Ch 15 - Oligopoly and Game Theory.pptx

Ch 15 - Oligopoly and Game Theory.pptx - Chapter 15...

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Chapter 15 Oligopoly and Game Theory
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Overview Markets with small numbers of competitors Strategic decision-making What I do depends on what they do and vice-versa. Introduction to Game Theory Several models Cartels Oligopoly 2
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  Monopol y Competitio n Monopolistic Competition Oligopoly More Competition Less Competition (less price control) (more price control) YOU ARE HERE
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Studying Oligopoly Behavior Is complicated  because it’s not a single firm  considering its own costs and pricing independently  (like competitive firms and monopolies). The profits of a large firm depend heavily on the  actions taken by other large firms. Strategic Decision-Making  = Decision-making in  situations that are interactive.
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Cartels cartel  attempts to move a market from a competitive  one to what would occur if the market were controlled by  a single monopoly. Undifferentiated product (Q) Small number of producers Textbook example: Oil and OPEC Organization of Petroleum Exporting Countries (OPEC) 5
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Assume 4 firms in the industry. They want to form a cartel (and act like a  monopolist). Step one – Set the overall production level at the  monopolist quantity where industry profits are  maximized, i.e. Q = Q M Once the overall production level is set, then set  production quota  for each cartel member. 6
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P P Q Q D MC D MC MR Q C = 100 Q C Q M = 48 Competitive Cartel P C P M π 7 “The alleged collusion transformed a cutthroat, highly competitive business into one where sudden, coordinated price spikes on identical generic drugs became almost routine. ” The firms want to go from here . . . . . . to here.
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P Q D MR Q C Q M = 48 Cartel P M π Each firm in the cartel must produce quota = 48/4 = 12. In return, each firm gets π/4. MC 8
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P Q D MR Q C Q M = 48 Cartel P M π Each firm in the cartel must produce quota = 48/4 = 12. In return, each firm gets π/4. MC Firm 1 What if Firm 1 cheats and produces 24 units? 9
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P Q D MR Q C Cartel P M π Each firm in the cartel must produce quota = 48/4 = 12. In return, each firm gets π/4. MC Firm 1 What if Firm 1 cheats and produces 24 units? This lowers market price, but Firm 1 only “pays” ¼ of this loss while gaining larger additional profits. Q M Loss Gain Bottom line: Each firm in the cartel has a strong incentive to cheat. 10 REEF Time
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Suppose that Lakota, Kaldi's, and Coffee Zone form a local coffee shop cartel and  decide to charge $3 for a cup of coffee, with each firm agreeing to sell four cups of  coffee. However, after making the agreement, Kaldi's cheats and produces four  additional cups of coffee. Based on the given demand curve, what happens to the price  of coffee in this market?
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