powerpoint - Oligopoly and Monopolistic Competition Key...

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Oligopoly and Monopolistic Competition
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Key issues 1. market structure 2. game theory 3. Cournot model of oligopoly 4. Stackelberg model of oligopoly 5. cartels 6. monopolistic competition 7. Bertrand model of oligopoly
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Market structures markets differ according to number of firms in market ease of entry and exit ability of firms to differentiate their products
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Oligopoly small group of firms in a market with substantial barriers to entry because relatively few firms compete in such a market, each firm faces a downward-sloping demand curve each firm can set its price: p > MC market failure: inefficient (too little) consumption each affects rival firms typical oligopolists differentiate their products
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Strategies and games oligopolistic or monopolistically competitive firm use a strategy: battle plan of actions (such as setting a price or quantity) it will take to compete with other firms oligopolies engage in a game: any competition between players (such as firms) in which strategic behavior plays a major role
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Game theory set of tools used by economists, political scientists, military analysts, and others to analyze decision making by players (such as firms) who use strategies these analytic tools can be used to analyze oligopolistic games poker coin-matching games tic-tac-toe elections nuclear war
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Firm's objective obtain largest possible profit (or payoff) at game’s end typically, one firm's gain comes at expense of other firms each firm's profit depends on actions taken by all firms
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Nash equilibrium set of strategies is a Nash equilibrium if, holding strategies of all other players (firms) constant, no player (firm) can obtain a higher payoff (profit) by choosing a different strategy in a Nash equilibrium, no firm wants to change its strategy because each firm is using its best response : strategy that maximizes its profit given its beliefs about its rivals' strategies
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Duopoly consider single-period, duopoly, quantity- setting game duopoly : an oligopoly with two ("duo") firms
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Firms act simultaneously each firm selects a strategy that maximizes its profit given what it believes other firm will do firms are playing a noncooperative game of imperfect information: each firm must choose an action before observing rivals’ simultaneous actions
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Dominant strategy a strategy that strictly dominates all other strategies regardless of which actions rivals’ chose firm chooses its dominant strategy where a firm has a dominant strategy, its belief about its rival's behavior is irrelevant
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Noncooperative game firms do not cooperate in a single-period game In Nash equilibrium, each firm earns less than it would make if firms restricted their outputs sum of firms' profits is not maximized in this simultaneous choice, one-period game
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Why don't firms cooperate? don't cooperate due to a lack of trust:
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This note was uploaded on 08/01/2008 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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powerpoint - Oligopoly and Monopolistic Competition Key...

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