Economics 103

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Economics 103

• Lecture 17
• Interaction Among the Few

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To this point weve assumed

• Firms were so small relative to the market they
  could
• ignore other firms.

2. Firms were simple price takers and didnt
need to take into account the actions of
others.
But in many situations in life, we strategically
interact with others.
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A few other examples
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There is a language to talk about these
situations Game Theory.
Strategy the margin you make a decision on
up/down, price, etc.
Pay-off the reward profit/utility
Best Response the best strategy, given the
strategy of others.
Nash Equilibrium when everyones best strategy
is the BR to the strategies of all the
players.
Dominant Strategy always the best strategy,
regardless of the strategies of the others.
Common Knowledge I know what you know, you know
I know what you know, I know you know I know
what you know .
-the princess bride.
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Lets start with games of dominant strategies.
Suppose we have to following, meaningless game.
Player 1 is on the side, and the first number
is his payoff.
We can find the equilibrium by eliminating
dominated strategies.
Player 2, would never play M.
Now, Player 1 would never play M or D.
Player 2 would not choose R.
Up, Left is the NE!
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Theres lots of examples of dominant strategies
in life

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Youre caught in a battle, what is your dominant
strategy?
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Do you remember this movie?
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The Prisoners Dilemma
Do you recall the interrogation scene from this
movie?
Here you separate criminals and give them the
following payoff.
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This game is interesting because
-both players have a dominant strategy, and
- the outcome is not Pareto optimal.
People dont like the PD outcome, and we do
things to avoid it.
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The PD game is relevant to us because colluding
firms face a PD situation.
It doesnt take a genius to figure out that if a
group of competitive firms can restrict output,
they can raise price and transfer wealth to
themselves.
The question is, why dont competitive firms do
this?
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The answer is that each firm has a dominant
strategy to violate the collusive agreement.
The cartel must figure out a way to police
the individual firm.
This means the conditions for collusion are quite
limited.
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1. There should be no fringe of small firms.
2. Entry to the industry should be costly. Eg.
Resource based.
3. Standardized products to police cheating.
4. Inelastic demand. Second law of demand works
against collusion.
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Competition Policy in Canada.
Anti-trust laws in our country are designed
around the models weve looked at.
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Our Anti-trust laws go back to 1889, The Combines
Investigation Act.
Criminal offense to conspire to unduly lesson
competition.
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In 1986 it all changed.
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Generally speaking, Horizontal restraints
(cartels, bid rigging, etc) are generally per
se illegal.
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If the tribunal does not have direct evidence of
a cartel, then it looks at circumstantial
evidence.
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With the other situations (eg. Tie in sales, RPM,
etc.) the tribunal listens to efficiency
arguments, and tries to decide if the act is
competitive or not.