Oligopoly. A market structure in which there are few firms, each of which is large relative to the total industry. Key idea: Decision of firms are interdependent. The Simple Mathematics of Oligopoly. Given: P = 200 – 2Q TC = 500 + 40Q + 2Q 2 What is the profit maximizing price? $160
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A market structure in which there are few firms, each of which is large relative to the total industry.
Key idea: Decision of firms are interdependent.
Given: P = 200 – 2Q
TC = 500 + 40Q + 2Q2
What is the profit maximizing price? $160
If this firm’s current price was $170 and it lowered its price, how would its competition respond?
IF YOU DO NOT KNOW THE COMPETITOR’S RESPONSE, IT IS DIFFICULT TO PREDICT WHAT THE NEW DEMAND CURVE WILL BE!!! THEREFORE OUR SIMPLE PROBLEM HAS BECOME A BIT MORE COMPLICATED!!
Game Theory – the study of how individuals make decisions when they are aware that their actions affect each other and when each individual takes this into account.
History: Introduced in 1944 by John von Neumann and Oskar Morgenstern in “The Theory of Games and Economic Behavior.”
The work of von Neuman and Morgenstern was expanded upon by John Nash.
A game is a situation in which a decision-maker must take into account the actions of other decision-makers. Interdependency between decision-makers is the essence of a game.
In games people must make strategic decisions. Strategic decisions are decision that have implications for other people.
Strategy – a decision rule that describes that actions a player will take at each decision point.
Normal form game – a representation of a game indicating the players, their possible strategies, and the payoffs from alternative strategies.
Non-Cooperative Games are games in which players cannot enter binding agreements with each other before the play of the game.
Cooperative Games are games in which players can enter binding agreements with each other before the play of the game.
In class we only review non-cooperative games.
Simultaneous move game – Game in which each player makes decisions without knowledge of the other players’ decision.
Sequential move game – Game in which one player makes a move after observing the other player’s move.
Actions – The set of choices available at each decision in a game.
Pure strategy – a rule that tells the player what action to take at each of her information sets in the game.
Mixed strategy – when players can choose randomly between the actions available to them at every information set.
Payoffs, for our purposes, consist of either profits to firms, or income to individuals. Payoffs can also be characterized in terms of utility.
Solution Concept – a methodology for predicting player behavior.
Nash Equilibrium - a collection of strategies one for each player, such that every player's strategy is optimal given that the other players use their equilibrium strategy.
Payoff matrix – a matrix that displays the payoffs to each player for every possible combination of strategies the players could choose.
Dominant Strategy – a strategy that is always strictly better than every other strategy for that player regardless of the strategies chosen by the other players.
Dominated Strategy – a strategy that is always strictly worse than some other strategy for that player regardless of the strategies chosen by the other players.
Weakly dominant strategy - a strategy that is always equal to or better than every other strategy for that player regardless of the strategies chosen by the other players.
Weakly Dominated Strategy – a strategy that is always equal to or worse than some other strategy for that player regardless of the strategies chosen by the other players.
Confess Don’t Confess
Confess 6 years, 6 years 1 year, 10 years
Don’t Confess 10 year, 1 year 3 years, 3 years
High 40,40 100, 10
Low 10, 100 60,60