ECO101H1 Lecture Notes - Monopolistic Competition, Normal-Form Game, Strategic Dominance

34 views4 pages

chocolatewhale65

14 Apr 2014

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

elizabethkandelaki and 40134 others unlocked

ECO101H1 Full Course Notes

Verified Note

98 documents

Document Summary

If collude to form cartel (illegal - cannot be enforced), industry may earn monopoly profits. If one firm has mr>mc, may cheat (by increasing output) and cartel may break down. Duopolists form cartel and agree to divide market output (hence profits) 50:50. Payoff matrix - summarize the reward of different strategies. If each produces two-thirds of monopoly output (both cheats ) If one produces one-half of monopoly output and one produces two-thirds of monopoly output. Go through every possibility of action the other firm can take. Strategies (possible: produce one-half monopoly output, produce two-thirds monopoly output. Outcome: a and b each produce 2/3 monopoly output (dominant strategy) For b, best strategy is to cheat no matter what a will do. Same for a: cartel breaks down (example:opec) One off game: in repeat game, punishment strategies may lead to more cooperation. Prevent oligopolist from colluding (typically, via price fixing )

Related Questions

Price	Quantity Demanded	Total Revenue
(Dollars per gallon)	(Gallons of water)	(Dollars)
4.80	0	0
4.40	45	$198.00
4.00	90	$360.00
3.60	135	$486.00
3.20	180	$576.00
2.80	225	$630.00
2.40	270	$648.00
2.00	315	$630.00
1.60	360	$576.00
1.20	405	$486.00
0.80	450	$360.00
0.40	495	$198.00
0	540	0

Suppose Jacques and Kyoko form a cartel and behave as a monopolist. The profit-maximizing price is _________per gallon, and the total output is____________ gallons. As part of their cartel agreement, Jacques and Kyoko agree to split production equally. Therefore, Jacques's profit is_________, and Kyoko's profit is_________.

Suppose that Jacques and Kyoko have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Jacques says to himself, "Kyoko and I aren't the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Jacques implements his new plan, the price of water(decreases/ increases) to_______ per gallon. Given Kyoko and Jacques's production levels, Jacques's profit becomes_________ and Kyoko's profit becomes____________.

Because Jacques has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Kyoko decides that she will also increase her production to 45 gallons more than the cartel amount.

After Kyoko increases her production, Jacques's profit becomes___________, Kyoko's profit becomes_________, and total profit (the sum of the profits of Jacques and Kyoko) is now_____________.

True or False: Based on the fact that both Jacques and Kyoko increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity.

-True

-False

Jacques and Kyoko have each cheated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Jacques's profit when he produces 90 gallons more than the cartel amount compared to his profit when he produces 45 gallons more than the cartel amount.)

Neither Jacques nor Kyoko has an incentive to further increase output, nor does either have an incentive to decrease output. This outcome is an example of _____________ .

amberminnow41

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.

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.

ECO101H1 Lecture Notes - Monopolistic Competition, Normal-Form Game, Strategic Dominance

ECO101H1 Full Course Notes

Document Summary

Get access

Related textbook solutions

Principles of Economics

Principles of Macroeconomics

Principles of Microeconomics

Related Documents

ECO101H1 Lecture Notes - Lecture 9: Monopolistic Competition, Demand Curve, Price Fixing

ECO101H1 Lecture Notes - Lecture 9: Potashcorp, Monopolistic Competition, The Globe And Mail

ECO101H1 Lecture Notes - Monopoly Price, Blackberry Limited, Demand Curve

Related Questions