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ECS1010.07.post - UNIT III MONOPOLY OLIGOPOLY Monopoly...

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UNIT III: MONOPOLY & OLIGOPOLY Monopoly Oligopoly Strategic Competition 7/20
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Output MR = MC = P ??? MR = MC < P Profit No ? Yes Efficiency Yes ? ???
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Oligopoly We have no general theory of oligopoly. Rather, there are a variety of models, differing in assumptions about strategic behavior and information conditions. All the models feature a tension between: Collusion : maximize joint profits Competition : capture a larger share of the pie
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Game Theory Game Trees and Matrices Games of Chance v. Strategy The Prisoner’s Dilemma Dominance Reasoning Best Response and Nash Equilibrium Mixed Strategies
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Games of Chance Buy Don’t Buy (1000) (-1) (0) (0) Player 1 Chance You are offered a fair gamble to purchase a lottery ticket that pays $1000, if your number is drawn. The ticket costs $1. What would you do?
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Games of Chance Buy Don’t Buy (1000) (-1) (0) (0) Player 1 Chance You are offered a fair gamble to purchase a lottery ticket that pays $1000, if your number is drawn. The ticket costs $1. The chance of your number being chosen is independent of your decision to buy the ticket.
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Games of Strategy Buy Don’t Buy (1000,-1000) (-1,1) (0,0) (0,0) Player 1 Player 2 Player 2 chooses the winning number. What are Player 2’s payoffs?
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Games of Strategy Advertise Don’t Advertise A D A D (10,5) (15,0) (6,8) (20,2) Firm 1 Firm 2 Duopolists deciding to advertise. Firm 1 moves first. Firm 2 observes Firm 1’s choice and then makes its own choice. How should the game be played? Profits are in ( )
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Games of Strategy Advertise Don’t Advertise A D A D (10,5) (15,0) (6,8) (20,2) Firm 1 Firm 2 Duopolists deciding to advertise. Firm 1 moves first. Firm 2 observes Firm 1’s choice and then makes its own choice . How should the game be played? Backwards-induction
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Games of Strategy Advertise Don’t Advertise A D A D (10,5) (15,0) (6,8) (20,2) Firm 1 Firm 2 Duopolists deciding to advertise. The 2 firms move simultaneously . (Firm 2 does not see Firm 1’s choice.) Imperfect Information. Information set
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Matrix Games Advertise Don’t Advertise A D A D (10,5) (15,0) (6,8) (20,2) Firm 1 Firm 2 10, 5 15, 0 6, 8 20, 2 A D A D
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Matrix Games Advertise Don’t Advertise A D A D (10,5) (15,0) (6,8) (20,2) Firm 1 Firm 2 10, 5 15, 0 6, 8 20, 2 A D A D
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Games of Strategy Games of strategy require at least two players. Players choose strategies and get payoffs. Chance is not a player! In games of chance, uncertainty is probabilistic, random, subject to statistical regularities. In games of strategy, uncertainty is not random; rather it results from the choice of another strategic actor. Thus, game theory is to games of strategy as probability theory is to games of chance.
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A Brief History of Game Theory Minimax Theorem 1928 Theory of Games & Economic Behavior 1944 Nash Equilibrium 1950 Prisoner’s Dilemma 1950 The Evolution of Cooperation 1984
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The Prisoner’s Dilemma In years in jail Player 2 Confess Don’t Confess Player 1 Don’t -10, -10 0, -20 -20, 0 -1, -1 The pair of dominant strategies ( Confess, Confess ) is a Nash Eq.
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