1. How do monopolistically competitive markets differ from perfectly competitive markets? If monopolistically competitive firms are making economic profits in the short run, what happens in the long run?

2. How do monopolistically competitive firms exhibit market power? In what ways can a firm increase market power?

3. Explain what strategic interdependence means and how it applies to oligopoly markets.

4. Why is it difficult for cartels to maintain high prices effectively over the longer term?

5. Why would the use of repeated games make overcoming the Prisoner’s Dilemma easier compared to a game that is played only once?

6. What is the difference between a tit-for-tat trigger strategy and a grim trigger strategy?

7. “Monopolistic competition has a little of monopoly and a little of competition, hence its name.” Do you agree? Why or why not?

8. Many product markets exhibit characteristics of both monopolistic competition and oligopoly, such as video game consoles and movie theater chains. What characteristics in each of these markets make it more monopolistically competitive? Which characteristics make it more like an oligopoly?

9. In both competitive and monopolistically competitive markets, firms earn normal profits in the long run. What enables oligopoly firms to have the opportunity to earn economic profits in the long run?

10. Poker players are known to bluff once in a while, meaning that they will make a large bet despite holding bad cards in an effort to pressure other players to fold their hands. Would bluffing be considered a dominant strategy to be used in poker?

11. Suppose you choose to pledge for your top choice of sorority or fraternity at your university. Despite the tiny odds of getting accepted into your top choice, that does not deter you from spending all of rush week focusing on your top choice. Would this strategy coincide with a best-response strategy in a Nash equilibrium?

12. Suppose two competing stores each announce a “low price guarantee,” meaning that each store would match the prices of the other store if they were lower. Does providing this guarantee make it easier or more difficult to overcome the Prisoner’s Dilemma facing the two firms?

13. In recent years, the expansion of the Open Skies Agreement has dramatically increased nonstop international flights to cities around the world. For example, U.S. airlines now fly nonstop to many cities in the Middle East, Africa, and China, providing a potential benefit to U.S. cities from the increased flow of foreign tourists and investors. However, an unexpected consequence of the agreement that resulted in a major dispute in 2015 is that foreign airlines also can fly direct to many U.S. cities, increasing competition against U.S. airlines. U.S. airlines alleged that foreign airlines, especially those from the Middle East, received government subsidies that allowed them to underprice U.S. airlines on competing routes. Discuss how the expansion of Open Skies affects the market structure and concentration of the airline industry. If the allegations of unfair competition are true, who is potentially hurt and who potentially benefits?

14. “Bank of America Faces Outrage over Debit Card Charge” was the headline in the Washington Post on September 30, 2011. Bank of America attempted to institute a new fee on debit card accounts by charging its debit card users $5 per month, in hopes that other banks would follow its lead. However, no other major bank did, and Bank of America was pummeled in the media and by customers who closed their accounts until Bank of America relented and dropped the new fee. Explain how Bank of America was attempting to overcome the Prisoner’s Dilemma. Provide reasons why this attempt was unsuccessful.

15. Suppose each member of a diamond cartel consisting of five producers agrees to sell 100 carats of diamonds a day. With 500 total carats being sold, the market price is $1,000/carat, and each firm earns $100,000. Now assume that one producer cheats by producing 110 carats, causing the market price for 510 total carats to drop to $980/carat. How does this action affect the revenues of the cheating firm and the noncheating firms? Suppose the four noncheating firms change course and all produce 110 carats, and the market price for 550 total carats drops to $850/carat. How much does each firm earn now? How important is loyalty to maintaining an effective cartel?

16. The following shows a pricing game between Allegiant and Delta. Each airline has a choice between offering a fare sale and not offering a fare sale. The resulting profits of each airline are provided, where the first number in each payoff box equals Allegiant’s profit and the second number is Delta’s profit.

17. According to By the Numbers, in terms of number of restaurants, what percentage of all restaurants among the top ten chains is a Subway, McDonald’s, or a Starbucks? (Hint: First calculate the total number of Subways, McDonald’s, and Starbucks combined and compare with the total restaurants among all top ten chains.)

18. According to By the Numbers, if the third and fourth largest wireless providers merged into one new company, would the combined company surpass the market share of either of the largest two firms prior to the merge?