PAM_2000_Fall_2008_Chapter_14 - Title: Hard Knock Life...

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1 • Title: Hard Knock Life (Ghetto Anthem) • Artist: Jay-Z • Economic concept: crime, poverty, income- consumption path • Representative lyrics: Let's stick up the world and split it 50-50, uh huh Let's take the dough and stay real jiggy, uh huh PAM 200: Intermediate Microeconomics Prof. John Cawley Chapter 14: Strategy
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2 Where We Are Consumer Theory Individual Demand Market Demand Theory of Production Costs of Production Perfect Competition Imperfect Competition: Monopoly Monopolistic Competition Oligopoly Prices General Equilibrium Market Imperfections Factor Markets Strategy Game Theory Outline • Preventing entry: – Simultaneous decisions – Sequential decisions • Strategic behaviors: – Predatory pricing –Th rea t s – Creating and using cost advantages • Advertising
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3 Preventing Entry • When new firms enter oligopolistic markets, profits of incumbent firms fall • Consider the strategic implications in two scenarios: – Firms decide simultaneously whether to enter – Firms decide sequentially whether to enter Simultaneous Entry Game—Room for 2 Firms 1 , 1 3 , 0 0 , 3 0 , 0 Do Not Enter Enter Do Not Enter Enter Firm 2 Firm 1
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4 • In that payoff matrix, easy to predict what will happen: – Each firm has dominant strategy to enter – Both firms entering is a Nash equilibrium Simultaneous Entry Game Room for 2 Firms Pure vs. Mixed Strategies • Pure strategy: each player chooses an action with certainty • Mixed strategy: player chooses between actions with given probabilities – Basketball: randomly alternate between going to your left and right when “driving to the basket” – Hockey/soccer: randomly vary intended location of penalty shot – Security: Marc Grossman, US Ambassador to Turkey in mid-1990s instructed embassy employees to plot 6 ways to drive to work then throw dice in the morning to choose route – need to be unpredictable
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5 Simultaneous Entry Game--Room for 1 Firm - 1 , - 1 1 , 0 0 , 1 0 , 0 Do Not Enter Enter Do Not Enter Enter Firm 2 Firm 1 • In that payoff matrix, harder to predict what will happen: – Neither firm has dominant strategy Optimal decision of each firm depends on decision of rival firm – This game has more than one Nash equilibrium • Firm 1 enters, Firm 2 does not (pure strategy) • Firm 2 enters, Firm 1 does not (pure strategy) • Each firm enters with 50% probability (mixed strategy) Simultaneous Entry Game Room for 1 Firm
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PAM_2000_Fall_2008_Chapter_14 - Title: Hard Knock Life...

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