Economics of cooperation a Prisoners dilemma i Particular game between 2

Economics of cooperation a prisoners dilemma i

This preview shows page 23 - 26 out of 27 pages.

Economics of cooperation a. Prisoners’ dilemma i. Particular “game” between 2 captured prisoners ii. Illustrates why cooperation is difficult to maintain even when it is mutually beneficial iii. Bc each pursues his/her own interests the 2 prisoners together reach an outcome that is worse for each of them iv. Cooperation between the 2 prisoners is difficult to maintain bc cooperation is individually irrational b. Dominant strategy- strategy that is best for a player in a game regardless of the strategies chosen by the other players
Image of page 23

Subscribe to view the full document.

Microeconomics Final Exam Study Sheet c. Game oligopolists play in trying to reaching the monopoly outcome i. Similar to the game that the 2 prisoners play in the prisoners’ dilemma d. Firms are self-interested & do not cooperate even though cooperation (cartel) would increase profits i. Each firm has an incentive to cheat e. Common resources i. 2 companies own a common pool of oil ii. Strategies 1. Each company drills 1 well 2. Each company drills a second well & get more oil iii. Dominant strategy- each company drills 2 wells: lower profits 1. Noncooperative equilibrium may be bad for society & the players 2. Noncooperative equilibrium may be good for society a. Oligopolists trying to obtain monopoly profits b. Quantity & price- closer to optimal V. Why people sometimes cooperate a. Game of repeated prisoners’ dilemma i. Repeat the game ii. Agree on penalties if 1 cheats iii. Both have incentive to cooperate iv. As long as the players care enough about future profits, they will choose to forgo the 1-time gain from defection VI. Public policy toward oligopolies a. Govts can sometimes improve market outcomes b. Policymakers try to induce firms in an oligopoly to compete rather than cooperate i. Move the allocation of resources closer to social optimum c. Antitrust laws- used to prevent mergers & oligopolies from colluding d. Controversies over antitrust policies i. Used to condemn some business practices whose effects are not obvious ii. Resale price maintenance (fair trade)- require retailers to charge customers a given price 1. Might seem anticompetitive---prevents the retailer from competing on price 2. Defenders a. Not aimed at reducing competition b. Legitimate goal: some retailers offer service iii. Predatory pricing- not a profitable strategy 1. Charges prices that are too low a. Anticompetitive b. Price cuts may be intended to drive other firms out of the market 2. Skeptics a. Price war to drive out a rival; prices are driven below cost
Image of page 24
Microeconomics Final Exam Study Sheet iv. Tying- offer 2 goods together at a single price---expand market power 1. Skeptics- cannot increase market power by binding 2 goods together 2. Forms of price discrimination- tying may increase profit Chapter 21 The Theory of Consumer Choice (15% of exam) I. Budget constraint- limit on the consumption bundles that a consumer can afford---shows trade-off between goods a. Slope of budget constraint- rate at which the consumer can trade 1 good for the other i. Relative price of the 2 goods II. Preferences a.
Image of page 25

Subscribe to view the full document.

Image of page 26
  • Fall '08
  • BARCIA

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes