Module 11 and 12 Video / Other Flashcards
monopolistic competition
has a large number of firms, they have differentiated products, and compete on price, quality, and marketing, and theres free ventry and exit into the market
ATC stands for
average total cost
Game Theory
Oligopoly: Because of the interdependence between firms, you have to use a different method to figure out what they’re going to do. It is different than all the other market systems. (Cereal Example)
So they consider the actions of other firms when they make their decisions.
Game theory is a useful tool for analyzing firm decision making in this environment.
The Prisoner’s Dilemma is the classic game theory.
Art and Bob have been caught stealing a car. The sentence for stealing a car is 2 years in jail. The police want to convict them of a bank robbery. And the sentence for that is 10 years in jail but they have no evidence on the bank robbery. So they’ve got to get them to confess to the bank robbery in order to get them for that. So they make the prisoners play a game. Art and Bob have this payoff matrix. It shows the outcomes of different decisions. There are 3 components to every game: the rules, the strategies (confess or deny the bank robbery), and the payoffs (in this case how many years in jail
The rules - Art and Bob can’t talk to each other
The game is only played one time & you don’t get a do over.
Strategies are confess or don’t confess.
You read this pay-off matrix like this -
Art can choose to either confess or deny. Now the outcome for Art whether he denies depends on what Bob does. Art gets different outcomes depending on what Bob does. If Bob confesses to the robbery and Art denies, then then Bob gets only 1 year in prison while Art gets 10 years in prison.
The easiest way to solve these is to start in one place.
If Bob confesses, how is Art going to respond?
Art has 2 choices: if art knew bob was confessing, he could also go to jail for 3 years or he could deny and go to jail for 10 years. He would obviously pick to go to jail for 3 years by confessing.
Now if Bob denies, Art could confess or deny. Art would still confess. No matter what Bob does, Art is better off confessing. That’s called the dominant strategy because it’s the best he can do no matter what Bob does. Now we know Art is going to confess and they know this matrix because that’s his dominant strategy/best thing to do no matter what Bob does.
So then Bob is going to confess also to go to jail for 3 years. So both Art and Bob would choose to confess and then they’d get the Nash Equilibrium.
They would both get a better option if they both chose to deny. But if one of them knew the other was going to deny, they could switch to confess and get a lower sentence, so it isn’t an equilibrium. It doesn’t make it so neither one have incentive to change unless the other changes their strategy.
Choosing deny/deny is the collusion outcome where they can work together to create the best outcome for both of them.
Game Theory
Oligopoly: Because of the interdependence between firms, you have to use a different method to figure out what they’re going to do. It is different than all the other types of systems.
Measuring market structure
Sometimes people want to know if a certain industry has a certain market structure.
Then the department of justice may also try to figure that out, like to see how competitive a market is.
