4.5.10 – Lecture Notes, Econ 201

4.5.10 – Lecture Notes, Econ 201 - 4.5.10...

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4.5.10 – Lecture Notes, Econ 201 NO COLLUSION 1. Price Wars 2. Kinked Demand Curve KINKED DEMAND CURVE Model to explain price stability - A Price is established - Owner believes that if he/she increases the price, rivals not follow - Owner believes that if he/she decreases price, rivals will follow - Pessimistic assumptions assume the worst NO COLLUSION 1. Price Wars 2. Kinked Demand Theory 3. Game Theory GAME THEORY - The study of how firms react in strategic situations o When take rivals reactions or actions into own decision-making - “Prisoner’s Dilemma” Assumptions for our sample game 1. There are only 2 firms 2. There are 2 options for each firm 3. They each want to maximize profits Here’s a real world problem that can be studied using game theory - Pepsi and Coca Cola are deciding whether or not to advertise DOMINANT STRATEGY - Definition: A strategy that is best for a firm, regardless of the strategy chosen by the other firm - The payoffs to different strategies for Pepsi and Coke are given on the next slide
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This note was uploaded on 10/13/2011 for the course EC 201 taught by Professor Haider during the Spring '10 term at Michigan State University.

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4.5.10 – Lecture Notes, Econ 201 - 4.5.10...

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