M5l4 - UGBA 10 Module 5 Lecture 4 Avoiding the Bertrand Trap Recall the model’s Recall the model’s assumptions assumptions fir ms produce a fir

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Unformatted text preview: UGBA 10 Module 5 Lecture 4: April 30, 2008 Avoiding the Bertrand Trap Recall the model’s Recall the model’s assumptions: assumptions: fir ms produce a fir ms produce a homogeneous product homogeneous product fir ms have unlimit ed fir ms have unlimit ed capacity capacity fir ms play once fir ms play once (alt er natively, (alt er natively, myopically) myopically) cust omers know pr ices. cust omers know pr ices. cust omers face no cust omers face no switching costs switching costs fir ms have the same, fir ms have the same, constant unit cost constant unit cost The The Bertrand Bertrand Trap Trap Avoiding the Ber trand Trap Must alt er the assumptions ( Kobayashi Moru ); that is, do at least one of following: don’t produce a homogeneous product don’t have unlimit ed capacity don’t play myopically (facilitat e tacit collusion) make it difficult for customers to lear n pr ices make it difficult for customers to switch from one fir m to the other lower your costs Avoiding the Trap: Method 1 — Lower Costs • Each bidder (except one) has a cost of $1. • Exception has a cost of $0. • Simultaneous bid. • Lowest bid gets amount bid less cost (unless all bids exceed $5, in which case no one gets anything). • Ties decided by fair randomization. • Note: A winning bid at less than cost means you pay me! Another Game Pot ential Problems with Method 1 • Question is sustainability of cost advantage: • Could fail the “ R ” test in AU R A....
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This note was uploaded on 03/22/2009 for the course UGBA 08403 taught by Professor Robinson during the Spring '09 term at University of California, Berkeley.

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M5l4 - UGBA 10 Module 5 Lecture 4 Avoiding the Bertrand Trap Recall the model’s Recall the model’s assumptions assumptions fir ms produce a fir

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