1 game theory and oligopoly l principles of microeconomic theory, eco 284 l john eastwood l cba 247...
TRANSCRIPT
1
GAME THEORY AND OLIGOPOLY
Principles of Microeconomic Theory, ECO 284
John Eastwood CBA 247 523-7353 e-mail address:
2
Game Theory is a field of mathematics first developed by John Von Neumann, and Oskar Morgenstern (Theory of Games and Economic Behavior).
What is Game Theory?
3
Payoff Matrix
Two players, each may choose between two strategies. There are four possible mutually exclusive outcomes.
Matrix shows the payoff to each player. If Jill (x) holds out, & Jack (y) confesses,
the payoff,(x,y) = (-6,0), means Jill gets 6 years, and Jack goes free.
4
Strategy, Outcomes & Equilibria
A dominant strategy is a player’s best response to any strategy other players might pick
A Nash equilibrium is an outcome that is stable once reached. No player has an incentive to change strategy unless other players change.
5
Terminology
In a cooperative game, players may make binding agreements, or form coalitions.
In a noncooperative game, players may neither make binding agreements, nor form coalitions.
A zero-sum game is one in which one player may gain only what others lose; poker is an example.
6
More terminology
The Prisoners’ Dilemma is a non-cooperative, nonzero sum game.
Whether Jack or Jill moves first is unimportant.
Moving first is advantageous in many other games.
7
Dynamic Games
Grim strategy -- refusal to commit to a position until the other player commits to a position.
A tit-for-tat strategy begins cooperatively, and then echo what the opponent did in the previous period
8
Other Strategies
A player who follows the Trigger Strategy cooperates as long as the other player cooperates, but adopts the most extreme form of punishment possible if their agreement is broken.
Reputation building: Players gain a reputation through consistent behavior for several rounds of the game.
10
Predatory Behavior
Predatory behavior occurs when a firm attempts to drive rivals from the industry and deter entry.
The predator sets P < ATC, while producing the quantity demanded.
If all rivals shut down to reduce their SR losses AND exit in the LR, the predator monopolizes the market.
11
Strategic BTE, Predation and Accommodation
Strategic BTE may be viewed as predatory weapons.
Less costly to acquire your rival? Accommodation: Allowing a rival to enter
(or survive) may be less costly.
12
Jack & Jill
Jack's Strategies
Confess Holdout
Confess -3,-3 0,-6
Jill
'sS
trat
egie
s
Holdout -6,0 -1,-1
13
Oz & Lilliput
Lilliput's Strategies
Tariff No Tariff
Tariff 40,40 170,80
Oz'
s S
trat
egie
s
No Tariff
30,100 150,140
14
Duopoly and Advertising
Y's Strategies
High budget
Low budget
High budget
0, 0
12, -5
X’s
S
trat
egie
s
Low budget
-5, 12
5, 5