ECON 0100 Lecture Notes - Lecture 8: Nash Equilibrium, Normal-Form Game, Strategic Dominance
Market Structures
There are 4 possible market structures:
Perfect Competition
§
Oligopoly
§
Monopoly
§
Monopolistic Competition
§
○
They differ in 2 primary dimensions:
Number of Sellers
§
Product Differentiation
§
○
•
Number
Of Firms
One
Product Differentiation
Few
Many
No
Yes
---
Monopoly
Oligopoly
Perfect
Competition
Monopolistic
Competition
What is a Monopolistic Competition?
A market structure characterized by the following:
Many firms (same as PC)
§
Free entry & exit (same as PC)
§
Product Differentiation (different from PC)
§
○
The product differentiation exists in a market when consumers treat goods
from different producers as different, but close substitutes
This gives the firms some market power.
§
Examples
Athletic shoes
□
Toothpaste
□
Cafes
□
§
○
There are 3 Important Forms of Product Differentiation:
Style or Type
Type of food in the food court
□
§
Location
Gas station in Oakland vs one in downtown
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§
Quality
Low vs high quality of some good or service
□
§
○
•
Features of Monopolistic Competitive Firm
Monopolistic competition shares some features with both a monopoly and with
perfect competition
○
Product differentiation --> Market power (Like Monopoly)
Monopolistic Competition forms can set P > PPC
§
Monopolistic Competition firms face downward demand
§
○
Monopolistic Competition firms face competition (Like PC)
π affected by other firms in the industry
§
π = 0 in Long Run
§
○
•
Monopolistically Competition in the Short Run
In the short run, monopolistically competitive firms look very similar to
monopolies
○
•
Like all firms, Monopolistic Competition firms face:
π > 0 if P ___ ATC
Occurs if D is ABOVE ATC at least for some q
□
§
π < 0 if P ___ ATC
Occurs if D is BELOW ATC at least for some q
□
§
π = 0 if P ___ ATC
Occurs if D is TANGENT to ATC at least for some q
□
§
○
If P ______, firm should shut down in the Short Run.
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Monopolistically Competition in the Long Run
Remember, in monopolistic competition there are no or low barriers to enter
or exit the market. That means:
If π < 0, some firms _______ in the Long Run
§
If π > 0, some firms _______ in the Long Run.
§
○
Monopolistically competitive firms in an industry are competing for the same
group of consumers. That means:
When new firm ENTERS, the existing firms are not able to sell as much.
Demand DECREASES for each firm.
□
Demand shifts leftward.
□
§
When new firm EXITS, each remaining firms able to sell more.
Demand INCREASES for each firm.
□
Demand Shifts rightward.
□
§
○
•
Negative Profit in the Short Run
•
Zero Profit in the Long Run
•
A monopolistically competitive industry is in equilibrium when NO FIRM
wishes to ENTER or EXIT.
Zero π Equilibrium
When profit for each firm is zero.
□
§
○
Monopolistic Competition vs Perfect Competition
•
P*MC > P*PC
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Excess Capacity
When the market operates at ATCmin in the long run
§
Happens in perfect competitions
§
Not true in monopolistic competition
§
○
π = 0 for both Monopolistic Competition and Perfect Competition in the long
run
○
It is unclear where Monopolistic Competition is actually less efficient than
Perfect Competition.
Some economists argue that while Monopolistic Competition firms have
excess capacity and produce lower Q, made up for by gain consumers get
from diversity.
§
○
Oligopoly
An Oligopoly:
Small number of firms
§
Usually due to some barriers to entry
§
Can have, but it is not necessary, product differentiation
§
○
Oligopolist
Firm in a oligopoly
§
Examples:
Airlines
□
Soda brands
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Oil
□
§
○
•
Decision Making for an Oligopolist
Unlike the earlier market structures we have studied, find the profit
maximizing quantity for an oligopolist is a bit unique
○
Like monopolistic competition,, actions of one firms affect π of other firms via
price effect.
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Unlike monopolistic competition, very few firms ---> ability to strategize.
Thus, oligopolist can realize their actions affect and are affected by other
firms and try to cooperate to keep q low.
§
○
Collusion
When sellers cooperate to raise their joint profits.
§
○
Cartel
An agreement between several producers on output restrictions
§
Strong form of collusion
§
○
Sellers in a cartel act as if they are a single monopolist by maximizing π
Firms decide how to split optimal output between each firm in cartel.
§
Output for each firm below firms individual πmax quantity.
§
Thus, each firm has incentive to break the agreement and sell more.
§
○
Problems Oligopolists face:
Cooperate with other firms to max joint π
§
Incentives for non-cooperative behavior to max individual π
§
○
To ho help model decision making for an oligopolist, we will use a simple
example called a duopoly
Oligopoly with only 2 firms
§
○
•
Decision Making for an Oligopolist -- Game Theory
Game Theory
A study of behavior in environments where your actions affect and/or
are affected by others.
§
A way to analyze how oligopolist behave
§
Used in MANY disciplines
Politics, philosophy, military strategy, biology,…
□
§
○
Game
A scenario we analyze using game theory
§
○
Players
The individuals making decisions
§
○
Payoff
The reward received by a player in a game
§
○
Payoff Matrix
Shows how the payoff to each player in a two-player game depends on the
actions of both players
§
○
•
The Prisoners' Dilemma
Each player has an incentive to choose beneficial action at other player's
expenses.
Outcome from both individuals pursuing own interest leads to worse
outcome than if both had cooperated.
§
○
In this game, suppose Intel and AMD are each trying to decide how many
processors to produce.
○
50K
60K
50K
$200m , $200m
$170m , $220m
60K
$220m , $170m
$180m , $180m
Dominant Strategy
Player's best strategy regardless of other player's strategy
§
In a game, it could be at most one dominant strategy per player.
§
In some games, the players may not have dominant strategy.
§
○
Nash Equilibrium
Occurs when no player can be made better off holding fixed the actions of
the other players.
§
Sometimes called non-cooperative equilibrium.
§
Neither player has incentive to change the action
§
○
In the game we considered:
Intel's dominant strategy is ______
When AMD produces 50K, __________________________
□
When AMD produces 60K, __________________________
□
§
AMD's dominant strategy is ______
When Intel produces 50K, _________________________
□
When Intel produces 60K, _________________________
□
§
The Nash Equilibrium is ______________________
§
○
•
πmax where ________
•
Use ___________ to set
P* given q*
•
Remember, that:
TR =
○
TC =
○
π =
○
•
Some firms will _____ the
market in the long run,
causing the demand curve
for existing firms in the
industry to ________. This
will continue until profit
reach _____. At this point,
market is in the Long Run
equilibrium.
Similarly, if the firm entering
profit in the short run:
New firms enter
•
Demand for each firm
shifts _____
•
Continues until π _____
•
Intel
AMD
Lecture 8
Wednesday,+June+13,+2018
6:11+PM
Document Summary
The product differentiation exists in a market when consumers treat goods from different producers as different, but close substitutes. There are 3 important forms of product differentiation: Gas station in oakland vs one in downtown. Low vs high quality of some good or service. Monopolistic competition shares some features with both a monopoly and with perfect competition. Monopolistic competition forms can set p > ppc. Affected by other firms in the industry. In the short run, monopolistically competitive firms look very similar to. In the short run, monopolistically competitive firms look very similar to monopolies. Occurs if d is above atc at least for some q. Occurs if d is below atc at least for some q. Occurs if d is tangent to atc at least for some q. If p ______, firm should shut down in the short run. Remember, in monopolistic competition there are no or low barriers to enter or exit the market.
