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Lecture 29

ECON101 Lecture 29: Week 11 / Mar 29 - Game theory, repeated games competition vs cooperation, concentration measures

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University of Alberta
Gordon Lee

Week 11 / Mar 29, 2017 1. Game theory 2. Repeated games 3. Competition vs Cooperation 4. Concentration measures ie: 2 companies: subscription for music streaming Apple and Spotify Suppose each firm charges a subscription rate of $9.99. Each will earn a profit of $7.5M However these firms could charge a subscription rate of $14.99. If they did, each would earn a profit of $10M If 1 firm charges $9.99 and the other $14.99, The firm charging $9.99 earns $15M, the other firm earns $5M Cooperative Equilibrium: Each firm charges $14.99 (but it's illegal for them to price fix and explicitly cooperate) Apple : If Spotify charges $9.99, I charge $9.99 If Spotify charges $14.99, I charge $9.99 Dominant strategy: $9.99 Spotify: Dominant strategy: $9.99 Cartel = several firms acting together like a monopolist. Players agree (sometimes illegally) to cooperate to max collective economic profits. (However, they will soon start producing more than agreed on) University of Chicago - Economics dept: used this result to clean that cartels are not stable Tit-for-tat strategy = a player cooperates Yale University - Economics dept: until the other player Response: suppose the fame is played more than once defects and then defects until the other Repeated Games player cooperates ie: Suppose the game is played 4 times again. Yale: result both players collude Chicago response - Backwards induction conclusion: firms will always cheat 㱺 Competition New players: UCLA, Standford uncertainty in the payoffs and in the # of times the game will be played 㱺 cannot use backwards induction (as long as you have uncertainty) UCLA, Stanford ??? COOPERATION or COMPETITION Empirical research by economists like Joe Bain and Herbert Simon suggests that the relat
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