Chap_11 - 1 Chapter 11 Strategic Choice in Oligopoly,...

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Chapter 11 Strategic Choice in Oligopoly, Monopolistic Competition and Everyday Life Purpose: To explain game theory and several related concepts can be used to analyze choice situations in an economy characterized by imperfect competition. Game theory is shown to be appropriate in settings in which two or more players know the outcomes of two or more possible courses of action. In such instances, behavior is interrelated so that what “B” does is conditioned by what “A” does or is expected to do. Simple games and examples (real and hypothetical) ar4e solved by using payoff matrices and decision trees. The role of preferences is given extensive treatment. Length: XX pages Time required to read: Two and one-half hours. “Real world” examples complete with graphs and tables make the chapter easy to read but understanding the workings of the prisoners’ dilemma and other strategies introduces some need for additional time. Number of lectures required for understanding: More than one; less than two. After a sometimes-difficult introduction, students find this topic to be intriguing. Developing new problems and working through new games can take a huge amount of time. Sticking to the text generally allows coverage in two or fewer lectures. Summary The chapter opens with a real-life situation in which incorrect timing cost a movie studio a large sum for what should have been a fairly modest contractual arrangement. If the movie studio had paid attention to timing and to normal protocols, it could have completed the movie at much lower cost. The problem? The movie company did not consider the possible reaction of a star. This action is suggested as typical when imperfectly competitive firms do not consider the possible response that a rival might make. 1
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Game theory is introduced using a payoff matrix faced by two firms. The solution to the game is explained in terms of a dominant strategy and a Nash Equilibrium. Modifications of the payoff matrix are used to show the solution of a game when the players do not have a dominant strategy. The outcome is again presented as a Nash Equilibrium. The classic “prisoner’s dilemma” is used to explain a category of games in which dominant strategies result in losses for the players. The prisoner’s dilemma is described as a “dilemma” that two imperfectly competitive firms might face. The diagrams and concepts from Chapter 10 are used to explain the game. Additional dilemmas from other aspects of life and society are used to make additional points about the process of gaming in choice-making. The section ends with a short sub-section on resolving the problems that the prisoner’s dilemma poses. Games relating to timing (sequential decisions) are explained using decision trees. Sub-sets of tree games include credible threats (promises), location decisions, and commitment problems. The final section of the chapter explains the relationships between incentives and preferences.
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This note was uploaded on 03/30/2008 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Summer '08 term at Pennsylvania State University, University Park.

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Chap_11 - 1 Chapter 11 Strategic Choice in Oligopoly,...

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