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Class04_04

# Class04_04 - Class Notes(cover part of Chapter 12 in the...

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4/04/2008 Class Notes (cover part of Chapter 12 in the textbook) Class Outline Sequential Games Review Ch.7-8 Sequential Games A Sequential Entry Game in a Contestable Market Let’s look at a contestable market —a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants— where firms play a sequential entry game (one firm chooses first and the other next). Example : Airlines Routes Stage 1 : Agile decides whether to set the monopoly price or the competitive price. Agile cannot change the price afterwards. Stage 2 : Wanabe decides whether to enter or stay out. Representing the game tree: 1

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In the equilibrium of this entry game, Agile sets a competitive price and zero profit to keep Wanabe out. A less costly strategy is limit pricing , which sets the price at the highest level that is consistent with keeping the potential entrant out. Chapter 7: Utility and Demand Consumer’s objective : Max (Total) Utility subject to (s.t., henceforth) budget constraint . Def. Total Utility Total utility is the total benefit a person gets from the consumption of goods or services. Def. Budget Constraint (Budget Line) The budget constraint is the boundary between the consumption possibilities that are affordable and those that are not given the goods’ prices and consumer’s income. 1. If widgets cost \$5, and gadgets cost \$2, and your income is \$60, what would the equation of your budget line be? (W= quantity of widgets and G = quantity of gadgets) a. 60 = 5W + 2G b. 5 = 2W + 30G c. 60= 2W + 30/G d. 60 = 2W + 5W If the consumer’s income increases (decreases) the budget line shifts right (left). If the price of one of the goods changes, the budget constraints changes slope. Only the intercept on the axis of the good whose price is changing changes. 2

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Class04_04 - Class Notes(cover part of Chapter 12 in the...

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