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Unformatted text preview: Oligopoly M icroeconomics P R I N C I P L E S O F P R I N C I P L E S O F N. Gregory Mankiw N. Gregory Mankiw Chapter 17 Oligopoly • Oligopoly is a market structure in which only a few sellers offer similar or identical products. • Oligopoly is the middle ground between perfect competition and monopoly. Game Theory • Game theory is the study of how people behave in strategic situations. • By “ strategic situations ” we mean situations in which a person, when choosing among alternative courses of action, must consider how others might respond to the action he takes. Types of Games • Simultaneous move games – Rock – paper – scissors (Rochambeau) – Firms decide simultaneously whether they will charge high prices or low prices. • Sequential move games – Chess – Checkers – Tictactoe – A potential entrant decides whether or not to enter a new market. After the potential entrant makes its decision the incumbent firm decides whether to fight or accommodate. Grades Game • If you both choose 1 finger you each get a C • If you both choose 2 fingers you each get a B • If one chooses 1 finger and the other chooses 2 fingers – The person who chooses 1 gets an A – The person who chooses 2 gets an F One finger Two fingers One finger C C F A Two fingers A F B B B A One finger Two fingers One finger C C F A Two fingers A F B B B A A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by other players. One finger Two fingers One finger C C F A Two fingers A F B B B A One finger Two fingers One finger C C F A Two fingers A F B B B A A dominant strategy equilibrium is an equilibrium in which each player has a dominant strategy. One finger Two fingers One finger C C F A Two fingers A F B B B A Prisoners’ Dilemma • A and B are arrested for a crime. • The district attorney tells each. “If you confess and agree to testify against the other, I will see that you get just one year in jail and your partner will get 10 years. If you both confess you will each get 3 years.” • Both know that if neither confesses both will be convicted of a lesser crime and each will get a two year Confess Not Confess Confess 3 3 10 1 Not Confess 1 10 2 2 B A One finger Two fingers One finger C C F A Two fingers A F B B B A Demand Schedule Price Quantity $2 4 $3 3 $5 2 Low (Q = 1) High (Q = 2) Low (Q = 1) 5 5 6 3 High (Q = 2) 3 6 4 4 B A Low (Q = 1) High (Q = 2) Low (Q = 1) 5 5 6 3 High (Q = 2) 3 6 4 4 B A Low (Q = 1) High (Q = 2) Low (Q = 1) 5 5 6 3 High (Q = 2) 3 6 4 4 B A One Solution to the Prisoner’...
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 Spring '08
 Bulmash
 Oligopoly, Perfect Competition

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