# Chapter 12. A Game Theoretic Approach to Strategic Behavior

Size: px
Start display at page:

Transcription

1 Chapter 12 A Game Theoretic Approach to Strategic Behavior

2 Chapter Outline An Introduction to the Theory of Games Prisoner s Dilemma Nash Equilibrium Maximin Strategy Strategies for Repeated Play Sequential Games Commitment Problems 2

3 Game Theory Game theory is a means of analyzing markets where strategies matter. A game describes the players, timing, possible strategies and outcomes. A strategy is a statement of what move a player will choose. 3

4 Game Theory A key distinction in game structure is whether players move simultaneously (prior to knowing other players move) or take turns. In a normal form game, players choose their actions at the same time. In an extensive form (or sequential) game, players take turns choosing their actions. 4

5 Dominant Strategy Dominant strategy: the strategy in a game that produces better results irrespective of the strategy chosen by one s opponent. 5

6 Prisoner s Dilemma Two prisoners are held in separate cells for a serious crime that they did commit. The prosecutor has only enough hard evidence to convict them of a minor offense, for which the penalty is 1 year in jail. Each prisoner is told that if one confesses while the other remains silent, the confessor will go free while the other will spend 20 years in prison. If both confess, they will get an intermediate sentence of 5 years. The two prisoners are not allowed to communicate with one another. 6

7 Prisoner s Dilemma A game is a prisoner s dilemma if: 1. Each player has a dominant strategy 2. When both players choose their dominant strategy, each gets a smaller payoff than if each had chosen their dominated strategy 7

8 Prisoner s Dilemma Table 12.1 The Prisoner s Dilemma Confess Prisoner Y Remain silent Prisoner X Confess 5 years for each 0 years for X, 20 years for Y Remain silent 20 years for X, 0 years for Y 1 year for each 8

9 Prisoner s Dilemma The dominant strategy is for each prisoner to confess. Yet when each confesses, each does worse (5 years) than if each had remained silent (1 year). Situation where rational pursuit of individual self interest does not yield the best outcome for the players as a group. 9

10 Prisoner s Dilemma Oligopolists trying to collude face a similar challenge. Suppose two firms agree to each produce half the monopoly level of output to split the market. Agreement will not be stable each will want to undercut the other s price and capture the entire market. 10

11 Prisoner s Dilemma Firms may overspend on advertising for similar reason. If neither of two firms advertise, they split the market and have high profits of 500 each. If both firms advertise, their efforts cancel each other out and they still split the market but with lower profits of 250 each due to advertising costs. If one firm advertises and the other does not, the firm that advertises earns 750 and the other 0. 11

12 Prisoner s Dilemma Table 12.3 Advertising as a Prisoner s Dilemma Don t advertise Firm 1 Advertise Firm 2 Don t advertise \$500 for each \$750 for Firm 1, \$0 for Firm 2 Advertise \$0 for Firm 1, \$750 for Firm 2 \$250 for each 12

13 Prisoner s Dilemma Each firm has a dominant strategy of Advertise: If Firm 1 advertises, Firm 2 earns more by advertising \$250 > \$0 If Firm 1 does not advertise, Firm 2 earns more by advertising \$750 > \$500 Ditto for Firm 1 wanting to advertise regardless of whether Firm 2 advertises. 13

14 Prisoner s Dilemma Both firms pick their dominant strategy of advertising, and each earns \$250. If they could somehow have committed to not advertise, they could have each earned \$500. Instead, they wasted money advertising to fight over market share, and the advertising canceled each other out. 14

15 Nash Equilibrium What is the equilibrium if one (or both) players do not have a dominant strategy? Nash equilibrium: the combination of strategies in a game such that neither player has any incentive to change strategies given the strategy of his opponent. A Nash equilibrium does not require both players to have a dominant strategy. 15

16 Nash Equilibrium Don t advertise Firm 1 Advertise Firm 2 Don t advertise \$500 for each \$750 for Firm 1, \$0 for Firm 2 Advertise \$0 for Firm 1, \$450 for Firm 2 \$250 for each 16

17 Nash Equilibrium Firm 1 still has a dominant strategy to Advertise but now Firm 2 does not: If Firm 1 advertises, Firm 2 earns more by advertising \$250 > \$0 If Firm 1 does not advertise, Firm 2 earns more by not advertising \$500 > \$450 The Nash Equilibrium is for both firms to advertise. 17

18 The Maximin Strategy Maximin strategy: choosing the option that makes the lowest payoff one can receive as large as possible. Cautious behavior when do not have a dominant strategy and not sure what other player is apt to do. 18

19 Tit for Tat If a prisoner s dilemma game is repeated over and over (with the same two players), can the players somehow learn to cooperate? Or will they keep defecting over and over? Tit for tat is a way to support cooperation in a repeated play prisoner s dilemma game. 19

20 Tit for Tat Tit for tat strategy: The first time you interact with someone, you cooperate. In each subsequent interaction you do what that person did in the previous interaction. Thus, if your partner defected on your first interaction, you would then defect on your next interaction with her. If she then cooperates, your move next time will be to cooperate as well. Requirements: there not be a known, fixed number of future interactions (will unravel). Care about future payoffs. Can remember last strategy your partner played. 20

21 Sequential Games Sequential game: one player moves first, and the other is then able to choose his strategy with full knowledge of the first player s choice. Example United States and the former Soviet Union (USSR) during much of the cold war. 21

22 Sequential Games If USSR launches missiles (node B), US best choice is to not retaliate (node E). If USSR does not launch missiles (node C), US best choice is to not launch either (node G). USSR chooses between 100 if launches (with no US launch) and 0 if does not launch (with no US launch), and decides to launch. US can threaten to retaliate against any USSR launch, but not optimal to do if payoffs are as in this decision tree. 22

23 Figure 12.1: Nuclear Deterrence as a Sequential Game 23

24 Sequential Games Strategic entry deterrence change potential rivals expectations about how the firm will respond when its market position is threatened. Sears has an option to add a platform on top of building that would make adding to height cheaper in the future. 24

25 Sequential Game Without the platform, a new entrant knows that Sears will not decide to add on to the tower s height, and entrant decides to enter and earns 60 (while Sears earns 40). With the platform installed, a new entrant knows that Sears will respond to its entry by adding height, and the entrant would earn 50 so entrant stays out and earns 0 instead. Sears earns 90 by keeping the entrant out. 25

26 Figure 12.2: The Decision to Build the Tallest Building 26

27 Figure 12.3: Strategic Entry Deterrence 27

28 Commitment Problems Commitment problems: games where the common feature is that people can do better if they can commit themselves to behave in a way that will later be inconsistent with their own material interests. Commitment device: a device that commits a person to behave in a certain way in the future, even though he may wish to behave otherwise when the time comes. 28

29 Problem 1 Tariff Wars Free trade The United States Tariff China Free trade \$100 for each \$200 for the United States, \$500 for China Tariff \$500 for the United States, \$200 for China \$300 for each 29

30 Problem 1 1. If the United States adopts a tariff, would China choose a tariff or free trade? If the United States picks free trade, would China choose a tariff or free trade? Does China have a dominant strategy? If yes, what? Does the United States have a dominant strategy? If yes, what? What is the equilibrium outcome in this game? Is this game a prisoner s dilemma? 30

31 Solution 1 1. If the United States adopts a tariff, China would choose a tariff over free trade ( \$300 > \$500). If the United States picks free trade, China would choose a tariff over free trade (\$200 > \$100). China has a dominant strategy of imposing a tariff. The United States also has a dominant strategy of imposing a tariff. Thus, the equilibrium outcome in this game is both countries adopt tariffs. 31

32 Solution 1 1. This game is a prisoner s dilemma. Each player has a dominant strategy and when both players choose their dominant strategy, each gets a smaller payoff than if each had chosen their dominated strategy. The countries would be better off if somehow they could both commit to free trade and each earn \$200 instead of both imposing tariffs and each earning \$

33 Problem 2 Water Wars Crystal Springs P= \$1 P = \$0.99 Castle Springs P= \$1 \$500 for each \$990 for Crystal Springs, \$0 for Castle Springs P= \$0.99 \$0 for Crystal Springs, \$990 for Castle Springs \$495 for each 33

34 Problem 2 2. Two water suppliers can collude by charging price \$1 and splitting the market. If one undercuts the price to \$0.99, will capture the whole market. If both charge \$0.99, the split the market but at a lower price than were both to charge \$1. Do the firms have a dominant strategy? If so what? What will happen in equilibrium? What if the firms then decide between \$0.99 and \$0.98? 34

35 Solution 2 2. If Crystal Springs charges \$1, Castle Springs will charge \$0.99 (as \$990 > \$500) and capture the whole market. If Crystal Springs charges \$0.99, Castle Springs will charge \$0.99 (as \$495 > \$0), preferring to split the market over letting its rival sell everything. Castle Springs has a dominant strategy of charging \$0.99, as does Crystal Springs (the game is symmetric). Equilibrium will be each charging \$0.99. Next equilibrium would be \$0.98 and so on until price equals marginal cost. 35

36 Problem 3 Car Wars No hybrid Chevrolet Corvette Hybrid Dodge Viper No hybrid \$50 million for each \$80 million for Chevy, \$70 million for Dodge Hybrid \$70 million for Chevy, \$80 million for Dodge \$60 million for each 36

37 Problem 3 3. Chevrolet (Chevy) and Dodge are deciding whether to offer a hybrid version of the Corvette and Viper. Do the firms have a dominant strategy? If so what? What will happen in equilibrium? Is this game a Prisoner s Dilemma? Why or why not? 37

38 Solution 3 3. If Chevy makes a hybrid Corvette, Dodge will opt to not make a hybrid version of its Viper (\$70 > \$60). If Chevy does not make a hybrid Corvette, Dodge wants to make a hybrid Viper (\$80 > \$50). Dodge does not have a dominant strategy as its strategy depends on the strategy chosen by its rival. Similarly for Chevy. 38

39 Solution 3 3. There are two Nash equilibrium in the game: {Chevy hybrid, Dodge not} and {Chevy not, Dodge hybrid}. If Chevy makes a Corvette hybrid and Dodge does not make a hybrid version of its viper, neither firm would want to change its strategy, given the strategy of its rival. Same for if the roles are reversed. There is no telling which of the two possible equilibria will happen when the game is played simultaneously. 39

40 Problem 4 4. Suppose similar situation as in Problem 3, but now Dodge gets to decide first, then Chevy. What would the equilibrium be now? Why does timing matter? Dodge decides Offer hybrid Viper Don t offer hybrid Viper Chevy decides Chevy decides Offer hybrid Vette Don t offer hybrid Vette Offer hybrid Vette Don t offer hybrid Vette \$60 million for each \$80 million for Dodge, \$70 million for Chevy \$70 million for Dodge, \$80 million for Chevy \$50 million for each 40

41 Solution 4 4. If Dodge decides to make a hybrid Viper, Chevy will opt to not offer a hybrid Vette (as \$70 > \$60). If Dodge decides to not offer a hybrid Viper, then Chevy will decide to offer a hybrid Vette (as \$80 > \$50). Anticipating Chevy s response, Dodge will offer a hybrid Viper, preferring a payoff of \$80 million from {Dodge offers Viper hybrid, Chevy not} over a payoff of \$70 million from {Dodge not, Chevy offers Vette hybrid}. The order of play permits Dodge to pick its most preferred of the two possible outcomes. 41

Games and Strategic Behavior Chapter 9 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives 1. List the three basic elements of a game. Recognize

### Chapter 13. Game Theory. Gaming and Strategic Decisions. Noncooperative v. Cooperative Games

Chapter 13 Game Theory Gaming and Strategic Decisions Game theory tries to determine optimal strategy for each player Strategy is a rule or plan of action for playing the game Optimal strategy for a player

### Analyze different types of non zero sum games. Hawk vs. Dove game. Advertising problem. Problem of companies polluting the environment.

Unit 3 GME THEORY Lesson 31 Learning Objective: nalyze different types of non zero sum games Hawk vs. game. dvertising problem. Problem of companies polluting the environment. Rationalizability or Iterative

### Microeconomics LESSON 6 ACTIVITY 41

Microeconomics LESSON 6 ACTIVITY 41 Game Theory Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you. Dixit and Nalebuff Game theory is used

### Do not open this exam until told to do so. Solution

Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Fall 003 Final (Version): Intermediate Microeconomics (ECON30) Solution Final (Version

### 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22

Monopoly. Principles of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side

### Oligopoly is a market structure in which Natural or legal barriers prevent the entry of new firms. A small number of firms compete.

CHAPTER 15: OLIGOPOLY What Is Oligopoly? Oligopoly is a market structure in which Natural or legal barriers prevent the entry of new firms. A small number of firms compete. Barriers to Entry Either natural

### Econ Economics of Public Sector HW #1 Suggested Solutions.

Econ 411-1 Economics of Public Sector HW #1 Suggested Solutions. by Anna Rubinchik-Pessach October 7, 1 Problem 1: Chapter 5, q.4 Cash-for-Clunkers Program The goal of the EPA policy is to limit emission

### FOUR MARKET MODELS. Characteristics of Oligopolies:

FOUR MARKET MODELS Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly Characteristics of Oligopolies: A Few Large Producers (Less than 10) Identical or Differentiated Products High Barriers

### Chapter 15 Oligopoly

Goldwasser AP Microeconomics Chapter 15 Oligopoly BEFORE YOU READ THE CHAPTER Summary This chapter explores oligopoly, a market structure characterized by a few firms producing a product that mayor may

### Oligopolies Part III

Oligopolies Part III It's called an oligopoly. It's not a regular market. It's a market in which they control the prices and they've been doing it for years. Richard Miller The Prisoner s Dilemma Consider

### Oligopoly. Quantity Price(per year) 0 \$120 2,000 \$100 4,000 \$80 6,000 \$60 8,000 \$40 10,000 \$20 12,000 \$0

Oligopoly 1. Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as a. monopoly markets. b. perfectly competitive markets. c. monopolistically

### AQA Economics A-level

AQA Economics A-level Microeconomics Topic 5: Perfect Competition, Imperfectly Competitive Markets and Monopoly 5.5 Oligopoly Notes Characteristics of an oligopoly: High barriers to entry and exit There

### STRATEGY. Here we suppose a game with one other player. The other player could be another firm, another person, or the industry.

STRATEGY Strategy deals with managerial decisions when other firms (or persons) change their behavior in response to your behavior. For example, in the last section we learned that demand for a firm s

### Principles of Microeconomics Assignment 8 (Chapter 10) Answer Sheet. Class Day/Time

1 Principles of Microeconomics Assignment 8 (Chapter 10) Answer Sheet Name Class Day/Time Questions of this homework are in the next few pages. Please find the answer of the questions and fill in the blanks

### Microeconomics LESSON 6 ACTIVITY 40

Microeconomics LESSON 6 ACTIVITY 40 Monopolistic Competition Figure 40.1 Monopolistically Competitive Firm in the Short Run MC COSTS/REVENUE (DOLLARS) E D C B A F H K G ATC D 0 MR L M QUANTITY 1. Use Figure

### Exam #2 (100 Points Total) Answer Key

Exam #2 (100 Points Total) Answer Key 1. A Pareto efficient outcome may not be good, but a Pareto inefficient outcome is in some meaningful sense bad. (a) (5 points) Give an example or otherwise explain,

### Principles of Economics: Seminar 1 - Game Theory

Principles of Economics: Seminar 1 - Game Theory July 18, 2017 Principles of Economics: Seminar 1 - Game Theory July 18, 2017 1 / 20 What is a game? Definition: A game is any situation involving two or

### ECON December 4, 2008 Exam 3

Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly

### Lecture 22. Oligopoly & Monopolistic Competition

Lecture 22. Oligopoly & Monopolistic Competition Course Evaluations on Thursday: Be sure to bring laptop, smartphone, or tablet with browser, so that you can complete your evaluation in class. Oligopoly

### Edexcel (A) Economics A-level

Edexcel (A) Economics A-level Theme 3: Business Behaviour & the Labour Market 3.4 Market Structures 3.4.4 Oligopoly Notes Characteristics of an oligopoly: High barriers to entry and exit There are high

### Chapter 13 Outline. Challenge: Intel and AMD s Advertising Strategies. An Overview of Game Theory. An Overview of Game Theory

Chapter 13 Game Theory A camper awakens to the growl of a hungry bear and sees his friend putting on a pair of running shoes. You can t outrun a bear, scoffs the camper. His friend coolly replies, I don

### OLIGOPOLY. After studying this chapter, you will be able to:

After studying this chapter, you will be able to: Define and identify oligopoly Use game theory to explain how price and output are determined in oligopoly Use game theory to explain other strategic decisions

### Lecture 21: Strategic Interaction and Game Theory

Lecture 2: Strategic Interaction and Game Theory EC DD & EE / Manove Strategic Interaction p What types of firms are most likely to engage in costly rent-seeking? EC DD & EE / Manove Monopoly>Rent Seeking

### Microeconomics (Oligopoly & Game, Ch 12)

Microeconomics (Oligopoly & Game, Ch 12) Lecture 17-18, (Minor 2 coverage until Lecture 18) Mar 16 & 20, 2017 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4

### The Analysis of Competitive Markets

C H A P T E R 12 The Analysis of Competitive Markets Prepared by: Fernando & Yvonn Quijano CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus

### Chapter 12. Oligopoly. Oligopoly Characteristics. Oligopoly Equilibrium

Chapter Oligopoly Oligopoly Characteristics Small number of firms Product differentiation may or may not eist Barriers to entry Chapter Oligopoly Equilibrium Defining Equilibrium Firms are doing the best

### #1: Monopolistic Competition

Answers: #1: Monopolistic Competition MC-1. d. All of the terms describe economically breaking even MC-2. c. Economic profits will attract competition MC-3. d. Economically breaking even means you just

### ECG 507 Professor Allen Fall 2005

ECG 507 Professor Allen Fall 2005 I. Introduction to game theory II. Repeated games III. Sequential games A. Look ahead and reason back B. Strategic moves C. Credibility I. Introduction to game theory

### Oligopoly Pricing. EC 202 Lecture IV. Francesco Nava. January London School of Economics. Nava (LSE) EC 202 Lecture IV Jan / 13

Oligopoly Pricing EC 202 Lecture IV Francesco Nava London School of Economics January 2011 Nava (LSE) EC 202 Lecture IV Jan 2011 1 / 13 Summary The models of competition presented in MT explored the consequences

### Microeconomics. More Tutorial at

Microeconomics 1. Suppose a firm in a perfectly competitive market produces and sells 8 units of output and has a marginal revenue of \$8.00. What would be the firm s total revenue if it instead produced

### Game theory (Sections )

Game theory (Sections 17.5-17.6) Game theory Game theory deals with systems of interacting agents where the outcome for an agent depends on the actions of all the other agents Applied in sociology, politics,

### Syllabus item: 57 Weight: 3

1.5 Theory of the firm and its market structures - Monopoly Syllabus item: 57 Weight: 3 Main idea 1 Monopoly: - Only one firm producing the product (Firm = industry) - Barriers to entry or exit exists,

### MOT Seminar. John Musacchio 4/16/09

Game Theory MOT Seminar John Musacchio johnm@soe.ucsc.edu 4/16/09 1 Who am I? John Musacchio Assistant Professor in ISTM Joined January 2005 PhD from Berkeley in Electrical l Engineering i Research Interests

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Review 10-14-15 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1. The four-firm concentration ratio equals the percentage of the value of accounted

### Monopolistic Competition Oligopoly Duopoly Monopoly. The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Oligopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm. Imperfect competition refers to those market

### Chapter 9: Static Games and Cournot Competition

Chapter 9: Static Games and Cournot Competition Learning Objectives: Students should learn to:. The student will understand the ideas of strategic interdependence and reasoning strategically and be able

### ECMC02H Intermediate Microeconomics - Topics in Price Theory

1 ECMC02H Intermediate Microeconomics - Topics in Price Theory Answers to the Term Test June 23, 2010 Version A of the test Your name (Print clearly and underline your last name) Your student number 1.

### Econ Microeconomic Analysis and Policy

ECON 500 Microeconomic Theory Econ 500 - Microeconomic Analysis and Policy Monopoly Monopoly A monopoly is a single firm that serves an entire market and faces the market demand curve for its output. Unlike

### Thinking strategically: Conflict and Cooperation

Master in International Cooperation and Development (MIC&D) Thinking strategically: Conflict and Cooperation Luigi Curini Università degli Studi di Milano luigi.curini@unimi.it Twitter: @Curini http://www.luigicurini.com

### Use the following to answer question 4:

Homework Chapter 11: Name: Due Date: Wednesday, December 4 at the beginning of class. Please mark your answers on a Scantron. It is late if your Scantron is not complete when I ask for it at 9:35. Get

Business 33001: Microeconomics Owen Zidar University of Chicago Booth School of Business Week 8 Owen Zidar (Chicago Booth) Microeconomics Week 8: Oligopoly & Strategy 1 / 89 Today s Class 1 Overview of

### Eco 685 Graphs, Tables, and Definitions

Eco 685 Graphs, Tables, and Definitions David L. Kelly 1 1 Department of Economics, University of Miami dkelly@miami.edu Fall, 2017 Introduction Introduction Managerial Economics Definition Definition

### 1. Fill in the missing blanks ( XXXXXXXXXXX means that there is nothing to fill in this spot):

1. Fill in the missing blanks ( XXXXXXXXXXX means that there is nothing to fill in this spot): Quantity Total utility Marginal utility 0 0 XXXXXXXXXXX XXXXXXXXXXX XXXXXXXXXXX 200 0 = 200 1 200 XXXXXXXXXXX

### sample test 3 - spring 2013

sample test 3 - spring 2013 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. A natural monopoly occurs when a. the product is sold in its

### MGMT 784: Managerial Economics and Game Theory, Q1, 2017

1 Wharton School Professor Louis Thomas 2111 SH-Dietrich Hall Office hours: Thomas@wharton.upenn.edu MGMT 784: Managerial Economics and Game Theory, Q1, 2017 MGMT 784 is a short elective course in Game

### Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007

Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label

### Analytic Preliminaries for Social Acceptability of Legal Norms &

Analytic Preliminaries for Social Acceptability of John Asker February 7, 2013 Yale Law School Roadmap Build on case studies of environments where extra-legal norms are at least as important as formal

### Economics of Managerial Decision Making (MGEC 611) SAMPLE EXAM

Economics of Managerial Decision Making (MGEC 611) SAMPLE EXAM QUESTION 1 Short Questions. This part consists of three short, stand-alone questions of lower math intensity. Please provide an answer or

### Section I (20 questions; 1 mark each)

Foundation Course in Managerial Economics- Solution Set- 1 Final Examination Marks- 100 Section I (20 questions; 1 mark each) 1. Which of the following statements is not true? a. Societies face an important

### CMSC 474, Introduction to Game Theory Analyzing Normal-Form Games

CMSC 474, Introduction to Game Theory Analyzing Normal-Form Games Mohammad T. Hajiaghayi University of Maryland Some Comments about Normal-Form Games Only two kinds of strategies in the normal-form game

### Part III: Big Applications

Part III: Big Applications Repetition Asymmetric Information Signaling Long-Run Relationships Auctions & Market Design Credibility & Reputation Classes 12-14 Classes 15-18 Classes 19-21 MIT Sloan 15.025

### Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (Gwartney, Stroup, Lee, and Ferrarini - St. Martin s Press, 2010)

1 Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (Gwartney, Stroup, Lee, and Ferrarini - St. Martin s Press, 2010) Reading Guide Part I. Twelve Key Elements of Economics

### CHAPTER 5 THE ANALYSIS OF COSTS

1. CHAPTER 5 THE ANALYSIS OF COSTS Long-run average cost equals long-run marginal cost whenever a) the production function exhibits constant returns to scale. b) fixed costs are zero. c) no factor always

### Marginal Costing Q.8

Marginal Costing. 2008 Q.8 Break-Even Point. Before tackling a marginal costing question, it s first of all crucial that you understand what is meant by break-even point. What this means is that a firm

### CHAPTER 13 Oligopoly and Monopolistic Competition

CHPTER 13 Oligopoly and Monopolistic Competition CHPTER OUTLINE 13.1 Market Structures 13.2 Game Theory Single-Period, Two-Firm, Quantity-Setting Game Why Firms Do Not Cooperate in a Single-Period Game

### Chapter 13. Oligopoly and Monopolistic Competition

Chapter 13 Oligopoly and Monopolistic Competition Chapter Outline Some Specific Oligopoly Models : Cournot, Bertrand and Stackelberg Competition When There are Increasing Returns to Scale Monopolistic

### Managerial Economics & Business Strategy. Game Theory: Inside Oligopoly

Managerial Economics & Business Strategy Chapter 10 Game Theory: Inside Oligopoly Revised 2/12 by DF McGraw-Hill/Irwin Copyright Copyright 2006 by The 2006 McGraw-Hill by The McGraw-Hill Companies, Inc.

### INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition

13-1 INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY Monopolistic Competition Pure monopoly and perfect competition are rare in the real world. Most real-world industries

### Chart: Initial Conditions in Computer Market

Oligopolies Part II It's called an oligopoly. It's not a regular market. It's a market in which they control the prices and they've been doing it for years. Richard Miller Oligopoly Behavior Market structure

### The Retailers Choices of Profit Strategies in a Cournot Duopoly: Relative Profit and Pure Profit

Modern Economy, 07, 8, 99-0 http://www.scirp.org/journal/me ISSN Online: 5-76 ISSN Print: 5-745 The Retailers Choices of Profit Strategies in a Cournot Duopoly: Relative Profit and Pure Profit Feifei Zheng

### Principles of Microeconomics Module 5.1. Understanding Profit

Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:

### EC493f Review Sheet 1

Econ 493f Law and Economics Spring 2017 1 Identify and/or Define: a. Codex of Hammurabi l. Dominant Strategy b. Marginal Cost m. Nash Equilibrium c. Net Benefit n. Optimal Crime Rate d. Expected Penalty

### ECONOMICS. Paper 3 : Fundamentals of Microeconomic Theory Module 28 : Non collusive and Collusive model

Subject Paper No and Title Module No and Title Module Tag 3 : Fundamentals of Microeconomic Theory 28 : Non collusive and Collusive model ECO_P3_M28 TABLE OF CONTENTS 1. Learning Outcomes 2. Introduction

### 5 Market Games For Teaching Economics

5 Market Games For Teaching Economics Progression 5 Market Games from website economics-games.com To be played separately or as a sequence: Market Game 1: Sunk costs, monopoly, and introduction to the

### JANUARY EXAMINATIONS 2008

No. of Pages: (A) 9 No. of Questions: 38 EC1000A micro 2008 JANUARY EXAMINATIONS 2008 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates

### Unit 4: Imperfect Competition

Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

### Practice Exam One. Chapter 1

Practice Exam One Name Chapter 1 1. Residents of your city are charged a fixed weekly fee of \$6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes

### Unit 4: Imperfect Competition

Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

### Collusion. Sotiris Georganas. February Sotiris Georganas () Collusion February / 31

Collusion Sotiris Georganas February 2012 Sotiris Georganas () Collusion February 2012 1 / 31 Outline 1 Cartels 2 The incentive for cartel formation The scope for collusion in the Cournot model 3 Game

### Common-Pool Resources (Ch 34) and Public Goods (Ch 36)

Common-Pool Resources (Ch 34) and (Ch 36) Final Exam Details 20 hours of OH between now and final Review Session: Saturday, 3/12, 4-6pm, NH 1006 Final exam: Tuesday, March 15, 12-3pm, here Format: 12 15

### Oligopoly. Market Structure in an Oligopoly p. 294 Oligopoly Models p. 297 The Collusion Model The Price-Leadership Model The Cournot Model

Oligopoly 14 We have now examined two pure market structures. At one extreme is perfect competition, a market structure in which many firms, each small relative to the size of the market, produce undifferentiated

### Market Equilibrium, the Price Mechanism and Market Efficiency. Chapter 3

Market Equilibrium, the Price Mechanism and Market Efficiency Chapter 3 Equilibrium Equilibrium is defined as a state of rest, self-perpetuating in the absence of any outside disturbance. Example: a book

### Collusion. So be deviating Firm 1 s profits are: So for the proposed strategies to form an equilibrium it has to be the case that 1 1

Collusion So be deviating Firm 1 s profits are: V = π M So for the proposed strategies to form an equilibrium it has to be the case that 1 1 2 πm 1 δ πm which is equivalent to δ > 1 2 So the question then

### Chapter Summary and Learning Objectives

CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect

### Imperfect Competition

Imperfect Competition 6.1 There are only two firms producing a particular product. The demand for the product is given by the relation p = 24 Q, where p denotes the price (in dollars per unit) and Q denotes

### PICK ONLY ONE BEST ANSWER FOR EACH BINARY CHOICE OR MULTIPLE CHOICE QUESTION.

Econ 101 Summer 2015 Answers to Second Mid-term Date: June 15, 2015 Student Name Version 1 READ THESE INSTRUCTIONS CAREFULLY. DO NOT BEGIN WORKING UNTIL THE PROCTOR TELLS YOU TO DO SO You have 75 minutes

### Exam #2 (100 Points Total)

Exam #2 (100 Points Total) Take the exam during an uninterrupted period of no more than 3 hours. (It should not take that long.) The space provided below each question should be sufficient for your answer,

### Economics : Principles of Microeconomics Spring 2014 Instructor: Robert Munk April 24, Final Exam

Economics 001.01: Principles of Microeconomics Spring 01 Instructor: Robert Munk April, 01 Final Exam Exam Guidelines: The exam consists of 5 multiple choice questions. The exam is closed book and closed

### CHAPTER 6: Monopoly and Imperfect Competition

CHAPTER 6: Monopoly and Imperfect Competition 1a. Column 1 (price): -, 2, 2, 2, 2; Column 2 (quantity): 0, 1000, 2000, 3000, 4000; Column 3 (total revenue): 0, 2000, 4000, 6000, 8000; Column 4 (marginal

### Multilateral negotiations with private side deals: a multiplicity example. Abstract

Multilateral negotiations with private side deals: a multiplicity example Sandeep Baliga Northwestern University and Institute for Advanced Study Roberto Serrano Brown University Abstract We study a multilateral

### 1. INTRODUCTION IS IT POSSIBLE TO MOVE THE COPPER MARKET? MATTI LISKI AND JUAN-PABLO MONTERO *

Cuadernos de Economía, Año 40, Nº 121, pp. 559-565 (diciembre 2003) IS IT POSSIBLE TO MOVE THE COPPER MARKET? MATTI LISKI AND JUAN-PABLO MONTERO * 1. INTRODUCTION In recent years, the question whether

### 9 Thinking Strategically (1): Interdependence, Decision Making and the Theory of Games

9 Thinking Strategically (1): Interdependence, Decision Making and the Theory of Games A US newspaper at the end of the 1990s 1 carried a story originating in Hollywood. At a Christmas Eve dinner party

### COST OF PRODUCTION & THEORY OF THE FIRM

MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue

### SAMPLE MULTIPLE CHOICE FINAL EXAM CHAPTER 6 THE ANALYSIS OF COSTS

1. SAMPLE MULTIPLE CHOICE FINAL EXAM CHAPTER 6 THE ANALYSIS OF COSTS Long-run average cost equals long-run marginal cost whenever a) the production function exhibits constant returns to scale. b) fixed

### Making game theory work for managers

1 JANUARY 2010 Making game theory work for managers A new model, rejecting solutions optimal only for a single precisely defined future, generates answers representing the best compromise between risks

### 21 Strategy and Game Theory

CHAPTER 21 Strategy and Game Theory ---.----- BASIC CONCEPTS In Chapter 20 we examined some of the problems that arise in modeling markets in which there are only a few firms. Perhaps the most difficult

### Perfectly competitive markets: Efficiency and distribution

Perfectly competitive markets: Efficiency and distribution By Fernando del Río Assistant Professor, University of Santiago de Compostela Introduction Free markets have been the main mechanism used to allocate

### MIT Carbon Sequestration Initiative

Question 1: Consider the following issues. What are the three most important issues facing the US today? [Note the graph does not include issues with less than five percent support.] Economy Health care

### Eco201 Review questions for chapters Prof. Bill Even ====QUESTIONS FOR CHAPTER 13=============================

Eco201 Review questions for chapters 13-15 Prof. Bill Even ====QUESTIONS FOR CHAPTER 13============================= 1) A monopoly has two key features, which are. A) barriers to entry and close substitutes

### Econ 001 Levinson -- Fall 2009

Page 1 of 9 Print this page. Econ 001 Levinson -- Fall 2009 Homework 8 An industry contains 5 firms, with the following sales: Firm 1 \$80 million Firm 2 \$50 million Firm 3 \$40 million Firm 4 \$10 million

### Game Theory Models of Pricing

Handbook of Pricing Management, Oxford University Press Game Theory Models of Pricing September 2010 Praveen Kopalle and Robert A. Shumsky Tuck School of Business at Dartmouth 1. Introduction In 1991,

### Strategic Corporate Social Responsibility

Strategic Corporate Social Responsibility Lisa Planer-Friedrich Otto-Friedrich-Universität Bamberg Marco Sahm Otto-Friedrich-Universität Bamberg and CESifo This Version: June 15, 2015 Abstract We examine

### [ECON10004: INTRODUCTORY MICROECONOMICS: LECTURE REVISION NOTES]

Lecture Two: Cost of an action: Opportunity cost: value of resources if they were used in their next best alternative Sunk cost: resources already used before making the choice about an action, not included

### History, Expectations, and Development, part 1

History, Expectations, and Development, part 1 Econ 6060 1 Outline Two approaches to economic development Complementarity A model of demand complementarity A model of Pitfall of partial reforms 2 1 Approaches

### The Quality of Complex Systems and Industry Structure

Forthcoming in W. Lehr (ed.), Quality and Reliability of Telecommunications Infrastructure. Lawrence Erlbaum. Hillsdale, NJ: 1995. The Quality of Complex Systems and Industry Structure by Nicholas Economides

### Umbrella Branding Can Leverage Reputation, but only with Market Power. May 19, Eric B. Rasmusen

Umbrella Branding Can Leverage Reputation, but only with Market Power May 19, 2012 Eric B. Rasmusen Dan R. and Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley