Question

1. By vertically? integrating, two firms can

A. avoid holdup problems. B. avoid antitrust issues. C. limit the problems inherent in moving too quickly. D. increase market share.

2. Which of the following is a way to deter? entry?

A.raise switching costs for customers that use your products

B.increase costs through legislation that affects only new entrants

C. obtain a patent so that others must license your invention

D.All of the above.

3. A player that starts at the end of the game and progresses to the first move to determine best responses

A.?doesn't understand how to play a game.

B.is using the Stackelberg Strategy.

C.is using backward induction.

D.is acting irrationally.

Answer 1

Answer 1: A

Under hold up problem two parties refrain from cooperating in the fear of reducing their profit. Thus after vertical integration, this problem is removed as both the firms aim at joint maximization of profit.

Answer 2: D

A firm can deter entry by raising switching cost so that customers do not shift toward the new products of the new entrant. It can also increase cost through legislation or obtain a patent that gives it exclusivity in production.

Answer 3: C

Under Backward induction, a player starts from the end result of the game. Then starts moving toward the beginning of the game by choosing an optimal action at each point of the game.