in jail.
  • They would both be sentenced to two years in jail if neither confessed.

Step by step solution

01

Step 1:Introdution to oligopolistic 

  • An oligopoly is a market structure in which a few businesses may prevent others from exerting significant influence.
  • The concentration ratio is used to assess the largest firms' market share.
02

Game theory to evaluate the pricing strategies of oligopolistic firms 

  • The prisoner's dilemma is a common scenario in which behavioral economics is used to help people make decisions.
  • Bank robbery has been charged against Bennie and Stella.
  • Each person was interrogated in their own room, with the interrogators offering them with the following options:
  • They would both be condemned to five years in prison if they confessed.
  • The confessor would be let free, while the other would be condemned to ten years in prison if they both confessed.
  • If none of them confessed, they would both be condemned to two years in prison.
03

Step 3:Oligopolistic firms 

  • Because quantity and pricing are inversely connected, oligopolistic organizations should consider what other firms would do when deciding on quantity and marketing.
  • Because every company produces too much, the cost may fall below their average overall expenses, resulting in a loss.
  • They can maximize their earnings by reducing the amount to the point when the marginal product for the whole oligopoly becomes cost-neutral.

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Most popular questions from this chapter

Suppose that the distribution of sales within an industry is as shown in the table.

a. What is the four-firm concentration ratio for this industry?

b. What is the eight-firm concentration ratio for this industry?

Consider Figure 26-2. Suppose conditions in the industry change in such a way that the amount that each firm makes if it charges a high price when the other firm charges low price increases from \(2million to \)3million. Is the firm's pricing decision altered by this change and, if so, in what way? Explain briefly.

Take a look back at the data regarding the inkjet printer industry in Problem 26-2, and answer the following questions.

a. Suppose that consumer demands for inkjet printers, the prices of which are readily observable in office supply outlets and at Internet sites, are growing at a stable pace. Discuss whether circumstances are favorable to an effort by firms in this industry to form a cartel.

b. If the firms successfully establish a cartel, why will there naturally be pressures for the cartel to break down, either from within or from outside?

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?

Consider Figure 26-3, and suppose that this typical firm has agreed to participate in the proposed cartel. What is the total dollar amount of the firm's economic incentive to cheat on the cartel agreement, assuming that all other firms continue to abide by the agreement? Explain your reasoning.

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