Section 11 Chapter 13

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Section 11Chapter 13

• 13.1 Market structures
• 13.2 Game theory
• 13.3 Cooperative oligopoly models- To read
• 13.4 Cournot Model
• 13.7 Monopolistic competition

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Oligopoly and monopolistic competition

• Definitions
• Oligopoly a small group of firms in the market
  with substantial barriers to entry
• Cartel a group of firms that agree to coordinate
  their activities
• Monopolistic competition market structure in
  which firms have market power (the ability
• to raise price above marginal cost)
• Market structure refers to the number of firms
  in the market, price ,profits, ease of entry
• and exit, ability of firms to differentiate their
  products.
• Types of market structures
• Monopoly
• Oligopoly
• Monopolistic competition
• Competition
• The four market structure can be characterized as
  follows

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Game theory

• Game theory is a set of tools that economists,
  political scientists, military analysts and
• others use to analyze decision making by players
  that use strategies.
• Players firms, countries, individuals, etc
• Strategy set of actions
• Example An oligopolistic firm or a
  monopolistically competitive firm consider how
  its
• actions affect its rivals and how rivals actions
  will affect it.
• Action choosing price or quantity
• Strategy battle plan the firm uses when
  competing with other firms
• Equilibrium in game theory
• In general, an oligopolistic market is in
  equilibrium if no firm has the desire to change
  its
• output level given what everyone else is doing.
• Nash equilibrium holding the strategies of all
  other players the same, no player(firm) can
• obtain a higher payoff(profit) by choosing a
  different strategy.
• In a Nash equilibrium, no player wants to change
  its strategy because each is using its best
• response the strategy that maximizes its profit.
  
• Example of game Prisoners dilemma

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A game

• Determining Nash equilibrium for a duopoly game
• We examine how American Airlines and United
  Airlines actually compete for customers on
• flights between Chicago and Los Angeles.
• Let qa and qu be the number of passengers flown
  by American and United.For simplicity,
• assume that they can have only 2 choices. They
  can choose to serve a large quantity of
• passengers( 64 units) or a small quantity of
  passengers(48 units)
• Note A unit is 1000 passengers.
• Payoff matrix

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Cournot Model

• Cournot Model is a model that describes decision
  making process for oligopolies that
• behave independently.
• To simplify the analysis, we examine a market
  structure in which
• There are two firms and no other firm can enter
• The firms sell identical goods
• The firms compete in a market that lasts for only
  one period and the product or service that they
  sell cannot be stored and sold later.
• The game
• Players
• Strategy
• We are looking for Nash equilibrium

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Monopolistic competition

• Monopolistic competition is a market structure
  characterized by
• 1. The market has no barriers to entry, o
  firms may enter the market until no new firm can
  enter profitably
• The residual demand for the monopolistic
  competitive firm is downward sloping because of
  few competitors or because the firms sell
  differentiated products.
• Monopolistic competitive equilibrium
• Each firm tries to maximize profits. However,
  each firm makes 0 profit due to entry.
• 2 conditions will always hold
• MRMC or profit maximization condition
• PAC or 0 profit
• Graphically