Intermediate Microeconomics: A Modern Approach, Seventh Edition

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1 Oligopoly
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2 Oligopoly - Competition among the Few In an oligopoly there are very few sellers of the good. The product may be differentiated among the sellers (e.g. automobiles) or homogeneous (e.g. gasoline). Entry is often limited either by legal restrictions (e.g. banking in most of the world) or by a very large minimum efficient scale (e.g. overnight mail service) or by strategic behavior. Sill assuming complete and full information.
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3 How Oligopolists Compete In an oligopoly firms know that there are only a few large competitors; competitors take account of the effects of their actions on the overall market. To predict the outcome of such a market, economists must model the interaction between firms and so often use game theory or game theoretic principles.
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4 Three Basic Models Competition in quantities: Cournot-Nash equilibrium Competition in prices: Bertrand-Nash equilibrium Collusive oligopoly: Chamberlin notion of conscious parallelism It is very useful to know some basic game theory to understand these models as well as other oligopoly models.
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5 Game Theory: Setup List of players: all the players are specified in advance. List of actions: all the actions each player can take. Rules of play: who moves and when. Information structure: who knows what and when. Payoffs: the amount each player gets for every possible combination of the the players’ actions.
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6 A Classic Two Player, Two Action Game - The Prisoners’ Dilemma Roger’s best response function: – If Chris lies, then Roger should confess (check out left column, 1st entries) If Chris confesses, then Roger should confess (right column, 1st entries) Confess is a dominant strategy for Roger Chris’s best response function: – If Roger lies, then Chris should confess (see top row, 2nd entries) – If Roger confesses, then Chris should confess (bottom row, 2nd entries) – Confess is a dominant strategy for Chris Chris Lie Confess Roger Lie -1 , -1 -6 , 0 Confess 0 , -6 -5 ,-5
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7 A Classic Two Player, Two Action Game - The Prisoners’ Dilemma There is a single dominant strategy equilibrium : – Rogers confesses and Chris confesses They both go to jail for 5 years Note: the game is played simultaneously and non-cooperatively! Ways to sustain the cooperative equilibrium (lie, lie) – different payoff structures – repeated play and trigger strategies Chris Lie Confess Roger Lie -1,-1 -6, 0 Confess 0, -6 -5,-5
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8 Question: Will There Always Be A Dominant Strategy Equilibrium? Answer…NO! Then what? Look for Nash Equilibrium.
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9 Nash Equilibrium Named after John Nash - a Nobel Prize winner in Economics. The Nash Non-cooperative Equilibrium of a
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oligopoly - Oligopoly 1 Oligopoly - Competition among the...

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