ECON 401 Study Guide - Final Guide: Bertrand Competition, Nash Equilibrium, Best Response

• School: U of M
• Department: Economics
• Course: ECON 401
• Professor: Rudi Bachmann

Document Summary

Monopolist chooses a quantity and can sell at price determined by inverse demand: pd(q) Monopolist maximizes profits: max p(q) * q c(q) P(q) + p"(q)q = c"(q) ) => mr(q) = mc(q) A game is a set of players, payoffs (utilities), and strategies. Best response function: the profit maximizing action for player i, given the (fixed) strategies of all other players. Nash equilibrium: every player"s strategy maximizes that player"s utility, taking all other players" strategies as fixed. No incentive to deviate, taking all other players" strategies as fixed. If everyone else is sticking to the plan, i should too. Two firms compete by setting prices simultaneously. Firm with a lower price gets the entire market. If both firms set the same price, split the market 50/50. Result: firms end up selling at mc. Two firms compete by setting quantities simultaneously. Both face the same price and same marginal cost. Assumptions: no capacity constraints and no firm sells below mc.