- The prisoner’s dilemma embraces such diverse cases as price wars, cartel
cheating, arms races, and resource depletion. In each instance, self-
interested behavior by interacting parties leads to an inferior outcome
for the group as a whole.
Questions and Problems
- Venture capitalists provide funds to finance new companies (start-ups),
usually in return for a share of the firm’s initial profits (if any). Of
course, venture capitalists look to back experienced entrepreneurs with
strong products (or at least product blueprints). But potential
competitors and the structure of the market into which the new firm
enters also are important. According to the conventional wisdom, the
best start-up prospects involve entry into loose oligopolies. What
economic factors might be behind this conventional wisdom? - In granting (or prohibiting) proposed acquisitions or mergers in an
industry, government regulators consider a number of factors, including
the acquisition’s effect on concentration, ease of entry into the market,
extent of ongoing price competition, and potential efficiency gains. In
2011, T-Mobile agreed to merge with AT&T at an acquisition price of $39
billion. In 2011, AT&T’s market share of the U.S. wireless market was
26.6 percent, with T-Mobile 12.2 percent, Verizon 31.3 percent, Sprint
11.9 percent, TracFone 5.0 percent, US Cellular 3.1 percent, MetroPCS
2.3 percent, Cricket 1.6 percent, and numerous small providers making
up the remaining 6 percent.
a. What would be the effect of the acquisition on the market’s
concentration ratio? On the HHI?
b. Antitrust guidelines call for close scrutiny of mergers in moderately
concentrated markets (HHI between 1,500 and 2,500) if the
resulting HHI increase is more than 100 to 200 points. How would
this rule apply to the AT&T merger with T-Mobile? (How would the
rule apply to a hypothetical merger between T-Mobile and
TracFone?)
c. AT&T has argued that the merger will extend its network, providing
more reliable and faster cell phone service (particularly to existing T-
Mobile customers who on average have lower-grade service plans at
cheaper rates). Market observers are worried that after the merger,
AT&T is likely to raise cellular rates to some customer segments.
Briefly evaluate these pros and cons. - The OPEC cartel is trying to determine the total amount of oil to sell on the
world market. It estimates world demand for oil to be QW103.33 P/6,
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