ajaz_204_2009_lecture_24

ajaz_204_2009_lecture_24 - University of Toronto Department...

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University of Toronto Department of Economics ECO 204 2009 2010 Sayed Ajaz Hussain Lecture 24 1 S. Ajaz Hussain [email protected]

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Today ± Prisoner’s dilemma ² Cournot game revisited ² Pricing games ² Price wars ² Avoiding and Stopping Price Wars o Tit for tat strategies o Implicit communication and signaling o Changing the rules of the game S. Ajaz Hussain [email protected] 2
Last Time: Prisoner’s Dilemma S. Ajaz Hussain [email protected] 3 PTC # 2 Outputs (Columns) PTC#1 Outputs (Rows) Cartel q 2 = 74.4 Cournot q 2 = 99.2 Monopoly q 2 = 148.9 Cartel q 1 = 74.4 53.5 53.5 44.6 59.4 26.8 53.5 Cournot q 1 = 99.2 59.4 44.6 47.6 47.6 23.8 35.7 Monopoly q 1 = 148.9 53.5 26.8 35.7 23.8 0 0 Cheat Nash Coop

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Firm 1 Produces Cartel Output Firm 2 can Cooperate or Cheat S. Ajaz Hussain [email protected] 4 If Firm 2 Cooperates T = 0 T = 1T = 2T = 3… q 1 74.4 74.4 74.4 74.4 74.4 74.4 q 2 74.4 74.4 74.4 74.4 74.4 74.4 Profit 2 53.5 53.5 53.5 53.5 53.5 53.5 If Firm 2 Cheats T = 0 T = = = q 1 74.4 99.2 99.2 99.2 99.2 99.2 q 2 99.2 99.2 99.2 99.2 99.2 99.2 Profit 2 59.4 47.6 47.6 47.6 47.6 47.6
If Firm 2 Cooperates S. Ajaz Hussain [email protected] 5 If Firm 2 Cooperates T = 0 T = 1T = 2… q 1 74.4 74.4 74.4 q 2 74.4 74.4 74.4 FV(Profit 2 ) 53.5 53.5 53.5 PV(Profit 2 ) 53.5/(1 + r) 0 53.5/(1 + r) 1 53.5/(1 + r) 2 PV(Profit 2 ) 53.5 53.5 β 53.5 β 2 PV(Firm 2 Coop) = 53.5 + 53.5 β + 53.5 β 2 + 53.5 β 3 + … PV(Firm 2 Coop) = 53.5(1 + β + β 2 + β 3 + … ) PV(Firm 2 Coop) = 53.5/(1 ‐ β )

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If Firm 2 Cheats S. Ajaz Hussain [email protected] 6 If Firm 2 Cheats T = 0 T = 1T = 2… q 1 74.4 99.2 99.2 q 2 99.2 99.2 99.2 FV(Profit 2 ) 59.4 47.6 47.6 PV(Profit 2 ) 59.4/(1 + r) 0 47.6/(1 + r) 1 47.6/(1 + r) 2
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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ajaz_204_2009_lecture_24 - University of Toronto Department...

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