Oligopoly Review Quiz Study Guide

1.What are the three characteristic of a market that is an oligopoly?

2.Provide three examples of markets that are oligopolies.

3 .If the members of an oligopoly could agree on a total quantity to produce, what quantity would they choose (what market structure would they copy to maximize profit)?

4.If the oligopolists do not act together but instead make production decisions individually, do they produce a total quantity more or less than in your answer to the previous question? Why?

5.How does the number of firms in an oligopoly affect the price and total quantity produced in the market?

6 .What does the prisoner’s dilemma teach us about oligopolies? (hint: is it easy for firms to cooperate with each other? Explain)

The players: American Airlines and United Airlines

The choice:  cut fares by 50% or leave fares alone

• If both airlines cut fares,
  each airline’s profit = $400 million
• If neither airline cuts fares,
  each airline’s profit = $600 million
• If only one airline cuts its fares,
  its profit = $800 million
  the other airline’s profits = $200 million

Draw the payoff matrix, find each airline’s dominant strategy, and find the Nash equilibrium. (put American on the top of the payoff matrix)