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Title: Oligopolies, Game Theory
Description: These notes are for the subject Economics for Business and Management (2nd year undergraduate). They include Oligopolies, Price/Non-Price Competition, Game Theory (Prisoners Dilemma +diagram) and Nash Equilibrium.
Description: These notes are for the subject Economics for Business and Management (2nd year undergraduate). They include Oligopolies, Price/Non-Price Competition, Game Theory (Prisoners Dilemma +diagram) and Nash Equilibrium.
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There are different pricing policies for each of the 4 main market structures
...
In monopolistic competition, where there are many firms in the market and again no
barriers to entry but each firm produces differentiated products, the pricing is competitive
...
However, in monopoly, we always observe a monopoly price because there
is one firm in the market and a great presence of barriers to entry
...
This means it does not
change despite changes in the economy
...
Firstly, they can collude with them either explicitly
via formal agreements or tacitly- unspoken agreements
...
If there is no agreement (tacit collusion) and if the dominant cuts its prices, other
firms should cut their prices regardless of their costs
...
When colluding, firms can jointly
maximize industry profits
...
They compete on other areas of the business, such as research and development,
special offers for customers, product differentiation etc
...
This will reduce uncertainty and fear of price cutting that exists because rice cutting itself
will lead to decrease in the total industry profits
...
Also, if they have similar production methods and/or similar products and they are likely
to change prices at the same time
...
Thus it may gain a bigger
share of the market and the profits
...
But, the price is again kept stable because the firm makes two key
assumptions that can happen if is about to change prices
...
The first assumption is that if the firm cuts its prices, the rivals will cut their
prices too
...
On these
assumptions, the firm’s demand curve is kinked at the current price and output so, in this situation,
the oligopoly will go for price rigidity
...
This is
called Game Theory or Prisoners Dilemma:
The position that comes after everyone making assumptions about the others’ behavior is called
Nash Equilibrium
...
In the diagram above the Nash Equilibrium would be last quadrant
where both prisoners confess and each gets 20 years
...
If there is collusion the best overall outcome would be the first quadrant
where both do not confess and each gets 1 year
Title: Oligopolies, Game Theory
Description: These notes are for the subject Economics for Business and Management (2nd year undergraduate). They include Oligopolies, Price/Non-Price Competition, Game Theory (Prisoners Dilemma +diagram) and Nash Equilibrium.
Description: These notes are for the subject Economics for Business and Management (2nd year undergraduate). They include Oligopolies, Price/Non-Price Competition, Game Theory (Prisoners Dilemma +diagram) and Nash Equilibrium.