In Bertrand model of oligopoly
each firm earns zero economic profit
In the prisoner's dilemma
both players would do better than the Nash equilibrium if they could cooperate, and it is difficult to cooperate because each player has an incentive to cheat
Comparing the Cournot equilibrium to a monopolist's profit-maximizing choices,
total profits are lower and total output is higher in the Cournot equilibrium
The prisoners dilemma is an example of a _________ game
noncooperative
The prisoner's dilemma shows that
cooperation is difficult to achieve
Monopolistically competitive industries are inefficient because
firms produce less output than the level that minimizes average cost and price is above marginal cost
bad practice for a seller in an auction
create uncertainty about the value of the item in a common-value action
monopolistic competition
market in which firms can enter freely, each producing it's own brand or version of a differentiated product
oligopoly
market in which only a few firms compete with one another and entry by new firms is impeded
cartel
market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits
in monopolistic competition firms face ________-sloping demand curves
downward
why is there no economic profit for a firm in monopolistic competition
because there is free entry, the potential to earn profits will attract new firms with competing brands, driving economic profit to 0
Unlike perfect competition, with monopolistic competition the equilibrium price...
exceeds marginal cost
a monopolistically competitive firm has output that is below
the point which minimizes average cost
in most monopolistically competitive markets monopoly power is...
small
monopolistic competitions are known to create
product diversity
Oligopolies have products that may or may not be
differentiated
oligopolies earn sometimes substantial economic profits because of
barriers to entry
Why might barriers to entry arise?
Scales of economies may make it unprofitable for more than a few firms to coexist in the market
In oligopolistic market, a firm sets price or output based on
strategic considerations regarding the behavior of its competitors
When a market is in equilibrium
firms a doing the best they can and have no reason to change their price and output
Nash Equilibrium
set of strategies or actions in which each firm does the best it can given its competitor's actions
duopoly
market in which two firms compete with each other
Cournot Model
Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce
reaction curve
relationship between firm's profit-maximizing output and the amount it thinks its competitor will produce
each reaction curve tells it how much to produce
given the output of its competitor
Intersection of the reaction curves
Cournot Equilibrium
cournot equilibrium
equilibrium in the cournot model in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly
collusion curve
gives all pairs of outputs Q1 and Q2 that maximize profit
Cournot outcome is better than ____ but not as good as ____
perfect competition, collusion
stackleberg model
oligopoly model in which one firm sets its output before other firms do
In stackleberg, going first....
gives that firm the advantage
Bertrand Model
firms produce a homogenous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge
A nash equilibrium is a
noncooperative equilibrium
prisoner's dilemma
game theory example in which two prisoners must decide separately whether to confess to a crime; if a prisoner confesses he will receive a lighter sentence and his accomplice will be receive a heavier one, but if neither confesses, sentences will be light
if firms compete passively, setting high price and limiting output...
they will make higher profits than if they compete agressively
price rigidity
characteristic of oligopolies by which firms are reluctant to change prices even if costs or demands change
kinked demand curve model
demand curve kinked at the currently prevailing price: at higher prices demand is very elastic, whereas at lower prices, demand is inelastic
dominant firm model
firm with a large share of total sales that sets price to maximize profits, taking into account the supply response of smaller firms
game
situation in which players make strategic decisions that take into account each other's actions and responses
payoff
value of associated with a possible outcome
optimal strategy
strategy that maximizes a player's expected payoff
it is essential to understand your opponent's point of view and to
deduce his or her likely responses to your actions
dominant strategy
strategy that is optimal no matter what an opponent does
equilibrium in dominant strategies
outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing
because each player has no incentive to deviate from its Nash strategy
the strategies are stable
maximin strategy
strategy that maximizes the minimum gain that can be earned
a maximin strategy is conservative and not _______
profit-maximizing
pure strategy
player makes a specific choice or takes a specific action
mixed strategy
player makes random choice among two or more possible actions
tit for tat strategy
a player responds in kind to an opponent's previous play, cooperating with cooperative opponents and retaliating against uncooperative ones
failure to cooperate is the result of
rapidly shifting demand or cost conditions
sequential game
game in which players move in turn, responding to another's actions and reactions
stackleberg model is an example of a
sequential game
extensive form of a game
representation of possible moves in a game in the form of a decision tree
auction market
products are brought and sold through formal bidding processes
english auction
a seller actively solicits progressively higher bids from group of potential buyers
Dutch auctions
a seller begins by offering an item at a relatively high price, then reduces it by fixed amounts until the item is sold
sealed-bid auction
all bids are made simultaneously in sealed envelopes, the winning bidder being the individual who has submitted the highest bid
first/second price auction
auction in which sales are sold to the highest/second highest bidder
private-value
Auction in which each bidder knows his or her individual valuation of the object up for bid, with valuations differing from bidder to bidder
common-value
auction in which the item has the same value to all bidders but bidders do not know that value precisely and their estimates vary
winner's curse
situation in which the winner of a common-value auction is worse off as a consequence of overestimating the value of the item and thereby overbidding
Since P > MC in monopolistic competition
there is going to be some deadweight loss