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

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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.

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