Chapter 10 - Competition among the few

Chapter 10 - Competition among the few - Competition among...

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Competition among the few – Principles of Economics (Ch.10) 01/12/10 In determining own decisions the decisions need to reflect the knowledge about the competitors behaviour. This is called interdependence of decision making. Game Theory: In small number markets where interdependence of decision making exists, tools of game theory (dominant strategy, prisoner´s dilemma) can help to analyse firm’s behaviour and how decisions are made. Explains why collusion is profitable and cartels are unstable! Sub sequential games: require decision trees because timing matters Simultaneous games: requires matrix of pay-offs Prisoners Dilemma and R&D: In order to maintain profits firms have to invest in R&D even if doing so will reduce profits. Dont Invest Inves Dont 10 12 Invest 10 4 4 5 12 5 Firm A Invest Firm B Cartel: A coalition of firms that agrees to restrict output for the purpose of earning an economic profit Law: cartels are generally illegal and laws are imposed to prevent them OPEC:
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