Imperfectly Competitive Markets:

Additional exercises
Course coordinator: prof. dr. Marijn Verschelde∗

2022-2023

Additional exercises on 2. Strategic interaction under

oligopoly
These exercises are intended to help students develop their economic skills concerning im-
perfectly competitive markets. The student is advised to exercise his/her economic skills by
solving these questions at home. Some of these questions will be discussed in class. The
labeling BASIC/INTERMEDIATE can help you decide whether to go for the BASIC MCQ
or INTERMEDIATE MCQ during the continuous evaluation assessments.

Question 2.A1 (BASIC): True or False: The joint profit of the duopolists is higher
when maintaining the agreement than when both duopolists break the agreement.

Question 2.A2 (BASIC): True or False: Hotelling’s metaphor teaches us, among other
things, that in a duopolistic setting, when there is the possibility of price competition, there
will be minimal product differentiation.

Question 2.A3 (BASIC): True or False: When both firms in a duopoly choose to
maintain the cartel agreement, they choose production levels as if they would be one merged
firm with a monopoly.
∗
Email: m.verschelde@ieseg.fr.

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 Question 2.A4 (BASIC): In a game with a unique Nash equilibrium, there is always
an equilibrium in dominant strategies.

Question 2.A5: (BASIC) Consider two basketball players, Alexandre (A) and Elise
(E), accused of stealing tactical information about the opponent. They are questioned sep-
arately. Possible actions for each of them are confess (C) or deny (D). A and B have no way
of talking and do not know the decision of the other. The disciplinary committee proposes
to each, separately: “If you confess and the other denies, you are suspended for 2 quarters,
the other is suspended for 7 quarters; if you deny and he confesses, you are suspended for 7
quarters, the other for 2 quarters; if you both confess, you are both suspended for 4 quarters;
if you both deny, you are both suspended for 3 quarters.” What is the expected solution for
this game when A and E play rationally?

Question 2.A6: (BASIC) Anthony (A) and Beatrice (B) are the only two friteries
on the Isle of Skye in Scotland. They have to decide whether to cooperate (C), setting a
monopoly price for their french fries, or to not cooperate (NC), setting a price as in perfect
competition. This choice is made simultaneously by the two vendors. If they cooperate, A
and B make a profit equal to 200. However, if they do not cooperate, A and B obtain a
profit equal to 150. In the case they take different decisions, the one who decided NC and
sets a monopoly price, gets a profit equal to 225, while the one choosing C will earn zero
profits.

(a) Write down the payoff matrix of the game. Do A and B have dominant strategies?

(b) Are there Nash equilibria?

Question 2.A7: (INTERMEDIATE) Suppose that you and a fellow student are
assigned a project on which you will receive one combined grade. You each want to receive
a good grade (which means you have to work), but you also want to do as little work as
possible (which means you shirk). In particular, here is the situation:

• If both of you work hard, you both get an A, which gives each of you 50 units of
happiness.

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 • If only one of you works hard, you both get a B, which gives each of you 40 units of
happiness.

• If neither of you works hard, you both get a D, which gives each of you 20 units of
happiness.

On the other hand, working hard costs 25 units of happiness while shirking costs 0 units of
happiness.

(a) Complete the payoff matrix:

You
Work (t1 ) Shirk (t2 )
Classmate

Work (s1 ) (... ; ...) (... ; ...)

Shirk (s2 ) (... ; ...) (... ; ...)

(b) What is the likely outcome?

(b.1) (s1 ; t1 )
(b.2) (s1 ; t2 )
(b.3) (s2 ; t1 )
(b.4) (s2 ; t2 )

(c) What if you both only get 24 units of happiness if you obtain a B, how would your
answers to parts (a) and (b) change?

(c.1) (s1 ; t1 )
(c.2) (s1 ; t2 )
(c.3) (s2 ; t1 )
(c.4) (s2 ; t2 )
(c.5) There are multiple Nash equilibria.

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 Question 2.A8: (INTERMEDIATE) Two firms compete with each other for profits
in a market. The two firms have decisions to make about their pricing strategies. They can
choose to set their prices at 10, 20, or 30. The matrix showing the profits made at these
different prices is shown in the table below:

Firm B
t1 t2 t3
p=10 p=20 p=30
Firm A s1 p=10 (0 ; 0) (20 ; -5) (100 ; -5)
s2 p=20 (-30 ; 60) (60 ; 30) (90 ; 90)
s3 p=30 (-50 ; 50) (90 ; 40) (60 ; 30)

(a) Does any of the two firms have a dominant strategy?

(b) What is the best strategy for each firm in this situation?