BA_315_LN_7B__Market_structure_and_Competition_Game_Theo

BA_315_LN_7B__Market_structure_and_Competition_Game_Theo -...

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1 Oligopolistic Market Structure & Competition: Game Theory Supplementary Lecture Notes Ali Emami BA 315: Economy, Industry, and Competitive Analysis Summer 2003 Department of Finance Charles H. Lundquist College of Business University of Oregon
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2 Competing in Oligopoly Markets This note is concerned with strategic decision making for competing in oligopoly markets. Oligopoly Markets: A Market with few large firms collectively controlling “large” market share and aware of “interdependence” of their profits and impacts of each firm’s strategic decision on their profits and market shares. Market and Product Characteristics: A firm must lower its price in order to sell more output. Each firm faces a demand curve that depends on how the firm’s rivals behave. A few firms account for a large portion of industry sales. Product is differentiated. Forms of None-price competition: Advertising Product quality differences Interdependence: One firm’s behavior affects other firms’ behavior and profits. Thus, profits of all firms are interdependent. Examples 1: A price cut to increase profits by an airline competing for overseas market:
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3 Company X’s special reduced air fair (an action to increase its profits), could be matched by other few large overseas carriers, creating loss for every firm (one firm’s behavior affects other firms’ behavior and profits). Example 2: Advertisement by one firm to increase its market shares and profits. Coca Cola vs. Pepsi Cola. If Coca Cola increases its advertisement to increase its market share and profits, Pepsi may do the same thing. Thus, Coca’s decision for advertisement and its profits depend on Pepsi’s reaction to such advertisement. Example 3: Production expansion by one firm to increase market shares and profits. A firm’s decision about expanding production by creating new outlet stores depends on rivals’ reaction. Consider Papas pizza decision of opening up a new pizza store closer to campus to increase its profits. Such decision depends on whether or not competition (other pizza firms) match Papas expansion. Questions: How to make profit increasing decisions in oligopolistic markets? Take rival’s reaction into consideration. What is the best way of predicting a rival’s reaction?
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4 Assume rivals always make “related” decisions that are the most profitable for them based on their expectation of decisions to be taken by their rivals.
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