Week 10 Oligopoly and Game Theory

Week 10 Oligopoly and Game Theory - 1 Oligopoly and Game...

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Unformatted text preview: 1 Oligopoly and Game Theory (TF Chapter 11 pp. 241-250) 2 Todays Agenda Characteristics of an oligopoly Game theory Applications of game theory to oligopolies 3 Oligopoly An Oligopoly has the following basic characteristics A small number of firms The firms produce identical or differentiated products There are barriers to entry 4 Oligopoly Because there are only a small number of firms, firms recognise that Actions of rival firms can have a large impact on profits A firms own actions can influence the profits and actions of rivals For example, the quantity sold by any one producer depends on the prices charged and quantities sold by other producers 5 Game Theory How firms interact strategically is very sensitive to particular contexts There are many models of oligopoly behaviour Game theory is a tool used to analyse the strategic interaction of agents (firms or people) 6 Game Theory What is a game? Games have these components: Rules Actions Strategies Payoffs 7 Dominant strategy A dominant strategy A strategy that is optimal for every possible strategy of your rival A weakly dominant strategy gives a payoff that is greater than or equal to other strategy payoffs for every possible rival strategy A strictly dominant strategy gives a strictly larger payoff for every possible rival strategy 8 In a Nash equilibrium , each player takes their best possible action given the action of their opponent . Nash Equilibrium 9 An example: The Prisoners Dilemma The setting: Two bank robbers (Timmy and Jimmy) have been captured by the police There is no physical evidence so without a confession, the police cannot convict them of a robbery Without a confession they can only convict them for a minor crime: possession of unlicensed weapons The police have a cunning plan 10 10 Rules of the game Prisoners are put in separate rooms and cannot communicate with each other. They are told If one of the prisoners confesses, he can go free The partner will then be convicted and face a heavy sentence for uncooperative behaviour If both prisoners confess, they will be convicted and face a moderate sentence If neither confesses they will each be convicted for the minor crime An example: The Prisoners Dilemma 11...
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Week 10 Oligopoly and Game Theory - 1 Oligopoly and Game...

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