Lecture 23

# Lecture 23 - Announcements HW for ch 10 due Monday 2 parts...

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Announcements HW for ch 10 due Monday – 2 parts Monday – review (and maybe some new stuff) Exam on Wednesday – same deal as last time. Practice exam on Scholar (note: no game theory questions on this practice exam but game theory will be on the test.)

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Oligopoly and game theory Another way to analyze the behavior of oligopolistic firms is to use something called game theory. The firms in Cournot’s model do not anticipate the moves of the competition. Yet in choosing strategies in an oligopolistic market, real-world firms can and do try to guess what the opposition will do in response. In 1944, John von Neumann and Oskar Morgenstern published a path-breaking work in which they analyzed a set of problems, or games , in which two or more people or organizations pursue their own interests and in which no one of them can dictate the
Game theory Game theory goes something like this: In all conflict situations, and thus all games, there are decision makers (or players), rules of the game (basically what strategies are available to the players), and payoffs (or prizes). Players choose strategies without knowing with certainty what strategy the opposition will use. The solution to the game is called the

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Game theory Below we have what is called a “payoff matrix” for a very simple game. Each of two firms, A and B, must decide whether to mount an expensive advertising campaign. If they both do not advertise, they both earn profits of \$50,000. If one firm advertises and the other does not, the firm that does will increase its profit by 50% (to \$75,000), while driving the competition into the loss column (losing \$25k). If both firms decide to advertise, they will each earn profits of \$10,000. They may generate a bit more demand by advertising, but that demand is completely wiped out by the expense of advertising itself.
OLIGOPOLY Payoff Matrix for Advertising Game

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Advertising Game If Firms A and B could collude (and we assume they cannot), their optimal strategy would be to agree not to advertise. That solution maximizes the joint profits to both firms. If neither firm advertises, join profits are \$100,000. If both firms advertise, joint profits are only \$20,000. If only one of the firms advertises, joint profits are \$50,000.
OLIGOPOLY Payoff Matrix for Advertising Game

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## This note was uploaded on 12/20/2011 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 23 - Announcements HW for ch 10 due Monday 2 parts...

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