ECON 1050 Chapter 15: Economics-1 (1) (dragged) 9

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salmoneagle674

17 Sep 2016

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A sequential entry game in a contestable market: In a contestable market a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants firms play a sequential entry game. In the first stage, agile decides whether to set the monopoly price or the competitive price. In the second stage, wannabe decides whether to enter or stay out. Wannabe"s payoffs are in blue and agile"s are in red. The equilibrium is agile sets a competitive price and makes zero economic profit to keep. A less costly strategy is limit pricing, which sets the price at the highest level that is consistent with keeping the potential entrant out. Canada"s first anti-combine law was enacted in 1989. The law today is defined in the competition act of 1986. The 1986 act established a competition bureau and a competition tribunal.

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Delphin has developed a new video game that can be produced with two technologies having the costs CÎ± = 10 + 8Q and CÎ² = 60 + 2Q. The alpha (Î±) technology is well known, while the beta (Î²) technology is known only to Delphin. Demand is estimated as P = 20 - Q, where Q is industry output.

a. Suppose Delphin is certain that it will have a monopoly on the new game. Which technology should Delphin adopt? What are its profits with each technology? Delphin has learned that its rival, Orpheus, is considering entering this market using alpha technology. If Orpheus enters, the firms will play a Cournot game (simultaneously choosing quantities).

b. If Delphin adopts the alpha technology and Orpheus enters, what are the profits of the two firms?

c. If Delphin adopts the beta technology and Orpheus enters the market, what are the profits of the two firms?

d. Draw out the extensive form sequential game (game tree) in which Delphin moves first to choose a technology, followed by Orpheus's choice to enter or not. Use your answers to a, b, and c above to determine the payoffs to each possible outcome. What is the Nash Equilibrium of this sequential game?

purplebuffalo338

Consider the following market game: An incumbent firm, called firm 3, is already in an industry. Two potential entrants, called firms 1 and 2, can each enter the industry by paying the entry cost of 10. First, firm 1 decides whether to enter or not. Then, after observing firm 1's choice, firm 2 decides whether to enter or not. Then, after observing firm 1's choice, firm 2 decides whether to enter or not. Every firm, including firm 3, observes the choices of firms 1 and 2. After this, all of the firms in the industry (including firm 3) compete in a Cournot oligopoly, where they simultaneously and independently select quantities. The price is determined by the inverse demand curve p = 12 â Q, where Q is the total quantity produced in the industry. Assume that the firms produce at no cost in this Cournot game. Thus, if firm i is in the industry and produces qi, then it earns a gross profit of (12 â Q)qi in the Cournot phase. (Remember that firms 1 and 2 have to pay the fixed cost of 10 to enter).

(a) Compute the subgame perfect equilibrium of this market game. Do so by first finding the equilibrium quantities and profit in the Cournot subgames. Show your answer by designating optimal action on the tree and writing the complete subgame perfect equilibrium strategy profile. [Hint: In an n-firm Cournot oligopoly with demand p = 12 â Q and 0 costs, the Nash equilibrium entails each firm producing the quantity q = 12/(n + 1).]

(b) In the subgame perfect equilibrium, which firms (if any) enter the industry?

silverantelope83

30. Economies of scale refer to:

a. the minimum point on the short-run average total cost curve.

b. the flat portion of the long-run average total cost curve.

c. a decrease in the long-run average total cost of production as output increases.

d. a and b.

31. With a natural monopoly, the price a single firm must charge to make a profit:

a. is lower than the price two or more firms would have to charge.

b. is always higher than the price two or more firms would have to charge.

c. is equal to the price of two or more firms would have to charge.

d. is half the price two or more firms would have to charge.

32. The long-run average cost curve is typically:

a. downward-sloping at first but then upward-sloping.

b. upward-sloping at first but then downward-sloping.

c. always downward-sloping.

d. always upward-sloping.

33. According to the contestable market model, if there are no barriers to entry or exit, the price an oligopolist sets will be equivalent to the competitive price.
True or False?

34. In the theory of perfect competition:

a. the market demand curve is horizontal (i.e. elastic).

b. the single firm's demand curve is horizontal (i.e. elastic).

c. the single firm's demand curve is downward sloping.

d. a and b.

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ECON 1050 Chapter 15: Economics-1 (1) (dragged) 9

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