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Chapter 11

Chapter 11: 11.4- Oligopoly and Game Theory.docx

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Department
Economics
Course
ECO100Y5
Professor
Kalina Staub
Semester
Fall

Description
Chapter 11- 11.4 Oligopoly and Game Theory  Oligopoly- An industry that contains two or more firms, at least one of which produces a significant portion of the industry’s total output Profit Maximization is Complicated  Complicated because the firm’s marginal revenue depends on what its rivals do  Strategic Behaviour- Behaviour designed to take account of the reactions of one’s rivals to one’s own behaviour The Basic Dilemma of Oligopoly  Firms can either cooperate (or collude) in an attempt to maximize joint profits or they can compete in an effort to maximize their individual profits  When thinking about how firm behaviour leads to market outcomes, distinguish between:  Cooperative (collusive) outcome- A situation in which existing firms cooperate to maximize their joint profits o Worthwhile for any one of them to cut its price or to raise its output so long as the others do not do so as well  Non-cooperative outcome- An industry outcome reached when firms maximize their own profit without cooperating with other firms o If every industry cuts its price or raises output, they will be worse off as a group and may all be worse off individually Some Simple Game Theory  Game Theory- The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions  When game theory is applied to oligopoly, the players are firms, their game is played in the market, their strategies are their price or output decisions, and the playoffs are their profits  Looking at example on figure 11-3 on page 265:  A Playoff Matrix  Shows the profits that each firm earns in each possible combination of two firms’ actions  Upper left and lower right show equal amounts of profit (total upper left > total lower right)  Upper right and lower left show profits in the case where one produces more than the other; the one that produces more earns greater
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