Lecture 24 - Announcements iClicker Questions will be...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Announcements iClicker Questions will be posted later t oday. Wednesday is review Br ing questions. MT is Fr iday 50 questions Can use a calculat or More details on Weds. 1 of 38 Oligopoly and game theor y Another way t o analyze the behavior of oligopolistic fir ms is to use something called game theor y. The fir ms in Cour nots model do not anticipat e the moves of the competition. Yet in choosing strat egies in an oligopolistic market, real-world fir ms can and do tr y t o guess what the opposition will do in response. I n 1944, John von Neumann and Oskar Morgenst er n published a path-breaking work in which they analyzed a set of problems, or games , in which two or more people or organizations pursue their own interests and in which no one of them can 2 of 38 Game theor y Game theor y goes something like this: I n all conf lict situations, and thus all games, there are decision maker s (or players), r ules of the game (basically what strategies are available to the players), and payoffs (or pr izes). Players choose strat egies without knowing with cer tainty what strategy the opposition will use. 3 of 38 Game theor y Below we have what is called a payoff matr ix for a ver y simple game. Each of two fir ms, A and B, must decide whether t o mount an expensive adver tising campaign. I f they both do not adver tise, they both ear n profits of $50,000. I f one fir m adver tises and the other does not, the fir m that does will increase its profit by 50% (t o $75,000), while dr iving the competition int o the loss column (losing $25k). I f both fir ms decide t o adver tise, they will each ear n profits of $10,000. They may generat e a bit more demand by adver tising, but that demand is complet ely wiped out by the expense of adver tising itself. 4 of 38 5 of 38 OLIGOPOLY Payoff Matrix for Advertising Game Adver tising Game I f Fir ms A and B could collude (and we assume they cannot), their optimal strat egy would be t o agree not to adver tise. That solution maximizes the joint profits to both fir ms. I f neither fir m adver tises, join profits are $100,000. I f both fir ms adver tise, joint profits are only $20,000. I f only one of the fir ms adver tises, joint profits are $50,000. 6 of 38 7 of 38 OLIGOPOLY Payoff Matrix for Advertising Game Adver tising Game The strat egy that Fir m A will actually choose depends on: 1.the infor mation available concer ning Bs likely strat egy, 2.Fir m As preferences for r isk. I n this case, it is possible t o predict behavior....
View Full Document

This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

Page1 / 29

Lecture 24 - Announcements iClicker Questions will be...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online