Tackle the Test: Free-Response Questions

1. Question

   Like other firms, universities face temptations to collude in order to limit the effects of competition and avoid price wars. (In fact, the U.S. Department of Justice formally accused a group of universities of price-fixing in 1991.) Answer the following questions about behavior in the market for higher education.

   
   

   
   

   1. Describe one factor of the market for higher education that invites tacit collusion.

      
      
   
   

   2. Describe one factor of the market for higher education that works against tacit collusion.

      
      
   
   

   3. Explain one way in which universities could engage in illegal collusion.

      
      
   
   

   4. What are three ways in which universities engage in product differentiation?

      
      
   
   

   5. Explain how price leadership might work in the university setting.

      
      
   
   

   6. What forms of nonprice competition do you see universities engaged in?

      
      
   
   
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   Rubric for FRQ 1 (6 points)

   1 point: The fact that universities offer a small number of products—enrollment into a small number of programs—invites tacit collusion. They may also have similar perceptions of fairness.

   1 point: Factors that work against tacit collusion in the market for higher education include the large number of universities and the bargaining power of the better applicants.

   1 point: Universities could engage in illegal collusion by holding meetings to establish uniform tuition rates, divvying up applicants so that each is accepted by a limited number of schools (to avoid competition), or sharing information on scholarship offerings so that applicants will receive similar offers from the competing schools.

   1 point: Universities seek product differentiation in regard to athletic programs, facilities, academic standards, location, overseas programs, faculty, graduation requirements, and class size, among other areas.

   1 point: Price leadership could be achieved in the university setting if one school, perhaps a large or prestigious university, announced its tuition early and then other schools based their tuition on that announcement.

   1 point: Universities can engage in nonprice competition by offering better food, bigger dorm rooms, more accomplished faculty members, plush student centers, and similar amenities.

2. Question

   Indicate whether each of the following circumstances makes it more likely that oligopolists will behave noncooperatively or engage in tacit collusion. Explain your answers.

   
   

   
   

   1. It is difficult for a firm to detect whether another firm has raised output.

      
      
   
   

   2. The firms have coexisted while maintaining high prices for a long time.

      
      
   
   

   3. Each oligopolist expects several new firms to enter the market in the future.(6 points)

      
      
   
   

   Rubric for FRQ 2 (6 points)

   1 point:Difficulty detecting each other’s output makes it more likely that the firms will behave noncooperatively.

   1 point:When it is very difficult for a firm to detect if another firm has raised output, it is also very hard to enforce cooperation by playing “tit for tat.”

   1 point:Long-term coexistence with high prices makes it more likely that the firms will engage in tacit collusion.

   1 point:When firms have maintained high prices for a long time, a pattern of cooperation has been established. And because this is a long-term repeated game, the value of behaving cooperatively is high.

   1 point:This makes each oligopolist more likely to behave noncooperatively.

   1 point:Future entry by several new firms will increase competition and drive down industry profits. As a result, there is less future profit to protect by behaving cooperatively now.