PAM_2000_Spring_2009_Lecture_23

PAM_2000_Spring_2009 - PAM2000:Lecture23 n n Agenda Oligopoly and monopolistic competition q q q q q q Oligopoly Dominant strategy Punishment in

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PAM 2000: Lecture 23 n Agenda: n Oligopoly and monopolistic competition q Oligopoly q Dominant strategy q Punishment in repeated games q Cooperative oligopoly: Cartels and policing q Monopolist competition q Non-cooperative oligopoly: Cournot model
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Oligopoly and Monopolistic  Competition n Oligopoly: A small number of firms in an industry that has some barrier to entry n Not perfect competition, not monopoly n Firms must consider the effects of the other firm’s (rival’s) decisions on their actions n Monopoly: No rivals n Competition: So many rivals that it ignores them
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 Oligopoly n Oligopolistic firms may either coordinate their actions or act separately n If they coordinate their actions (or cooperate) can form a cartel n A cartel occurs when oligopolistic firms coordinate their actions and charge the monopoly price n They can then earn the greatest profits: Monopoly profits
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Oligopoly (con’t) n There must be a barrier to entry to keep the number of firms small (cars, steel, oil) n Game Theory : An interaction that takes strategic behavior of the players into account n Originally developed for defense analysis purposes during the Cold War (few number of players, US, Soviet Union, China, etc.)
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Oligopoly (con’t) n In an oligopolistic market (or monopolistic competition), firm considers the actions of its rivals when it forms its strategy n Strategy : Firm’s plan of action n Firm picks a strategy based on its goal, which is to maximize profits n Different notion of equilibrium
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Oligopoly (con’t) n Oligopolistic market is in equilibrium when no firm wants to change its strategy given what the other firms are doing n In a Nash Equilibrium , holding constant the strategy of other firms, no firm can obtain a higher payoff (profit) by changing its strategy n No firm wants to change its strategy because each firm is choosing its best response , i.e. the strategy that maximizes profit given what it thinks the rivals’ strategies are
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n Consider a duopoly (one type of oligopoly) n Say American Airlines and United Airlines are competing on a specific route n How many units of output (seats) to offer? n
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This note was uploaded on 11/14/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM_2000_Spring_2009 - PAM2000:Lecture23 n n Agenda Oligopoly and monopolistic competition q q q q q q Oligopoly Dominant strategy Punishment in

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