Transcript Game Theory
Oligopoly Behavior & Game Theory Chapter 16 Pages 345 - 360 4 Market Structures Perfect Competition Monopolistic Competition Oligopoly Most competitive No DWL P = MC Monopoly Least competitive Biggest DWL P > MC “Imperfect Competition” Two Imperfect Market Structures • Oligopoly – A few large sellers dominate the market (3-8 companies) – Example: automobile companies, wireless service providers – Fasting growing market structure in real world • Monopolistic Competition – Many firms in market – Example: coffee shops, restaurants , hair salons – Most common market structure in “real world” Oligopoly 5-Market Characteristics • • • • • Few large producers Similiar or differentiated products difficult to enter or leave market incomplete information Some price control & mutual interdependence Key with Oligopolies— Pricing decision is dependent on their competitors! Price Costs and Revenue Individual Firm MC MC=MR P = AR = MR P1 Average total cost MC=MR Demand Marginal cost Marginal revenue Q1 Perfect Competition 0 Qty Monopolistic Competition Oligopoly Q Quantity Q Monopoly INTERDEPENDENCE Company 1 Actions of your competition affect you! Company 2 Oligopolies are Interdependent Should I cooperate? Cooperative Behavior Non-cooperative Behavior What is in my Self Interest? Game Theory • John Nash developed Game Theory – Received 1994 Nobel Prize – Game Theory is the Basis for Oligopoly Pricing Your Choice is dependent on the choices other players have! Game Theory Handout • Read Handout carefully Reading Review Game Theory Intro: Coke Advertise Pepsi Dominant Strategy: Nash Equilibrium Don’t Advertise Advertise 80, 80 120, 45 Don’t Advertise 45, 120 100,100 Pepsi to Advertise Coke to Advertise Intro: Game Theory Wrap Up Dominant Strategy- best strategy for one player regardless of what the other player chooses Enforceable Equilibrium- is a stable “market” equilibrium. No incentive to move/cheat! Nash Equilibrium – a combination of strategies that each choose “best” choice in response to the other’s choice. • Every dominant strategy is a Nash Equilibrium • Every Nash equilibrium not is a dominant strategy! Current Events. Oligopoly Market Are 3 companies enough competition? http://www.youtube.com/watch?v=N7_Oiunf1go&feature=player_embedded