Chapter 10: Problem 20

Which of the following is a game theory strategy for oligopolists to avoid a low-price outcome? a. Tit-for-tat b. Price leadership c. Cartel d. All of the above

Short Answer

Expert verified

The correct answer is d. All of the above (Tit-for-tat, Price leadership, and Cartel) can be used as game theory strategies for oligopolists to avoid a low-price outcome.

Step by step solution

Understand the concepts

To solve this exercise, it's important to have a clear understanding of game theory and the different strategies used by oligopolists. Game theory is the study of mathematical models of strategic interaction among rational decision-makers. Oligopolists are firms in a market with a small number of competitors.

Evaluate Option A (Tit-for-tat)

Tit-for-tat is a game theory strategy in which a player chooses the same action that the opponent chose in the preceding round. In the context of oligopolists, this means that a firm will match the prices set by its competitors. This strategy can be effective for maintaining price stability, but it does not necessarily help avoid a low-price outcome, as the firms may still end up lowering their prices.

Evaluate Option B (Price leadership)

Price leadership is a strategy in which one firm sets the price for a particular product, and the other firms in the market follow suit. This strategy can help oligopolists avoid a low-price outcome by allowing the price leader to set a higher price than would have been chosen in a competitive environment. However, this strategy can also lead to higher overall prices for consumers.

Evaluate Option C (Cartel)

A cartel is a formal agreement among competing firms to control prices and output in an industry. Cartels are designed to maximize the profits of their members by avoiding price competition. In a cartel, all firms agree on a common pricing strategy and output levels, which helps to avoid a low-price outcome. However, cartels are often illegal and face regulatory scrutiny.

Determine the correct answer

Based on the analysis of options A, B, and C, it becomes clear that all of these strategies can be used by oligopolists to avoid a low-price outcome. Therefore, the correct answer is: d. All of the above