EC 201 - uncertainty Price lower, output lower Particularly...

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EC 201 14:24 No Collusion Price wars Kinked demand curve Game Theory The study of how firms react in strategic situations (when take rivals reactions or actions into own decision-making) “Prisoner’s dilemma” – (one type of game) Dominant strategy Def: A strategy that is best for your firm, regardless of the strategy chosen by the other  firm Note that cooperation leads to the most profits, but not necessarily the dominant  strategy Rule of the size of market (strategy) The larger the number of firms in the industry, the closer it will be to perfect competition Reason: Role of price effect More firms , price effect smaller Individual firm has less impact on market Closer to  perfect competition Fewer firms , price effect larger individual firm has greater impact on the market Oligopoly Summary No 1 model to explain but, likely a tendency for some degree of collusion to reduce 
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Unformatted text preview: uncertainty Price lower, output lower Particularly in oligopoly industries with small number of firms Economic profits since barriers to entry Non-price competition Monopolistic competition A market form in which there are Many firms Product differentiation Some examples Fast food Shoe store Pizza parlors Retail clothing stores Hand calculators Long run economic profits = 0 Short run economic profits = + Excess Capacity (long run) In long run equilibrium, note that the firm is operating: Not at efficient scale of the firm (where costs are lowest) ( Not at lowest AVC) It is an output less than that Because of downward slope Implications: Too many firms in the industry Each of the firms too small Cost of variety Price > Marginal Cost (small deadweight loss, markup compared to oligopoly) 14:24 14:24...
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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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EC 201 - uncertainty Price lower, output lower Particularly...

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