Lecture 27: Game Theory Flashcards
What is game theory?
the study of how people behave in strategic situations
What are strategic decisions?
Each person, in deciding what actions to take, must consider how other might respond to that action
What is a dominant strategy?
it is the best strategy for a player to follow regardless of strategies chosen by other players (they choose this both times, but it doesn’t have to be the same as the other person)
What is the Nash equilibrium?
Economic actors interacting with each other choose their best strategies that all other actors have chosen.
A player can achieve the desired outcome by not deviating from their initial strategy. In the Nash equilibrium, each player’s strategy is optimal when considering the decisions of other players.
For monopolistic competition, firms in the long run can only make
normal profit
What is a non-cooperative result/ non-cooperative equilibrium?
this is when one player has a dominant strategy and the other doesn’t
Monopoly and Oligopoly lead to
deadweight loss
What is the government response to an oligopoly and monopolies?
to enact laws to restrict the behaviour of monopolies and oligopolies
What is the aim of the Commerce Act in relation to monopolies and oligopolies?
To prohibit conduct that restricts competition such as
- merges that lessen competition
- price fixing/collusion
What are three tools of the competition authority?
- do nothing
- encourage competition practices
- regulate the behaviour or private suppliers
- nationalise suppliers
Why would the competition authority do nothing?
because monopoly profits attract competitors and profits also encourage cheating by cartel members
Why would the competition authority encourage competitive practices?
to discourage and prevent mergers
and to investigate/prosecute potential anti competitive behaviour
Why would the competition authority regulate the behaviour of private suppliers?
to manage prices and have access to networks
Why would the competition authority nationalise suppliers?
so that pricing and good characteristics are controlled by Parliament or local councils
and to encourage public monopoly
What is a cartel?
where two or more businesses agree not to compete with each other. This conduct can take many forms, including price fixing, dividing up markets, rigging bids or restricting output of goods and services.
