ECON 1B03 Lecture Notes - Lecture 26: Resale Price Maintenance, Nash Equilibrium, Oligopoly

• School: McMaster University
• Department: Economics
• Course: ECON 1B03
• Professor: Hannah Holmes

Document Summary

Self-interest makes it difficult for oligopoly to maintain cooperative outcome with low production, high prices, monopoly profits. Ex focused on advertising -- radio vs tv. The nash equilibrium is at (5,5) when both make tv ads. Had they both placed radio ads, the both would have been better off with higher profits. Note this game is a one-time only game, but real-world application are repeated games, played over and over with same competitors. Firms that care about future profits will cooperate in repeated games rather than cheating at one game for one time gain. Temptation to cheat is there so cooperation is. Cooperation among oligopolies is undesirable from standpoint of society as whole because it leads to production that is too low and prices that are too high. Canadas competition act makes it illegal to collude. Most collusion is tacit collusion no formal agreements (no paper trails) , ie just an understanding.