Lecture 6 Oligopoly_ Strategic Behaviour and Competition Policy

Lecture 6 Oligopoly_ Strategic Behaviour and Competition Policy

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Lecture 6 Oligopoly, Strategic Behaviour and Competition Policy EC1101E Introduction to Economic Analysis 1
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Outline 1. Definition and features of oligopoly and the oligopolist’s problem and strategies. 2. Using Game Theory - dominant strategy and Nash equilibrium. 3. Cartel pricing and the duopolists’ dilemma. 4. Game Tree, sequential games and price-fixing. 5. Payoff matrix and simultaneous games. 6. The prisoners’ dilemma and overcoming the prisoners’ dilemma. 7. Other oiligoply models - price leadership and kinked demand curve 8. Entry deterrence, limit pricing and contestable 2
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Oligopoly Is a market served by a few profitable and interdependent firms with market power. Concentration ratio - a measure of the degree to which a market or industry is oligopolistic. The four-firm concentration ratio is the percentage of the market output produced by the four largest firms. 3
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Key features of Oligopoly Barriers to entry: Economies of scale in production Artificial barriers to entry Advertising campaign 4
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Key features of Oligopoly Firms are interdependent. Actions of one firm affect the profits of other firms in the oligopoly. As a result, each firm acts strategically, taking into account its competitors likely reactions to its decisions and how it will be affected by their actions. 5
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Oligopolist's Problem Oligopolists are pulled in two different directions : The interdependence of firms may make them wish to collude with each other, to act like a monopoly. They are tempted to compete with their rivals to gain a bigger share of industry profits for themselves. 6
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Oligopolist’s Strategies Price fixing Entry deterrence Advertising 7
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Game Theory An area of applied mathematics that studies the games of strategy, a theoretical method of analyzing strategic behavior. Plays an important role in modern economics. Economic situations are treated as games. A framework to explore the actions and reactions of interdependent decision- makers. 8
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Game Theory All games have three things in common: Rules : state who can do what and when they can do it. Strategies : a plan for action in each possible situation in the game. Payoffs : the amount that the player wins or loses in a particular situation in a game. Assumption: 9
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Game Theory Dominant strategy: An action that is the best (optimal)choice for a player, no matter what an opponent does. Nash equilibrium: An outcome of a game in which each player is doing the best he or she can, given the action of the other players. 10
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Cartel Pricing and Duopolists’ Dilemma We will use a market with two firms— a duopoly— to explain the key features of an oligopoly. Consider a duopoly in the market for air
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This note was uploaded on 02/12/2012 for the course ECON EC1101 taught by Professor Ms during the Spring '08 term at National University of Singapore.

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Lecture 6 Oligopoly_ Strategic Behaviour and Competition Policy

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