Lecture 11.pptx - Economic Analysis Introduction Consumer...

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1 Economic Analysis Introduction Strategic Analysis 1. Market Concepts Supply Demand 10.Game T Consumer Producers & Competition Market Structure 2.Consumer 3.D-Analysis Network externalitie s Preference P /Income Substitute 4.Production Costs MP & MRTS Scale Types Scale Learning 9. Monopolistic Market Structure 5.Competition 6. Monopoly 7. Pricing Perfect Group Versioning Personal Antitrust Power Collusion Oligopoly Nash Strategies 11. Asym-Info Final Exam Stackelberg Cournot Bertrand Signalling Lemon Switching MU MS Case Lock-in Equilibrium Elasticity Intertemporal 2-part tariff Revision Bundling 8. Peak Load Scope Output in SR Output in LR Tying Lecture 11: Strategies, Lemon & Signaling After this lecture, you should be able to: 1. Explain bargaining strategy 2. Explain entry deterrence strategy 3. Explain pre-emptive strategy 4. Explain Lemon problem 5. Explain market Signaling Theory
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Sequential Games Players move in turn , responding to each other’s actions & reactions. Eg: Stackelberg model (ch. 12) Respond to a competitor’s ad campaign Entry decisions Respond to regulatory policy Go back to product choice problem: 2 new (sweet, crispy) cereals. Successful only if each firm produces 1 cereal Sweet will sell better but both still profitable with only 1 producer. Firm K Crispy Sweet Crispy Sweet Firm N -5, -5 10, 20 -5, -5 20, 10 If firms both announce their decisions independently & simultaneously, they will both pick sweet cereal & both will lose. What if Kellogg sped up production & introduced new cereal first? Now there is a sequential game . Kellogg will think about what Nestle will do.
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First Mover Advantage A clear advantage to moving first in this product-choice game. 1st firm chooses a large output, & forcing 2nd firm chooses a small one. Compare the advantage: [a] Stackelberg; [b] Cournot; [c] P-competition. Assume duopoly, P = 30 – Q where Q = total production = Q 1 + Q 2 MC = 0 & Cournot: Q 1 = Q 2 = 10 & P = $10 & = $100/firm With collusion: Q 1 = Q 2 = 7.5 and P = $15, & = $112.50/firm Firm Moves First (Stackelberg) Q 1 = 15 Q 2 = 7.5 and P = 7.50 1 = 112.50 & 2 = 56.25 Firm 2 Firm 1 7.5 112.50, 112.50 56.25, 112.50 0, 0 112.50, 56.25 125, 93.75 50, 75 93.75, 125 75, 50 100, 100 10 15 7.5 10 15 This payoff matrix shows various outcomes Move together, both produce 10 If Firm 1 moves first (Q=15), best Firm 2 can do is 7.5 In perfect competitive market, both produce 15.
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4 Threats, Commitments, and Credibility What actions can a firm take to gain advantage in the marketplace? (1) Deter entry; (2) Induce competitors to reduce output, leave, raise price (3) Implicit agreements that benefit one firm Strategic Move : action that gives a player an advantage by constraining his behavior. Firm K must constrain its behavior to the extent Firm N is convinced that it is committed to produce sweet cereal .
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