ch09 - Static Games and Cournot Competition Chapter 9:...

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Chapter 9: Static Games and Cournot Competition 1 Static Games and Cournot Competition
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Chapter 9: Static Games and Cournot Competition 2 Introduction In the majority of markets firms interact with few competitors oligopoly market Each firm has to consider rival’s actions strategic interaction in prices, outputs, advertising … This kind of interaction is analyzed using game theory assumes that “players” are rational Distinguish cooperative and noncooperative games focus on noncooperative games Also consider timing simultaneous versus sequential games
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Chapter 9: Static Games and Cournot Competition 3 Oligopoly theory No single theory employ game theoretic tools that are appropriate outcome depends upon information available Need a concept of equilibrium players (firms?) choose strategies, one for each player combination of strategies determines outcome outcome determines pay-offs (profits?) Equilibrium first formalized by Nash: No firm wants to change its current strategy given that no other firm changes its current strategy
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Chapter 9: Static Games and Cournot Competition 4 Nash equilibrium Equilibrium need not be “nice” firms might do better by coordinating but such coordination may not be possible (or legal) Some strategies can be eliminated on occasions they are never good strategies no matter what the rivals do These are dominated strategies they are never employed and so can be eliminated elimination of a dominated strategy may result in another being dominated: it also can be eliminated One strategy might always be chosen no matter what the rivals do: dominant strategy
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Chapter 9: Static Games and Cournot Competition 5 An example Two airlines Prices set: compete in departure times 70% of consumers prefer evening departure, 30% prefer morning departure If the airlines choose the same departure times they share the market equally Pay-offs to the airlines are determined by market shares Represent the pay-offs in a pay-off matrix
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Chapter 9: Static Games and Cournot Competition 6 The example 2 The Pay-Off Matrix American Delta Morning Morning Evening Evening (15, 15) The left-hand number is the pay-off to Delta (30, 70) (70, 30) (35, 35) What is the equilibrium for this game? The right-hand number is the pay-off to American
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Chapter 9: Static Games and Cournot Competition 7 The example 3 The Pay-Off Matrix American Delta Morning Morning Evening Evening (15, 15) If American chooses a morning departure, Delta will choose evening (30, 70) (70, 30) (35, 35) If American chooses an evening departure, Delta will also choose evening The morning departure is a dominated strategy for Delta Both airlines choose an evening departure The morning departure is also a dominated strategy for American
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Cournot Competition 8 The example 4 Now suppose that Delta has a frequent flier program When both airline choose the same departure times Delta
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This note was uploaded on 08/08/2011 for the course EC 170 taught by Professor Menegotto during the Fall '08 term at Tufts.

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ch09 - Static Games and Cournot Competition Chapter 9:...

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