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Lecture 10

ECON 100B Lecture Notes - Lecture 10: Repeated Game, The Incredibles, Simultaneous Game


Department
Economics
Course Code
ECON 100B
Professor
CHAKRABORTY, D
Lecture
10

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Econ 100B Lecture 10 - May 15, 2018
Repeated games and cartels
Repeated games
Disney is ready to release “the Incredibles 2” while DreamWorks is ready to release “the
Boss Baby”
The cost of making each movie is $175 million
Advertising cost is $75 million
Advertising influences the choice of people who already watch animated movies
People will watch either one
Assumption
Advertising will not bring new audience to the theater
Advertising costs money and will affect profit
If both advertise: they split the maker and each earns $400 million
Profit = $400 M - (175+75) = 150 M
If non advertise: they split the market and earn $400 M
But profit = 400 - 175 = 225 M
If one company advertises and other does, the revenge of the company that advertises is
$700M and the other company will only earns $100M
Profit = 700 - 250 = 450 M
Loss = 100 - 175 = -75M
Disney
Dreamworks
Advertise
Not Advertise
Advertise
150, 150
450, -75
Not Advertise
-75, 450
225, 225
The dominant strategy is to advertise
Unless there is a collusion or an agreement both firms are stuck with an inferior outcome:
(advertise, advertise)
Assume that the firm are able to communicate and reach an agreement that they will not
advertise
The firms do not have an incentive to keep the promise because they have an
incentive to deviate for a higher profit
We assume that the decision is simultaneous and there is interaction only one time
What if they productions houses know that they are going to en up in the same
situation again next year?
When a simultaneous game is played repeatedly, layers’ strategies consist of actions
taken during each reputation
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