3.4.4 Oligopoly Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. Which best describes an oligopoly?

   • A market of identical firms that all accept the market price
   • A market with a single firm and no rivals at all
   • A market dominated by a few large firms with high concentration and strong interdependence
   • A market with many small firms that take no notice of one another

2. Which features are typical of oligopoly?

   • High barriers to entry and exit, a high concentration ratio, interdependence and product differentiation
   • Zero barriers to entry and exit, with many small firms
   • Single-firm dominance with no substitute products
   • Identical products sold by price-taking firms

3. Three firms have market shares of 30 per cent, 20 per cent and 15 per cent. What is the 3-firm concentration ratio?

   • 75 per cent
   • 15 per cent
   • 65 per cent
   • 50 per cent

4. Interdependence in oligopoly means that:

   • Firms compete only on product quality and never on price
   • Each firm's decisions depend on the likely reactions of its rivals
   • Each firm ignores what its rivals do when setting its price
   • Firms set prices independently of demand in the market

5. What is the difference between overt and tacit collusion?

   • Overt collusion is an open agreement, while tacit collusion is an informal understanding with no written agreement
   • Tacit collusion requires government approval before it can take place
   • Overt collusion means firms compete fiercely on price in the market
   • Tacit collusion is always illegal and overt collusion is always legal

6. A cartel is best described as:

   • A government body that regulates the prices of firms in an industry
   • A formal agreement among firms to fix prices or output and raise joint profits
   • A merger of two rivals into one firm under single ownership
   • A group of firms competing hard on price to force each other out

7. Price leadership in oligopoly refers to:

   • One firm sets the price and the other firms follow
   • All firms setting different prices with no reaction to one another
   • Firms setting prices at random with no reaction to rivals
   • The government setting prices for all firms in the market

8. What does the prisoner's dilemma show in oligopoly?

   • Cooperation is always the dominant strategy for every firm in the game
   • There is never an equilibrium in any game between two firms
   • Both firms always gain by raising their prices together in the market
   • Each firm has an incentive to cheat, leading to a worse outcome for both than cooperation would give

9. Two firms each choose a high or low price. If both set high, each earns £10m; if both set low, each earns £4m; if one undercuts the other, it earns £14m and the other earns £0. What is the Nash equilibrium?

   • No equilibrium exists because each firm changes its choice each time
   • Both set high prices, since this gives the highest joint profit
   • One sets a high price and the other sets a low price
   • Both set low prices, since undercutting is the dominant strategy for each firm

10. Predatory pricing is best described as:

    • Setting one fixed price for all customers across the market
    • Offering lower prices to protect the market share of a rival
    • Setting price above cost to attract rivals into the market
    • Setting price below cost temporarily to drive rivals out, then raising the price once they leave

11. Limit pricing aims to:

    • Force rivals to merge into a single firm in the market
    • Set price low enough to deter entry while still earning some profit
    • Set price at marginal cost for ever, regardless of rivals
    • Raise price to attract entrants and share the market

12. Which is an example of non-price competition?

    • Advertising, branding, loyalty schemes and after-sales service
    • Lowering production costs by replacing machinery
    • Cutting prices below cost permanently to win customers
    • Changes in government taxes applied to all firms

13. A price war in an oligopoly is:

    • A government freeze on all prices in the market
    • A single price rise made by all firms at the same time
    • An agreement to fix the price at the monopoly level
    • A repeated cycle of price cuts by rivals responding to each other, which can squeeze profits

14. A high concentration ratio in a market suggests:

    • Perfect competition with price-taking firms
    • A low barrier to entry for new firms
    • Many firms with little market power each
    • Few firms dominate, so market power and interdependence are likely

15. Evaluate the view that oligopoly always harms consumers.

    • True, because oligopolists are always productively inefficient
    • True in every case, because oligopolists always collude
    • False, because oligopoly has no prices to affect consumers
    • Overstated: collusion can raise prices, but rivalry can drive innovation and non-price competition, so effects depend on conduct

16. Market shares are A 40 per cent, B 30 per cent, C 20 per cent and D 10 per cent. What is the 2-firm concentration ratio?

    • 30 per cent
    • 90 per cent
    • 70 per cent
    • 40 per cent

17. Why does collusion tend to break down?

    • Collusion is always legal and therefore stable over time
    • Each firm gains by cheating for a short-run gain, and detection and punishment are imperfect
    • Firms never have any incentive to cheat on a cartel agreement
    • Consumers always refuse to buy from colluding firms in the market

18. The kinked demand curve model implies that:

    • Demand is perfectly elastic at all prices in the market
    • Prices are sticky, because rivals match price cuts but ignore price rises
    • Firms always cut prices together, so prices never stay stable
    • Rivals always match price rises, so prices change frequently

19. Which market structure best describes a market with five firms holding 85 per cent of sales and high entry barriers?

    • Perfect competition
    • Monopoly
    • Monopsony
    • Oligopoly

20. Evaluate the usefulness of game theory for analysing oligopoly.

    • Applicable only to monopolies, not to oligopolies
    • Perfectly predicts every outcome in every oligopoly market
    • Useless, because firms in an oligopoly never interact with each other
    • Helpful for showing interdependence and strategic choices, but predictions depend on assumptions about rivals' payoffs and repeated play

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