Week 10 Lecture - ECON1001 Week 10 Oligopoly and Game...

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ECON1001 Week 10 Oligopoly and Game Theory
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2 Oligopoly and Game Theory: Outline Define oligopoly Define a game and strategic interaction Use Prisoners’ Dilemma game to illustrate Nash equilibrium and dominant strategy Examine examples of other games including sequential move games Apply game theory principles to strategic settings of pricing and advertising
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3 Oligopoly An Oligopoly has the following basic characteristics A small number of firms compete The firms could produce identical or differentiated products There are barriers to entry
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4 Strategic Interaction Because there are only a small number of firms, firms recognise that Actions of rival firms can have a large impact on profits A firm’s own actions can influence the profits and actions of rivals For example, the quantity sold by each firm depends on the prices and quantities chosen by rivals. Firms have an incentive to act strategically to influence the actions of competitors.
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5 Game Theory How firms interact strategically is very sensitive to a particular market situation There are many models of oligopoly behaviour Game theory is a tool used to analyse the strategic interaction of agents (firms or people)
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6 Game Theory What is a game? Games have these components Rules Describe how the game works Actions Available choices to each player Strategies A contingent plan of action Payoffs Rewards to players for each possible outcome
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7 The Prisoners’ Dilemma The setting Two bank robbers (Alf and Bob) have been captured by the police Without a confession, the police have insufficient evidence to convict them of a robbery They can prosecute for possession of unlicensed weapons The police have a cunning plan…
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8 The Prisoners’ Dilemma 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
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9 The Prisoners’ Dilemma Possible actions Confess Deny Strategies (contingent plan of action) Confess Deny
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The Prisoners’ Dilemma Payoffs 4 outcomes are possible: Both confess. Both deny.
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This note was uploaded on 09/06/2011 for the course ECON 1001 at University of Sydney.

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Week 10 Lecture - ECON1001 Week 10 Oligopoly and Game...

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