ch09 - Chapter 9 Static Games and Cournot Competition...

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51 C hapter 9: Static Games and Cournot Competition Learning Objectives: Students should learn to: 1. The student should understand the ideas of strategic interdependence and reasoning strategically and be able to apply them to economic models of market behavior. 2. The student should understand and be able to apply simple ideas from game theory to economic models. Concepts include: a. Rational behavior b. Rules of a game c. Information sets and the idea of knowing the structure of a game including the preferences and information sets of other players d. Simultaneous move games e. Sequential move games f. Intuitive description of a Nash equilibrium g. Dominant strategies (pairwise, strong, and weak) h. Dominated strategies i. Reaction or “best response” functions j. Various practical techniques for solving games (cross out dominated strategies, use arrows to denote direction of improvement, find reaction functions and then find fixed point, etc.) k. Formal description of Nash equilibrium 3. The student should understand how to solve a simple Cournot duopoly model with very specific characteristics including: a. Constant marginal costs b. Identical marginal costs c. Linear inverse demand curves and the resulting linear marginal revenue curves d. Linear reaction functions e. Symmetric Nash equilibrium 4. The student should understand how the simple Cournot model easily generalizes to more realistic models, how to solve these models, and the insights gained from these generalizations. a. Different costs between firms b. Linear marginal costs (at the instructor’s discretion) c. More than two firms d. Using symmetry to solve more complex models e. Welfare implications of the Cournot model vis-a-vis perfect competition and monopoly (cartels)
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52 Suggested Lecture Outline: Spend three fifty-minute long lectures on this chapter. Lecture 1: 1. Strategy 2. Rules and structure 3. Simultaneous (normal) and sequential (extensive) form games 4. Dominant and dominated strategies 5. Solution strategies 6. Nash equilibrium as a solution concept 7. Finding Nash equilibrium 8. Best response functions 9. Formal discussion of Nash equilibrium Lecture 2: 1. Oligopoly models 2. The simple Cournot model 3. Numerical and Graphical Problems on the Cournot Model Lecture 3: 1. Extensions of the Cournot model 2.
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