Principles of Economics- Mankiw (5th) 348

Principles of Economics- Mankiw (5th) 348 - 358 PA R T F I...

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358 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY GAME THEORY AND THE ECONOMICS OF COOPERATION As we have seen, oligopolies would like to reach the monopoly outcome, but do- ing so requires cooperation, which at times is difficult to maintain. In this section we look more closely at the problems people face when cooperation is desirable but difficult. To analyze the economics of cooperation, we need to learn a little about game theory. Game theory is the study of how people behave in strategic situations. By “strategic” we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action. Because the num- ber of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce. In making its production decision, each firm in an oligopoly should consider how its decision might affect the pro-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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