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Unformatted text preview: 7. Oligopoly I. Overview A. We have now looked at two extreme types of markets. 1. Competitive markets have an infinite (or at least a very large) number of firms. 2. Monopolist markets have one firm. B. We now look at markets greater than monopoly but not large enough to be competitive. 1. These markets have features of competition. a. Firms can’t unilaterally affect price. b. Prices only partly depend on the quantity provided to the market 2. These markets also have features of monopoly. a. Firms tend to earn positive profits. b. Oligopolistic markets tend to feature some deadweight loss (e.g. underproduction) C. We use game theory to study behavior in oligopolies. 1. Firm decisions affect one another. a. Need an equilibrium concept that describes multiple agents trying to optimize. 2. Given the way we construct equilibria in game theory, the strategic variable chosen will matter. a. We solved the monopolist’s problem by describing its choice of quantities. b. We could have just as easily (and with the same result) had the monopolist choose a price. c. This symmetry disappears in our study of oligopoly. II. (Normal Form) Game theory A. A normal form (simultaneous play) game is defined by three elements 1. A list of N players 2. A set of strategies for each player s i ∈ S i = { s i 1 ,s i 2 ...sik } 3. A payoff function for each player as a function of the vector of each other player’s strategy:3....
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 Fall '09
 oprea
 Game Theory, Monopoly, Oligopoly, best response, oligopolies

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