63cdce1b0dd2b4d696630b508a8cbb97_intermediate market structures f 13.pptx

8/9/2019 63cdce1b0dd2b4d696630b508a8cbb97_Intermediate Market Structures f 13.pptx

1/21

Intermediate Market Structures

&Game Theory


2/21

Competitive Market

Market

You

Other Firms

Impersonal Price Taker

Entry inresponse

to profit

potential


3/21

Monopoly Market

Market

You

Barriers to entry Control of price Long term profit potential


4/21

Monopolistic Competitive Market:

Market

You

Other Firms

Many Competitors

Free entry & exit Prodct !ariety


5/21

Oligopoly Market

Market

You

Barriers to entry Control of price Long term profit potential Fe" #ellers Inter$dependent

decisions

%ey to eha!ior isinter$personal

reactions'

(o" do I respond

to yor actions )or

do yo potentially

respond to me*+


6/21

Intermediate Market StructuresMonopolistic Competition

Many Small uyers

Many Small Sellers

!on"homogeneous product

#$S%T

Free $ntry & $'it

#$S%T

(er)ect In)ormation

!o uyer market po*er Many alternative vendors Some product loyalty

EL,#TIC -EM,.-

Price #etter+must choose price,Impersonal+- graphs"market. )irm,

Firm price elasticity high

(ro)its *ill induce entry

osses *ill induce e'itLong /n Profit 0 1

!o mistakes


7/21

T/C

TFC

Monopolistic Competition

Indstry

ike competition. you need t*o graphs0ike Monopoly. 1 is do*n*ard sloping

P

2

-

#

P3

23

P

2firm

,TC

MC

Firm

23 firm

,4C

-

M/

ike Competition. (rice set *here 2S321 ike Monopoly. Set 2)irm*here M#3MC

Set (rice at ma' ( given 2)irm+on 1,

(45TC647$ntry +or (85TC687$'it,

M#8(M# steeper than demand +-',

P3

/elati!ely elastic demand

6


8/21

Intermediate Market Structures9inked 1emand

Many Small uyers

Fe* Sellers

!on"homogeneous product

#$S%T

Some arriers

(er)ect In)ormation

!o uyer market po*er 5lternative vendors kno*n Some product loyalty

Competitors respond to each otherPrice #etter+must choose price,

#ome Parallel eha!ior

Price #taility o!er time

(ro)its may induce entry osses may induce e'it

!o mistakes


9/21


10/21

Game Theory

(layers 5ctors e))ected ;y their o*n actions and those o) others ?hat opponent does a))ects the values o) alternative actions

Strategies I) you = I *ill = 1epends upon dynamics o) market

Is decision making se@uential or simultaneousA Is decision making repeatedA

Is learning possi;leA (ayo))s

May ;e monetary !eed to @uanti)y


11/21

Bo* Game Theory *orks

1eals *ith personal competition I) small num;er o) competitors. get to kno* each

others patterns O*n actions a))ect others actions. *hich. in turn.

a))ect *hat is ;est strategy

Individual chooses ;est e'pected payo)) Factor in opponents strategy Factor in importance o) gain and loss Factor in past and potential )uture impact

!ash $@uili;rium D no incentive to change given competitors strategy


12/21

Firm B

5dvertise 1ont 5dvertise 0 5dvertise E -7 E " E

E -7 E 7 E

E""""""""""""""""""""""""""E""""""""""""""""""""""""""""E 1ont 5dvertise E 7 E E

E " E E

I) )irm 5 5dvertises. Firm s ;est strategy is to advertise!otice 5s payo))s depend on s choice0I) )irm 5 1oes not advertise. Firm s ;est strategy is to 5dvertise

There)ore. Firm has a dominant strategy to advertise0 +;oth arro*s,Firm 5 also has a dominant strategy to advertise0The !ash e@uili;rium is to ;oth advertise0!either has an incentive to change strategy. i) the other does not0This sho*s ;y t*o arro*s into ;o'. and at least one out o) other ;o'es0, Beatifl Mind

G5M$ TB$O#Y(ayo))s *ith the di))erent strategies

.

Firm ,
http://www.haverford.edu/math/butler/governing.dynamics.htmlhttp://www.haverford.edu/math/butler/governing.dynamics.html


13/21

G5M$ TB$O#YT*o !ash e@uili;ria

Firm B

5dvertise 1ont 5dvertise 0

5dvertise E - E H E

E - E 7 E

E""""""""""""""""""""""""""E"""""""""""""""""""""""""""E1ont 5dvertise E 7 E E

E H E E

I) )irm 5 5dvertises. Firm s ;est strategy is to not advertise

I) )irm 5 1oes not advertise. Firm s ;est strategy is to 5dvertiseFirm 5 has the same incentives as Firm

There are t*o !ash $@uili;ria:

5ny cell *ith t*o arro* coming in is a !ash $@uili;rium

Both .ash E6iliria ha!e one firm ad!ertising and the other not

!

.

Firm ,


14/21

G5M$ TB$O#Y(risoners 1ilemma

Firm B

5dvertise 1ont 5dvertise

5dvertise E H E - E

E H E 7 E

E""""""""""""""""""""""""""E"""""""""""""""""""""""""""E1ont 5dvertise E 7 E E

E - E E

I) )irm 5 5dvertises. Firm s ;est strategy is to advertise

I) )irm 5 1oes not advertise. Firm s ;est strategy is to 5dvertiseFirm 5 has the same incentives0

Only one !ash $@uili;rium e'ists:

oth advertise. even though this costs them

.

Firm ,


15/21

(ractical 5pplication o)Game Theory: 5dvertising

5dvertising Some o) advertising increases total demand

;y in)orming customers

Some o) advertising is destructive as itattempts to take other vendors customers

The )irst adds to value. the latter destroyssome value as it adds to private value

This creates a Game Theory situation The payo)) o) my actions depends on others

actions My actions a))ect the payo))s o) others actions


16/21

$'ample

#ules:

0 Simultaneous decisions

-0 (ayo))s depend upon your and your

competitors choices

0 (ayo)) Matri' is symmetrical

H0 You are either (epsi or Coca Cola

0 You have to decide *hether to advertise ornot

J0 In class you have one competitor team


17/21

K

Coke

0 1ont 5dvertise 5dvertise 0

1ont 5dvertise E 7 E 7 EE 7 E -7 E

E"""""""""""""""""""""""E""""""""""""""""""""""""E5dvertise E -7 E 77 E

E 7 E 77 E

$ntries are pro)its. given the com;ination o) choices0You are either Firm 5 or Firm ?hat do you choose to doLadvertise or notAThere *ill ;e up to K rounds""each time each team chooses

simultaneouslyThen results *ill ;e ta;ulatedCumulative pro)it is the criterion )or *inningThere "ill e one chance to negotiate "ith yor competitor

?hat *ill you chooseA

Pepsi


18/21

?hy did *e do *hat *e did: (ayo))

5ssume that i) you advertise. it costs you N77 +;uilt into the num;ers;elo*, and that the payo))s are as in the ta;le:

Pepsi

5dvertise 1ont 5dvertise

5dvertise E 7 E 7 EE 7 E -7 E

E""""""""""""""""""""""""""E"""""""""""""""""""""""""""E

1ont 5dvertise E -7 E 77 E

E 7 E 77 E

!otice that this is a prisoners dilemma situation0

Bo* did your team respondA

Bo* much pro)it did you makeA

!

Coca Cola


19/21

Profits !s Pricing'The Incentive )or !o change

(ay"o))s a;ove diagonal to $''on

(ay"o))s ;elo* diagonal to Cro*n

Exxon

Cro"n

N0

N0H

N0-

N0-H

N07

N0-7

H7

K77

H77

J7

H

H7

J7

7K7

7-7

K7

7

H

Incorporating kno"ledge of competitor5s response rles ot certain options7

!

Only stale choice is88888888888887

$ntries in Ta;leare (ro)its

no change

37 Tale assmesindependent action0

?ith this assumption.;oth lo*ering price isthe only !ash

$@uili;rium097 Beha!ioral

,ssmption:a0 #aising price *illnot ;e responded to.;0 1ropping price *ill0

5rro* indicatespre)erred choice

Initial

situation

Chooses ro"

Chooses colmn

.ash E6ilirim'

!o incentive toautonomouslychange strategy


20/21

Game Theory over Time

More than one decision earning possi;le

Tit")or"tat

1ecision tree

Options and payo))s in se@uential decisions $': Take a Po; at N77. or *ait )or possi;le Po; QN-77

Take Po;A

Y

!

!e*

O))er

Y

Y

!

!

Outcome

N77

N7

N-77

N77

The key to success is

0 5ssess pro;a;ility o) Po;

-0 1ecide *illingness to risk0

0 1ecide a;out )irst Po;0


21/21

The argaining (rocess

%ltimatum 5ll"or"nothing

Take"it"or"leave"it

Credi;le threat One that is in threateners ;est interest

Credi;le promise One that is in promisers ;est interest

Commitment (ro;lem"not tied to promise

Commitment device"ties one to threat orpromise

63cdce1b0dd2b4d696630b508a8cbb97_intermediate market structures f 13.pptx

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