Econ501aL19 - Oligopoly Under perfect competition, a rm is...

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Oligopoly Under perfect competition, a ¯rm is too small to worry about how their rivals will react to its output decision. Under monopoly, there are no rivals to react to its output decision. Under oligopoly, before a ¯rm can calculate its optimal strategy, it must anticipate what its rivals think its strategy will be (in order to ¯gure out what they will do). Game Theory is designed to address these strategic interactions. A game is a set of players, a set of feasible strategies for each player, and an outcome function which speci- ¯eseachp layer 'spayo®asafunct ionofthestrateg ies selected.
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A Nash equilibrium of a game is a choice of strategies, one for each player, for which no player can receive a higher payo® by deviating to another strategy, holding the other players' strategies constant. Example: Prisoner's Dilemma Pepsi high low Coke high advertising 1,1 3,0 low advertising 0,3 2,2 Equilibrium is (high,high). No matter what the other player does, you are better o® with high. This is not purely confrontational. Both players could bene¯t by signing a binding contract.
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There should be a match between the environment to be understood and the game you specify. The following details can be important: 1. Whether the strategic choice is price, quantity, or something in between (for example, if ¯rms set prices but limit their quantity. 2. The timing of who moves ¯rst, or if moves are simultaneous. 3. Whether ¯rms know their own costs or not; whether ¯rms know the costs of other ¯rms.
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Econ501aL19 - Oligopoly Under perfect competition, a rm is...

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