IMCH13new07 - Chapter 13 Imperfect Competition A Game...

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Chapter 13 Imperfect Competition: A Game Theoretic Approach Chapter Summary Chapter 13 begins with a discussion of game theory using the simple prisioner’s dilemma model as a basis for exploring behavior where interdependence is the key feature of market interaction. Dominant strategies and Nash equilibrium terms are explained in both single play and sequential games. When the interdependency stage is set, the Cournot model is used to show how firms react when an opponent holds its quantity supplied fixed. Next, the Bertrand model assumes that other firms hold prices fixed. The Stackelberg model is contrasted with the Cournot case because it assumes that one duopolist knows the competitors reactive behavior and maximizes accordingly. These models are contrasted with each other and with the shared monopoly case to make judgments about efficiency. Consumers would prefer Bertrand outcomes and like shared monopoly outcomes the least. Stackelberg outcomes come in second and Cournot outcomes third when all are compared together. The impact of the costs to entry are considered in a section on contestable market theory and the effect of economies of scale on market concentration is also addressed. The rest of the chapter is devoted to monopolistic competition models beginning with the Chamberlin representative firm case followed by a spatial and time model of product differentiation. In the spatial model reduced travel costs from more restaurants are compared with the increased costs of restaurant building to find the optimal number of restaurants. The time model uses a similar method of comparing costs to find the optimal number of airline flights between cities. Wherever product differentiation occurs it is likely that the burden of cost for variety is borne mainly by those desiring the variety. Following applications on central tendency theory in monopolistically competitive markets, the chapter ends with some commentary on the nature of advertising and its prospects for altering consumer preferences. In general, only good products are worth advertizing. Chapter Outline Chapter Preview An Interoduction to the Theory of Games The Nash Equilibrium Concept The Maximin Strategy Strategies for Repeated Play in Prisoner’s Dilemmas Sequential Games Some Specific Oligopoly Models The Cournot Model The Bertrand Model The Stackelberg Model Comparing the Models Competition When There are Increasing Retuns to Scale The Chamberlin Model The Spatial Interpretation of Monopolistic Competition The Analogy to Product Characteristics Paying for Variety Hoteling’s Hot Dog Vendors Consumer Preferences and Advertising Summary Teaching Suggestions
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154 CHAPTER 13: Oligopoly and monopolistic competition 1. This chapter has a way of getting tedious if one gets bogged down in the a,b,c’s of the equations. Furthermore, some of the assumptions of the models seem to be so naive that students fail to see the relevance of the models. I find it helps to begin with a game that lends itself to an analysis of interdependency. This oligopoly game requires that the class
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