Lecture 25 - Oligopoly and Market Structure

Lecture 25 - Oligopoly and Market Structure - 1 FIN 501...

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Unformatted text preview: 1 FIN 501 Financial Economics Lecture 25: Oligopoly and Market Structure Professor Nolan Miller 2 Announcements Problem Set #7 is due Today The Final Exam will be Wednesday, December 15, from 1:30 4:30. If you have a conflict with the final exam, contact me as soon as possible. Todays Lecture: First, common values auctions, briefly. Then, market structure and oligopoly. 3 After today The next two/three lectures are on macroeconomics. May cover more on oligopoly on Thurs, start Macro in second half. Designed to be self-contained, very general overview. Cocktail Party macro. Exam questions, if any, will focus on very basic definitions. References: Brief Principles of Macroeconomics , N. Gregory Mankiw. Macroeconomics , Abel, Bernanke, Crushoure (just Abel & Bernanke in older editions). Both on reserve. I dont think it is a good use of money to buy one of these (very $$$), but some people like to have additional references. 4 Common Values Auctions & The Winners Curse In a second price auction with private values, it is a dominant strategy to bid your true value. This is not the case in a common values auction. With common values, there is once again a good reason to shade your bid downward. This is called the winners curse. 5 Guess how many pennies auction The guess the pennies auction is a common values auction. The jar is worth the same amount to everyone. Everyone has a guess about how much money is in the jar. If you knew other peoples opinions, that might lead you to refine your guess. Wisdom of crowds 6 Guess how much money I gave you no information about how much money was in the jar. Guesses ranged from $4.72 to $88. The average guess was $23.88. Really there was $15.17. About 41% of guesses were greater than 23. 61% of guesses were higher than $15.17. So, the average was often more accurate than individuals. And, presumably if I told you the average, you would lower your guess if you were above 21. 7 The Winners Curse When do you win this auction? Suppose everyone uses a formula to translate their estimate into a bid. Bid = f(estimate). If higher estimates lead to higher bids, then the one who wins the auction will be the one with the HIGHEST estimate of how much money is in the jar....
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Lecture 25 - Oligopoly and Market Structure - 1 FIN 501...

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