LECTURE 5 Oligopoly

7/23/2019 LECTURE 5 Oligopoly

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Mid-trimester Examination

Date: Week 6, Monday 17thAugust 2015

enue: !" 101 # !" 102

$ime: %:&0'm- 6:%0'm (in)*uding 10mins"eading $ime+

!oerage: e)tures 1 . 5/

Mid-trimester Exam: Monday tudents n*y

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Mid-trimester Examination

Date: Week 6, Wednesday 1thAugust2015

enue: !" 101 # !" 102

$ime: %:&0'm- 6:%0'm (in)*uding 10mins"eading $ime+

!oerage: e)tures 1 . 5/

Mid-trimester Exam: $hursday tudents



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34

4AME $8E"



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*igo'o*y and 9arriers to entry

*igo'o*y/ A .aret stru-ture in hi-h a s.all nu.er ofinterdependent fir.s -o.pete

t is diffi-ult to no hat an oligopolist4s de.and and.arginal revenue -urves loo lie

t is not non hat 5uantity an oligopolist ill sell at aparti-ular pri-e6 as the pri-e -harged de'ends on the

'ri)es and a)tions o )om'etitors/

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;arrier to entry/ Anything that eeps ne fir.s fro.entering an industry

Exam'*es are e)onomies o s)a*e, o


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=sing game theory to ana*yse o*igo'o*y

As the de.and and .arginal revenue -urves of anoligopolist .ay e unnon6 the profit8.a7i.ising levelof output and pri-e -annot e -al-ulated in the sa.e ayas for -o.petitive .arets

4ame theory/ 9he study of ho people .ae de-isionsin situations here attaining their goals depends on theirintera-tions ith others: in economics6 the study of thede-isions of fir.s in industries here the profits of ea-h

fir. depend on its intera-tions ith other fir.s

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!

4ame $heory: >ey !hara)teristi)s

; *ayers

9he a-tors&parti-ipant&opponents

; "u*es


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Dominant strategy/ A player has a do.inantstrategy hen it has one strategy that ors est(that is opti.al) no .atter hat an opponent does

ayo matrix/ A tale that shos the payoffs thatea-h fir. earns fro. every -o.ination of strategiesadopted y the fir.s

A duopoly game is pri-e -o.petition eteen tofir.s

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>ir. ehaviour and the prisoners4 dile..a

!oo'eratie e?ui*i9rium/ An e5uiliriu. in a ga.e inhi-h players -ooperate to in-rease their .utual payoff

@on-)oo'eratie e?ui*i9rium/ An e5uiliriu. in a ga.ein hi-h players do not -ooperate ut pursue their on self8interest

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10

Strategic Interaction: Payof Matrixand Dominant Strategy

The Payof Matrixdescribes the payofs to bothplayer or every possible outcome (see next slide)

A dominant strategy

;A player has a dominant strategy when it has one strategy thatworks best (that is optimal) no matter what an opponent does.

Example: A rm (e.g. !oolworths) has a dominantstrategy when it has one strategy that WORKS BEST

(that maximises its payof) O MATTER what its rival(e.g. "oles) does.


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!irm Aconsiders its "ayofs to #orm$%ate its strategy:; &' i# B ad(ertises )co%$mn&'; *' i# B doesn+t ad(ertise )co%$mn ,';

B !irm A %oo-s $" and do.n the "ayof matrix to to #orm$%ate its strategy!irm Bconsiders its "ayofs to #orm$%ate its strategy:; &' i# A ad(ertises )ro. &'; *' i# B doesn+t ad(ertise )ro. *'; B !irm B %oo-s acrossthe "ayof matrix to to #orm$%ate its strategy

Firm A

Advertise

Firm B

10, 5 15, 0

10, 26, 8

Dont advertise

Advertise

Dont

advertise

12


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Dominant Strategy (Firm A)

!irm A has a dominant strategy in this game

; # & advertises, A should advertise (-/0)

; # & doesnt advertise, A should advertise (-1/-).

; As ominant 2trategy is to Advertise.

; &ecause -/0 3 -1/-, A will always choose 4Advertise5.

Firm A

Advertise

Firm B

10, 15,

10,6,

Dont advertise

Advertise

Dontadvertise

5 0

8 2

13


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Dominant Strategy (Firm B)

!irm B a%so has a dominant strategy in this game

; # A advertises, & should advertise (1/)

; # A doesnt advertise, & should advertise (6/$).; &s ominant 2trategy is to Advertise.

; &ecause 1/ 3 6/$, & should always choose 4Advertise5.

Firm A

Advertise Dont advertise

Advertise

Dontadvertise

10, 15,

10,6,

5 0

8 2

1#

Firm B


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1$

Dominant Strategy )A / B'

oes A have a dominant strategy7 0ES' 8egardless o what & does, As best strategy is still TO

AD1ERTISE.

oes & have a dominant strategy7

0ES' 8egardless o what A does, &s best strategy is still TOAD1ERTISE.

!hen both rms have dominant strategies, there STABI2IT0.!e call the outcome a DOMIAT STRATE30 E45I2IBRI5M6

BUT Sometimes a frm does not have a dominantstrategy


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Exam!e o" a sit#ation $%ere a "irm does &'%ave a Dominant Strategy

# & 4Advertise, A should 9Advertise (-/0)

owever, i & 9ont Advertise, A should play ont Advertise($/-1).

A does not have a dominant strategy.

+hus, it is more di;cult to PREDI7TAs actions in thesecircumstances

1%

Firm A

Advertise

Firm B

Dont Advertise

Advertise

DontAdvertise

10, 15,

20,6,

5 0

8 2


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1!

@ash E?ui*i9rium (@E+

A situation here ea-h fir. -hooses the est strategy6gienthe strategies -hosen y other fir.s

; --urs here @E3$8E" AE" 8A 3@!E@$3E

$ DE3A$E =@3A$E"Afro. its -hosenstrategy

; .plies staility E=33;"3=M


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1"

Birm A does not hae a Dominanttrategy/ What is the @ash E?ui*i9riumC

Firm A

Advertise

Firm B

Dont advertise

Advertise

Dontadvertise

10, 15,

20,6,

5 0

8 2

(B: Advertise, A: Dont advertise) @ot @E6 e-ause A hasin-entive to unilaterally deviate and play ?Advertise@ (10%)

(B: Dont advertise, A: Dont advertise) @ot @E6 e-ause + hasin-entive to unilaterally deviate and play ?Advertise@ ("2)

next s*ide


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1

Birm A does not hae a Dominanttrategy/ What is the @ash E?ui*i9riumC

Firm A

Advertise

Firm B

Dont advertise

Advertise

Dontadvertise

10, 15,

20,6,

5 0

8 2

(B: Dont advertise, A: Advertise) @ot @E, e-ause + hasin-entive to unilaterally deviate and play ?Advertise@ ($0)

(;: Adertise, A: Adertise+ 3s @E,e-ause A has no in-entiveto unilaterally deviate and play ?


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risoners di*emma/ A ga.e here pursuing do.inantstrategies results in non8-ooperation that leaves everyoneorse off

=

A ga.e in hi-h ea-h player has a do.inant strategy6and hen ea-h plays their do.inant strategy theresulting payoffs are s.aller than if ea-h had played ado.inated strategy


$he 'risoners di*emma


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The Prisoners+ Di%emma+he setting

;+wo bank robbers (Al and &ob) have been captured bythe police

; !ithout a conession, the police have insu;cient

evidence to convict them o a robbery

;+hey can prosecute or possession o unlicensed weapons

;+he police have a cunning plan

LECTURE 5 Oligopoly

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