Ch10 - Strategic Choice in Oligopoly Monopolistic Competition and Everyday Life 1 Interdependencies Inmakingchoices,peoplemustconsider

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Strategic Choice in Oligopoly, Monopolistic Competition, and Everyday Life 1
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Slide 2 Thinking Strategically Interdependencies In making choices, people must consider  the effect of their behavior on others. Imperfectly competitive firms may consider  how rivals will respond to price changes or  new advertising.
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Slide 3 Using Game Theory to Analyze Strategic Decisions Basic Elements of a Game The players Their strategies The payoffs
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Slide 4 Example Should United Airlines spend more on  advertising? Note The airline industry is an oligopoly with an  undifferentiated product. Using Game Theory to Analyze Strategic Decisions
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Slide 5 The Payoff Matrix for  an Advertising Game Raise ad spending Leave ad spending the same Raise ad spending Leave ad spending the same $5,500 for American $5,500 for American $5,500 for United $5,500 for United American’s Choices United’s Choices $2,000 for American $2,000 for American $8,000 for United $8,000 for United $6,000 for American $6,000 for American $6,000 for United $6,000 for United $8,000 for American $8,000 for American $2,000 for United $2,000 for United
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Slide 6 Dominant Strategy One that yields a higher payoff no matter  what the other players in a game choose Dominated Strategy Any other strategy available to a player  who has a dominant strategy Dominant and Dominated  Strategies
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Slide 7 Any combination of strategies in which  each player s strategy is her or his best  choice, given the other player strategies When each player has a dominant  strategy, equilibrium occurs when each  player follows that strategy Nash Equilibrium
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Slide 8 Nash Equilibrium There can be an equilibrium when players  do not have a dominant strategy Example Should American spend more on  advertising? Assume United and American are the only  carriers serving the Chicago   St. Louis  market
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Slide 9 Equilibrium When One  Player Lacks a Dominant Strategy Raise ad spending Leave ad spending the same Raise ad spending Leave ad spending the same $4,000 for American $4,000 for American $3,000 for United $3,000 for United $3,000 for American $3,000 for American $8,000 for United $8,000 for United $2,000 for American $2,000 for American $5,000 for United $5,000 for United $5,000 for American $5,000 for American $4,000 for United $4,000 for United American’s Choices United’s Choices
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Slide 10 What Should United and American do  if Their Payoff Matrix is Modified? Raise ad spending Leave ad spending the same Raise ad spending Leave ad spending the same $8,000 for American $8,000 for American $3,000 for United $3,000 for United $5,000 for American $5,000 for American $4,000 for United $4,000 for United $2,000 for American $2,000 for American $5,000 for United
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This note was uploaded on 05/04/2011 for the course STAT 1301 taught by Professor Smslee during the Spring '08 term at HKU.

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Ch10 - Strategic Choice in Oligopoly Monopolistic Competition and Everyday Life 1 Interdependencies Inmakingchoices,peoplemustconsider

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