Transcript PowerPoints Chapter 11

Chapter 11
Chapter 11
McGraw-Hill/Irwin
IMPERFECT COMPETITION:
A GAME-THEORETIC APPROACH
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
• AN INTRODUCTION TO THE THEORY OF GAMES
• SOME SPECIFIC OLIGOPOLY MODELS
• COMPETITION WHEN THERE ARE INCREASING RETURNS TO
SCALE
• MONOPOLISTIC COMPETITION
• A SPATIAL INTERPRETATION OF MONOPOLISTIC
COMPETITION
• HISTORICAL NOTE: HOTELLING’S HOT DOG VENDORS
• CONSUMER PREFERENCES AND ADVERTISING
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Prisoner's Dilemma
• Two prisoners are held in separate cells for a serious
crime that they did in fact commit. The prosecutor
has only enough hard evidence to convict them of a
minor offense, for which the penalty is a year in jail.
Each prisoner is told that if one confesses while the
other remains silent, the confessor will go scot-free
while the other spends 20 years in prison. If both
confess, they will get an intermediate sentence of 5
years.
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Dominant Strategy
• Dominant strategy: the strategy in a game
that produces better results irrespective of the
strategy chosen by one’s opponent.
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The Nash Equilibrium Concept
• Nash equilibrium: the combination of
strategies in a game such that neither player
has any incentive to change strategies given
the strategy of his opponent.
– A Nash equilibrium does not require both players
to have a dominant strategy!
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The Maximin Strategy
• Maximin strategy: choosing the option that
makes the lowest payoff one can receive as
large as possible.
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Tit-for-Tat
• Tit-for-tat strategy: The first time you interact with
someone, you cooperate. In each subsequent
interaction you simply do what that person did in the
previous interaction. Thus, if your partner defected
on your first interaction, you would then defect on
your next interaction with her. If she then
cooperates, your move next time will be to
cooperate as well.
– Requirement: there not be a known, fixed number of
future interactions.
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Sequential Games
• Sequential game: one player moves first, and the
other is then able to choose his strategy with full
knowledge of the first player’s choice.
– Example - United States and the former Soviet Union
(USSR) during much of the cold war.
• Strategic entry deterrence – they change potential
rivals’ expectations about how the firm will respond
when its market position is threatened.
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Figure 11.1: Nuclear Deterrence
as a Sequential Game
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Figure 11.2: The Decision to Build
the Tallest Building
Transnet
Transnet
Transnet
Transnet
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Figure 11.3: Strategic Entry Deterrence
Transnet
Transnet
Transnet
Transnet
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The Cournot Model
• Cournot model: oligopoly model in which
each firm assumes that rivals will continue
producing their current output levels.
– Main assumption - each duopolist treats the
other’s quantity as a fixed number, one that will
not respond to its own production decisions.
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Figure 11.4: The Profit-Maximizing Cournot
Duopolist
R/Q
0
Q
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The Cournot Model
• Reaction function: a curve that tells the profitmaximizing level of output for one oligopolist
for each amount supplied by another.
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Figure 11.5: Reaction Functions
for the Cournot Duopolists
0
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Figure 11.6: Deriving the Reaction
Functions for Specific Duopolists
R/Q
0
0
13-17
The Bertrand Model
• Bertrand model: oligopoly model in which
each firm assumes that rivals will continue
charging their current prices.
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Figure 11.7: The Stackelberg Leader’s
Demand and Marginal Revenue Curves
R/Q
0
13-19
Figure 11.8: The Stackelberg Equilibrium
0
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Figure 11.9: Comparing Equilibrium Price
and Quantity
R/Q
0
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Comparison Of Outcomes
TABLE 11.5
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Figure 11.10: The Kinked Demand Curve
R/Q
MC2
P*
MC1
D
0
Quantity
Q*
MR
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Figure 11.11: Price Setting by a
Dominant Firm
Price
DM
SS
P1
MCD
P*
DD
P2
0
QS QD
QT
Quantity
MRD
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Figure 11.12: The OPEC Oil Cartel
Price
DT
SS
P*
DOPEC
MCOPEC
PC
MROPEC
0
QC
QOPEC
QT
Quantity
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Figure 11.13: The Monopolistic
Competitor’s Two Demand Curves
0
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The Chamberlin Model
•
•
Assumption: a clearly defined “industry group,”
which consists of a large number of producers of
products that are close, but imperfect, substitutes
for one another.
Two implications:
1. Because the products are viewed as close substitutes,
each firm will confront a downward-sloping demand
schedule.
2. Each firm will act as if its own price and quantity
decisions have no effect on the behaviour of other firms
in the industry.
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Figure 11.14: Short-Run Equilibrium for the
Chamberlinian Firm
R/Q
0
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Figure 11.15: Long-Run Equilibrium
in the Chamberlin Model
R/Q
0
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Perfect Competition Versus Chamberlinian
Monopolistic Competition
• Competition meets the test of allocative efficiency, while
monopolistic competition does not.
• Monopolistic competition is less efficient than perfect
competition because in the former case firms do not produce
at the minimum points of their long-run average cost (LAC)
curves.
• In terms of long-run profitability the equilibrium positions of
both the perfect competitor and the Chamberlinian
monopolistic competitor are exactly the same.
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Figure 11.16:Monopolistic Competition Equilibrium
and Perfectly Competitive Equilibrium
Price
Price
MC
MC
AC
AC
pMC
pC
D = MR
D
MR
0
QC
Quantity 0
QMC
Quantity
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Figure 11.17: An Industry in Which Location is the
Important Differentiating Feature
0,5 km
1 km
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The Optimal Number of Locations
• The number of outlets that emerges from the
independent actions of profit-seeking firms will in
general be related to the optimal number of outlets
in the following simple way:
– Any environmental change that leads to a change in the
optimal number of outlets (here, any change in population
density, transportation cost, or fixed cost) will lead to a
change in the same direction in the equilibrium number of
outlets.
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Figure 11.18: Distances with N Outlets
2
2
2
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Figure 11.19: The Optimal Number
of Outlets
R/day
0
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Competition When There Are Increasing
Returns To Scale
• In markets for privately sold goods, buyers are
often too numerous to organize themselves to
act collectively.
– Where it is impractical for buyers to organize
direct collective action, it may nonetheless be
possible for private agents to accomplish much
the same objective on their behalf.
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A Spatial Interpretation
of Airline Scheduling
• Why not have a flight leaving every 5 minutes,
so that no one would be forced to travel at an
inconvenient time?
– The larger an aircraft is, the lower its average cost
per seat is.
• If people want frequent flights, airlines are forced to
use smaller planes and charge higher fares.
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Figure 11.20: A Spatial Interpretation
of Airline Scheduling
24:00
18:00
06:00
12:00
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Figure 11.21: Distributing the Cost
of Variety
R/Q
R/Q
Volkswagen
Audi
270 000
210 000
150 000
0
180 500
MRVW
MCVW
DVW
QVW
0
MCAudi
MRAudi
DAudi
QAudi
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Figure 11.22: The Hot Dog Vendor Location
Problem
0.0
0.5
1.0
1.5
2.0
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Consumer Preferences And Advertising
• Because products are differentiated,
producers can often shift their demand curves
outward significantly by advertising.
• The revised sequence: the corporation decides
which products are cheapest and most
convenient to produce, and then uses
advertising and other promotional devices to
create demand for them.
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