Question

Multiple Choice: Choose the correct answer and report in your Word document.

1. Which of the following could be evaluated as anti-competitive using the per se rule?

A. Three rival oil and gas firms propose to merge in a highly concentrated industry.

B. Two oil and gas firms agree on who will win a new land lease before submitting bids.

C. A large upstream oil and gas producer decides to purchase a downstream retailing firm.

D. A new technological advancement allows a firm to sell oil at lower prices than rival firms.

2. The concept of “creative destruction” describes the process by which new product innovations take the place of older products. What must be possible to incentivize creative destruction to take place?

A. Firms are able to market new products at a discount.

B. Firms are able to earn positive economic profits by pricing above marginal cost.

C. Firms are guaranteed a rate of return for new product innovations by antitrust authorities.

D. Firms are given local monopoly power because the average cost of production from one firm is lower than if two firms serviced the market.

3. In a Nash equilibrium, it must be the case that ________.

A. firms play their dominant strategy

B. firms are able to out-strategize their opponent

C. a firm cannot be made better off given the decisions of other firms

D. a firm can be made better off in future competition by choosing a high level of advertising in earlier stages

4. Suppose the price of a product increases after installing workplace safety equipment. The expected profit after deciding to adopt or not adopt safety equipment for two competing firms that sell similar goods is shown below. What is the Nash equilibrium of this game?
   
   

		Firm 2
		Adopt	Don’t Adopt
Firm 1	Adopt	500, 500	150, 600
	Don’t Adopt	600, 150	200, 200

A. Both firms will adopt the safety equipment.

B. Neither firm will adopt the safety equipment.

C. Firm 1 will adopt the safety equipment and firm 2 will not adopt.

D. Firm 2 will adopt the safety equipment and firm 1 will not adopt.

Answer 1

1. Answer B

Competitors are agreeing with each other to rig the bid by agreeing on who will win before they are to submit the bids. This is clearly an anticompetitive action as per se rule.

2. Answer C

The schumpeterian notion of creative destruction concluded that it is good for markets to evolve again and again by opening new businesses and closing the old ones. The theory is based on how the firms can be ahead of their competitors due to information asymmetries which will only be beneficial for the market in long run. Thus, Firms need to be guaranteed a rate of return for new product innovations by antitrust authorities.

3. Answer C

In Nash equilibrium with respect to the dominant strategy, no matter what the rivals do, a firm plays its dominant strategy.

4. Answer A

Both firms adopt the safety equipment due to the application of Nash equilibrium. In this scenario, one firm would employ those strategies that are better suited while knowing little of others. Hence, A is optimal given that each firm’s strategy is optimal after taking consideration of other firms.