Monopolistic competition and oligopoly

Described by game tree and decision nodes credible

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Described by game tree and decision nodes Credible action Subgame perfect Nash equilibrium.
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Is the threat credible? Incumbent Entrant Fight Accommodate Enter -10, -10 10, 20 Doesn’t enter 0, 50 0, 50
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1 Out In (0, 50) 2 Fight (predation) Accommodate (-10, -10) (10, 20)
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Subgame perfect equilibrium: smaller game is subgame. Given the Nash equilibria in every subgame, Solution to the larger game is called subgame perfect equilibrium. Credible threat: If the equilibrium specifies some player to take certain action in future, the player must take that action, if that situation arises. The player should not back out at that point of time
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1 Generous offer Low offer (50, 150) 2 Strike Accept (0, 0) (150, 50) Management Union
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Time period: can be repeated finitely or infinitely. In such situations players consider their long- term payoffs in addition to short-term gains This might lead them to behave differently from how they would in one-shot interactions Airbus Boeing High price Low price High price 5, 5 3, 6 Low price 6, 3 4, 4
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Reward/punishment mechanism should be there Tit-for- Tat strategy: mimic your rival’s last period price Grim trigger strategy: compete forever in case of cheating A firm that contemplates undercutting its rivals faces a trade-off short-term increase in profits long-term decrease in profits if rivals retaliate by lowering their prices Depending upon which of these forces is dominant collusion could be sustained
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Cournot : Quantity competition. Applied to capacity comp as well. Assumes rivals output as fixed. Chooses her optimal output to maximise profit given rival’s output. Example: heavy manufacturing industries such as steel, cement etc. Bertrand: Price competition. Chooses her optimal price given rival’s price to maximise her own profit. Example: Airline industry.
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Consider two firms who Sell homogeneous goods Play a one-shot game Independently and simultaneously choose quantity have identical marginal cost c and no fixed costs Both face a linear demand function Firm i’s profit is given by, output industry total q q Q Q 1 p 2 1 1,2 i where cq q ) q , q ( p i i j i i
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3 c 1 q , Similarly 3 c 1 q 2 c 2 / ) c q 1 ( 1 q 1, firm of function reaction in q of value the g puttin 2) firm of
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  • Spring '12
  • AbhinavDhar
  • Game Theory, Airbus, player, low price

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