ECON 120W Lecture Notes - Lecture 14: Tacit Collusion, Predatory Pricing, Advertising Campaign

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raspberryrabbit779

5 Nov 2017

School

University of Waterloo

Department

Economics

Course

ECON 120W

Professor

Dr.Jackson

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Document Summary

In a repeated game, the losses associated with not cooperating are greater than the losses of cooperating. An agreement among firms to charge the same price or to otherwise not compete is collusion. A cooperative equilibrium is equilibrium in which players cooperate to increase their mutual payoffs, while a non-cooperative equilibrium is an equilibrium in which players do not cooperate. In the broadest sense, game theory studies the decision of firms in industries where the profits of each firm depend on. A strategy that is the best for a firm, no matter what strategies other firms use is known as a dominant strategy. Another measure of industry concentration is the herfindahl-hirschman index. In a repeated game, 2 firms are more likely to charge the high price and receive high profit. Explicit collusion example: the government were to discover a long-run, formal conspiracy to fix the price of marine hose.

Related Questions

Firms A and B are the only firms in the market for widgets. Each firm can choose between cooperating and fighting. If both firms choose to cooperate, each gets a profit of 10. If both firms choose to fight, each gets a profit of 5. If one chooses to cooperate and the other chooses to fight, the firm that chooses to cooperate gets a profit of 1 and the firm that chooses to fight gets a profit of 20. Each firm chooses the action that maximizes its profits.

(a) Suppose firms choose their actions simultaneously and they play this game once. Write the matrix of payoffs for this situation and find the pure strategy Nash equilibrium (or all equilibria) of the simultaneous-move game played by firms A and B.

(b) Suppose firms choose their actions simultaneously but the game is repeated for 10 years. So, when firms make their decisions in a specific year, each firm knows the choices of the other firm in the previous years. Find the equilibrium (or all equilibria) of this game.

magentacamel745

Consider the infinitely repeated game that I discussed in class that relies on the grim trigger strategy. I used the following definitions.

Î _coop = payoff for one period to a cooperative firm given that

the other n-1 other firms are also cooperating.

Î _ch = payoff for one period to a firm that has cheated given

that the other n-1 firms are playing cooperatively.

Î _comp = payoff per period per firm if all n firms are playing

competitively.

Assume (1) that this industry is perfectly competitive in the absence of collusion; and (2) that if any single firm undercuts the collusive price-by even a tiny amount- it gets the entire market and other firms sell nothing; (3) if all n firms are cooperating, each sells the same amount as all the other firms.

Questions:

1. What does Î _comp equal numerically?

2. If Î² equals .9, what is the maximum number of firms there can be in this industry if collusion is to be sustained as a Nash equilibrium?

3. Does your answer to the previous question depend on the size of the collusive payoff?

4. What law did the lysine defendants get charged with?

5. If they had set lower collusive prices, would this fact have affected their guilt or innocence? Explain.

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

ECON 120W Lecture Notes - Lecture 14: Tacit Collusion, Predatory Pricing, Advertising Campaign

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