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Economics 1021A Chapter 15

Both firms cheat one firm complies and the other firm

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Unformatted text preview: complies and the other firm cheats. – The other firm complies and the first firm cheats. One Firm Cheats Cheater Complier Price & cost 10 8 7.5 Economic loss 0 1 2 3 ATC Price & cost Price & cost ATC 10 7.5 6 5 Quantity (thousands of switchgears/week) 0 1 2 3 10 9 7.5 Complier’s output Economic Economic profit 4 Industry 4 5 Quantity (thousands of switchgears/week) Cheating pays! Cheat’s output D 01234567 Quantity (thousands of switchgears/week) Duopoly Payoff Matrix Duopoly Gear’s strategies Cheat $0 Comply -$1.0m Cheat Trick’s strategies $0 +$4.5m +$4.5m +$2m Comply –$1.0m +$2m Individual Firm MC ATC 10 6 0 1 2 3 4 5 Price and cost (thous. of $/ unit) Price and cost (thous. of $/ unit) Both Firms Cheat Industry 10 Quantity (thous. of Quantity switchgears/week) switchgears/week) MC1 MC 6 Both cheating achieves competitive outcome 0 1 2 3 4 5 D 6 7 Quantity (thous. of Quantity switchgears/week) switchgears/week) Repeated Games Repeated • Firms have the opportunity to penalize each other for cheating. • The firms cooperative equilibrium will share the monopoly profit. Oligopoly - Collusion Oligopoly Team A $10 Team B $9 $8 $10 16, 16 13, 19 9 ,22 $9 18, 13 15, 15 12, 18 $8 20, 10 16, 12 13, 14...
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