Opportunity cost value of the next best alternative

:
forgone
↳ Explicit costs & Implicit costs

Net benefits := Total benefits Total cost -

profit Revenue costs

= -

unit
Marginal benefit :(MB ) : A in total benefits arising from
Q A in

Marginal costs IMC ) : A in total costs arising from unit D- in

Q should be increased up to the point where MB Mc * =

MB =
-¥=¥ me = ?¥=d¥
'
positive statement : Descriptive value free would
'
, .

Normative statement : prescriptive value involved Should , ,

' '

Determinants of DD price of product Px price of related

:
,

goods Px , Income Y Tastes d Pref T.no Of ppl N

. .
.
Advertising A ,

consumer expectations E.
Dx f- (Px : Py Y T N A
=
, , , . , E)
* Inferior good =/ low quality !
Inferior good products that consumers purchase less when
:

income ties
DD function : Q ✗ 10 2 Px Inverse DD :P✗ = 5- 0.5 Qx
= -

* movement ALONG DD curve → 1^14 in qty DDed .

affected byprice -

*SH1 in DD curve → A in I , Ain Td P A in Pot RELATEDG

,
Determinants of SS : price of product Px . Input prices Py .

tech no Of firms N W rental R

Technology . . .
Wages , ,

producer expectations E .

S ✗ = Sfpx : Py Tech N W R E )
, , , , ,

SS function : Q✗ 10-12 Px Inverse SS :P✗ = 51-0.5 Qx

= -

* movement ALONG SS curve → 1^14 in qtyssed .

affected byFried
*sHl in SS curve → Ain W , Ain cost A in Pot RELATEDG .

¥? É s surplus : excess supply Pa

shortage excess demand
.

13

-11 I
:
.

Market equilibrium Pd Q :P.

"

* Exercise on lecture notes 2 Pg 22

É > D
> a
( Own ) Price Elasticity Of Demand IPED) :
e.
=%•Yn%n%i%p¥-p-=¥¥=¥%¥
measures sensitivity of Q☐ to P *Example on notes 2 Pg 27
PED < i -
1 Elastic) 914 in P → HIM in total revenue
:

-
I < PED < Of Inelastic) : Mtv in P→ train total revenue
PE D= -1 ( unitary ) : total revenue maximised

- :
perfectly elastic 1 perfectly
: inelastic
1 Own) Price Elasticity of supply IDEs) :

da
?
1 measures sensitivity of producer's
es = =
QT dp supply to As in P
Income Elasticity Of Demand IYED) :

ddQ¥yQ☐_ =¥,dy¥ sensitivity of Qi> toaint

measures
er
,
=

ex ☒ NIRMAL goods ex < 0 :INFERIOR goods

:
.

Cross Price Elasticity Of Demand ( ✗ ED) :

dQx measures
e☐ xx)
(
=
Q sensitivity
dpt for ✗ to Ain P Of Y
of Q ☐

exy ☒ 0 :
SUBSTITU-TF-sexv.CO : compliments
*SR d LR elasticities
may differ !
Consumer 's choice : Given their preferences & budget
constraints consumers choose the Optimal consumption
.

bundle of Goes to maximise satisfaction

tastes d Preferences : Minimum conditions for rational
consumer represent through utility function a
,

indifference curves .

Market basket / bundle : list w specific 1 or more Goes

qty of
3 basic assumptions :
* consumers can rank all
-
prefer A to B : A > B
-
Prefer B to A :B > A possible market baskets
-

Indifferent between Bd A : A ~ B
Transitivity : If prefer A to B and prefer B to C : A > C .

Non Satiation : prefer MOLE units of good than less eg

- .

A :( 5 6) B : 15,5 ) : A preferred to B
. ,

utilitynumerical score
:
representing level of satisfaction
consumer receives from
given basket of goods
 number to each basket to
Utility function : assigns
measure level of satisfaction consumer receives from
basket Of goods * Example on notes 3 pg 18
.

U = U 1×7 eg.UA/)=Fc,UfX.Y)=l0Oky/2O0x2y
* u is consumer -
specific ,
utility functionORDIN-AL.in
scale of
G ordering
not numerical
goods
.

marginal utility IMU ) : Additional utility derived from lone)

additional unit of consumption of the goods .

MU = AU du * Mutes as consumption Res

✗
TX
=

☒ G
Diminishing marginal utility
Indifference curve a c) : represents the locus of bundles
that give identical satisfaction/ utility level :
consumer
consumer is lND1FFERENT_along all combinations of
goods found on same 1C *Example on notes 3 pg 19420
.

Indifference map : SET of indifference curves representing

different satisfaction levels / utilities of a consumer .

* 1C is
DOGRI sloping
FURTt_ER from origin GRENIER level of satisfaction
cannot have + ve slope . intersect or thick
usually convex to origin L

Marginal rate of substitution ( Mrs) : quantifies no Of .

units of -
a consumer is willing to sacrifice to
consume one additional unit of -
While maintaining
utility at same level .
*Example on notes 3 Pg
21

MRS = -

II Mm¥- *MRS Ives in diminishing rate

=
applen left n
juice
indifferent btw shoe a- min ( L R ) ,

the two Additional

left no extra
sat unless
.

have right
orange
.

> juice >

right
perfect substitutes shoe
perfect complements

Budget constraint : represent all possible bundles of goods

consumer can buy given disposable income & market prices
of goods .

Budget line : All combination of goods where total am-1 .

income eg 17.x Ft Pc C I
Of money spent ✗
= .
=
.

*
Example on notes 3 pg 27 -29
A in income → budget line shift parallel to original
A in price → line rotate about I intercept
budget
Max U IX. Y) to Px ✗ + Py Y = I
subject
Optimal consumption bundle is the affordable bundle that
yields the highest level of satisfaction
-: choose bundle ON_the
budget line ON_the highest 1C .

ODTMALCHOICF.fi
Budget line TANGENT_ to indifference curve
slope of indifference curve
=
Slope of budget line .

Optimal if
=Mm1÷='¥ mm%÷,¥ 4¥ 7¥
. . .

Mrs → =
.

money spent on good ✗ must bringsAMEAM_OUNT Of

additional utility as money spent on
*
notes 3
good Ydoes .

Example on
pg 33
corner solution : MRS for one good in chosen market =/slope
of budget line * Example on notes 3 pg 34
↳ consumer maximise satisfaction by consuming only
ONE_ Of the 2 goods .

lipstick effect : with recession ,

income ties, budget line
shifts down Consumer choice shift down to inferior
.

goods *
Example notes 3 pg 35
on

* Exercise on notes 3 pg 38

Probability likelihood an event will occur

:

Expected value probability weighted average of payoffs

: -

associated with all possible outcomes .

ECX) PC ✗c) -1 PIX a) t

= 1- Plxn ) . . ..

Decision made based on expected value, satisfaction &risk

Face a trade-off between expected value us variability .

variability :EXTENT_ Which possible outcomes of uncertain

event D1FFER_ .

Deviation : measure of difference between observed value

and another value eg mean . .

standard deviation : square root of weighted average

Expected utility : SUM_ of utilities Ulx;) associated with ,

all possible outcomes ✗ i. Weighted by probability Pi that

each outcome will occur .

* Example on notes 4 pg 14
EU ( ✗ c) = § p, u ( ✗ ;)
(= I

*
risk averse →prefer certainty
risk loving →prefer risk / uncertainty
risk neutral → indifferent
t-REDUCER-sk-i.VE#FATONvariety
: of activities where outcomes are
not closely related .

INSURANCE : Risk-averse people pay to avoid risk .

people may not at Waye be RATIONAI.PH 'S decision is

based on
REFERENCE-POIstandard
or NTSGbas.for
is evaluation, comparison
Endowment effect :(status quo bias ) is an EMOTIONAL
bias thing
↳the usual
loss aversion : pain from loss =/ pleasure from gain
↳ person can be risk-averse over
GA1NS_ and risk loving -

over LOSSES but still can be loss AVERSE *

Example on
-
notes 4 Pg 39
G people rather AVOlD_a loss than
reap reward .

Framing effects presenting same option

: in different
formats alter people 's decisions .

Nudging manipulate people 's decisions

: more
beneficial to society
' ' ' '

is us
ought
.
sunk costs : costs which have already been incurred
and which are unrecoverable not included in ,

consideration when making future decisions as they

are seen as irrelevant current d future budgetary
concerns
profit maximisation : Balance customer 's demand for
valued firms need -10 cover costs & make profits .

Profit -_ Total Revenue Total cost -

IT = TRIG ) Tcfq ) → refers -10

-
minimum production cost
for output q=> cost to produce qmost
✗
refers -10 value of firm efficiently
monetary .

selling g. TR depends on market TC depends on : Technology factor costs

, ,

structure and time horizon , fixed us variable ,

pricing strategies
TRIS PXQ if firm is price taker , economy of scale etc .

PC firm .
Pgivenbymarketsoits
constant

Economic /Opportunity ) costs cost both

→ explicit explicit &
G Accounting costs : actual expenses appeared ofiimpiicit
↳ Opportunity costs : value of resource in best alternative
*should account for
* ECONOMIC cost -_
Opportunity cost bothaccdoppcost
*more deets on notes g-
pg ,,

Oppcostvs Sunk cost → expenditure spent and cannot be

recovered /fixed assets w
.

↳ value of best opportunities

zero salvage value )AK
forgone future decisions should
when people do not ignore ignore this non recoverable -

'
sunk costs, it is sunk initial outlay
'

cost fallacy
Fixed cost IFC) : does not vary with operation scale eg rent .

variable cost Cvc) : varies with Operation scale eg wages .

*
FC >0 even if Q = 0 so long as stay in business .

VC = 0 if Q = O
G many costs become variable in the long run

Fixed costs be eliminated when you go out of

can
business but sunk costs cannot be recovered .

Fixed cost part of economic cost in LR .

TFC (q) -1 TUC (g) profit / loss → look at Acd

TC (g)
=

ATC (9) = AFC (g) t AVC (q ) compare to P

dVC_ Max profit → look at Mca
MC (g) A☐¥=A☐¥
.

= =

dq compare to MR
*Equations on notes 5
In SR firms cannot adjust inputs
PG 23
.

In LR firms can
. adjust AI inputs
☒
q is individual firm output Q is market output
,

TC = 100 -150g 11 q2 + q 3
Eg
-
.

TFC = 100 ,
TVC =
50g -
11 of +93 , ATC = ¥+50 I lqtq? -

AFC =
.
A VC = 50 -

liq tq ? MC
-
=
d¥ 50-2,29--1392
=

2
= 50 -
229 -13g
If MC < AC ,
AC is FAUlNG_
If MC > AC ,
AC is Rising
Of AC
MC = AC at MINIUM
In SR Capital level is fixed , can
.
only work on the given SRAC
In LR adjust capital level to produce output target too)at
.

minimum cost .

i. At
output level control LRAC not to be greater than
any ,

short run costs

long run cost curve is the lower boundary of family of
short run costs due to freedom to choose any capital
level in LR .

ECONONHESOFSCALEAC.tn
AClv as output +

DISECONOMIESOFSCAC.ES
output
mallest
as
qty where
9
LRAC attains minimum point is
minimum
efficiency scale *Graph on notes 5 pg 30
ECONOMY OF SCALE :
Gindivisibilities & spreading of fixed cost
↳specialisation a division of labour
G Inventories
DIS ECONOMIES OF SCALE :
↳ large firms complex a inefficient
G Advantage of buying in bulk disappear
are flexible

%=¥¥¥¥i1¥¥¥Y¥1m!%n÷- ;ji•%
.

us
G each firm small enough price taker
↳ Mdiv consumer buys too small a share of industry output
to have impact on mkt price .

G no entry /exit barriers ↳ Both have complete info

 revenue : A in revenue due to one unit 4 in output
Marginal -

*TO
MAXIMISEPROFIT-MRfqj-MC.la)
For PC firm DD curve is horizontal
.
-
.

For PC industry DD curve is downward sloping \

. .

For PC firm MR=# to maximised *

.
.

If MR (g) > Mcl9) , 4 q for more profit

If MR (a) < Mags , Iq for more profit
Firm CONTINUE operating as long as .. .

TC -
TR (operational loss) £ FC ( loss when shut down )
01 TR ETC FC VC
*
- =

01
p z ATC AFC = AVC -

*choose
q so that F-MR MC
= as long as pz AUC !
When P < AVC as 99 , profit Iv
, .
: keep q=o *notes
Graph on
5pg
when P > A VC, as qt , profit 9 ,
- :
produce q > 040

Market SS → Adding all SS curves of individual firms in

industry ( HORIZON-ALS.UA#Over qty space )

In SR, firm cannot adjust capital level cannot enter /exit
In LR, firms adjust capital lever for bigger profit can
enter /exit .

If LR profit >0 , new firms enter Mkt supply Md shift right

.
-

pull down market price

If LR profit < 0 existing firms exit mkt supply Id shift
, ,

left push up market price

!
.
,

*
Entry d exit continue until no incentive : Opro
i. 0 profit in LR .
LR equilibrium reached when . .. D= LRMC =
min CLRAC)
G no incentive to exit /enter industry
↳ D= MR = LRMC SRMC profit Max over SR & LR
=
,

↳ D= LRAC 0 economic profit (normal profit)

Gp = min (LRAC) most efficient capital level chosen
G Market cleared DD= SS ,

* Exercise on notes 5 45
pg

consumer surplus : measure of consumer satisfaction .

Difference between maximum price level consumers willing

to pay and its actual price .

CS = Area of A ( bound by DD curve, Max price actual price . )

* Example on notes 6
pg 6
producer surplus measure of producer benefits Difference
:
.

between minimum price producer is willing to sell for and

its actual price .

PS Area of A 1 bound
-
- SS curve, min P actual D)
by ,

*Example on notes 6 pg 7
Total surplus =
Cst PS

* Total surplus
maximised at PC firm
Market Outcome fqty & P) is EFFlClENT_ it total surplus
MAXIMISED
is .

Market outcome not efficient when DEADGtTE is

present .

DWL : net loss in total surplus due to inefficient allocate

Of resources * DWL is the A- Pointing towards Q* .

price floor :( Minimum price ) : *

Example on notes 6 pg 22
Pa SS
↳ GOV set minimum price price surplus ,

< s
cannot fall below D= law
gov * by .

G Result in sURPlUS_ result in.

black market deals 'product

.

diversion
Ggov may have to buy the DD
surplus to stock .
>

Qty
price ceiling Cmaximum price ) : Pn
SS
G gov set maximum price , price
cannot rise above Pc by law
↳ Result in sHORTAGE- result
in long lines black market ' Pc ( >
,
DD
shortage
rationing
key
price support : price set by gov above free market level
( price floor) and maintained by gov purchases of excess SS .

* Example on notes 6 pg 24-25

production quotas : supply restriction , give incentive to

+ output
* Example on notes 6 pg 26 -
27
Excise Tax : tax of a certain amount of money per unit sold
↳ Without tax price consumers
.

pay CPb)= price producers

receive 1 Ps).

pay > price producers get

↳With taxi -17 price consumers
,

Pb Pst T 1*E×amp1eonnotes6pg33_→
=

☒ DOESNT MATTER if buyer/seller pay the tax market.

meit5AME_ !

If DD is inelastic burden of tax falls on buyers

,

If SS is inelastic burden of tax falls on sellers

,

when firms have ve supply shock ( Mct ) 9 in cost

-

cannot be fully shifted to consumers

when firms have tve
supply shock CMCH.lv in cost
cannot be fully passed to consumers .
Subsidy Payment reducing buyer 's price below seller 's
:

price ☒Example on notes 6

pg 38

Market power: Ability of seller /buyer to affect the price

of a good
sources of mkt power :
G Unique resources
↳ control over patent & copyright
↳ economies of scale
↳ Regulation
↳ Network effects
concentration Ratio (CRN ) add mkt share in % for top
n firms .

Herfin dahl Hirschman Index (HHE) add squared mkt

-

share for all firms in

industry .

Concentration F Mkt power *More deets on notes pg 12--13 >

p MC :O LIE 1
Lerner Index (4) LI monopoly
-
<
p-=
.
PC : 21--0

Monopoly :
G
highly concentrated
↳ significant barrier to entry
MR =d%¥
G Brand loyalty or switching costs
↳ price maker
-

Mkt DD = in div DD
DD curve is the HlGHEST_ monopolist can charge
MR curve below DD curve : MRCP
 D= 6- Q AR =
¥1 D =p =

Mr = dd¥- d%8)
=

= 6- ZQ

For linear DD curve MR curve has same P intercepted

,

twice the slope eg D= 6 Q , MR 6 -2 Q !

.
- =

profit Max When MR MC

.
=
,

profit = #ABC
profit ☒ more deets on notes >
pg 20
y * Example of profit Max on
notes
.

> 21
pg
• MR = MC

* very impt
CALCULATION STEPS :

1. Invert DD cure : solve for P interms of Q eg D= 40 Q

-

2.
Multiply inverse DD curve to get TR : TR =P ✗ Q = 140 Q ) ✗ Q -

3. Differentiate TR → MR : MR =D TR/d 0=40-2 Q

4. Solve for Q by MR = MC
setting
Q back into inverse DD
5. solve for P
by subbing profit Max .

curve :
:P = ? Q.
=
?
Rule of thumb for pricing :

↳ MR =
ddT¥ =

d(dPfp
GMR =p + Q ¥ ,
=
PIP (F) (%-)
i. MR = Pt P ( ¥ )→ elasticity of DD
↳ TO MAX .
profit MR = MC ,
* Examples on notes 7

Ptp ( Etd) = MC Pg 25 -26

FYI = -

Ed D= 1+714%5
Multi plant Monopoly :

1. Total output divided between 2 plants so MC is the

same .
: MC , = M Cz = MC . . .

2 .
MC ,
= Mcz = MR
Firm with 2 plants maximise profit by choosing output
levels Q , & Qz SO that MR = MC = Mca . .

* 30 31
Example pg
on notes > -

* Horizontal summation must have Q as the subject

then after addition Make MCT the subject again .
.
Social Costs Of Monopoly : *more deets on notes >
pg 34
-
loss of CS from At Bt D → D
-
But PS increase from
Etc → At E

-
Dead weight loss coz some
consumers who would be

willing up to marginal
to pay
cost CMG is not served
-

tip & to Q
Antitrust d competition laws
GGOU intervene to have more competitive outcome &
reduce DWC
G Ban collusion & prevent merger if it will 1amKt power
G protect or enhance dominant position is illegal

why does monopoly exist ?

↳ Natural monopoly →single firm services entire mkt
for a good due to economies of scale *notes more deets on
> pg 41-42
.

↳ created barriers to entry eg.gov regulation &

' '

patent copyright *notes deets

more on
, pg 43
>

Uniform pricing
↳ Without mkt power→ determined by DD ISS D= MC .

↳ With mkt power → monopoly set price where Mr -_Me

.

to maximise profit
Price discrimination : charging different prices to diff .

consumers for identical /similar goods .

↳ For it to be EFFECTIVE must identify different

. . .

customers d how to capture consumer surplus .

↳ Have info on DD characteristics d take advantage

of market power to improve profitability .

1st degree price discrimination : price each unit at

consumer 's maximum willingness to pay eg auction .
.

to pay is directly observable

↳
Willingness
reservation price
by monopolist .

identify reservation
G-
price of each consumer
sell to every potential
PS buyer, no buyer with any
surplus .

sell until reservation

price = MC : produced ,

sell efficient qty output

under uniform pricing :( Pm Qm) CS : Po Pm A. Ps : Pm ABF
, .

if 1st degree price discrimination : Q Qc Ps4 to Po EF

-
-

, ,

CS = 0
↳ produce same output as under PC firm .(P=MC) : sum of
PS & CS is the same DWL disappear & most efficient
.

outcome obtained
2nd degree price discrimination : charge different prices per
unit for different quantities of same good /service .

Without PD . .
-

Gp Pm Q=Qm=
,

With 2nd degree PD ,

GP, Pz Ps apply to purchasing units

, ,

up to Q , , Qz Qs ,
-

' '

Block pricing

3rd degree price discrimination : different price for different

segment of the market when membership in a segment
can be observed .

G Direct market segmentation

↳ Fixed identifiable characteristics eg Age .

lDENT and
SEPARATED
☒ONI feasible when seller can
ifferent consumer groups with different characteristics
also must prevent RESALE-an.nong consumer groups
G If not consumers can buy at one market at lower price
and sell to other market at higher price .

* notes 8 pg 24 -27
Example on

Indirect segment discrimination: seller cannot identify

different consumer groups .

↳sellers design and offer a set of menu to unidentifiable

consumer groups consumers self reveal their types
.
- .

G Involves product differentiation

Intertemporal price discrimination : separate consumers
with different demand functions , charge different prices
at different points in time .

G willing to pay more to get product early / willing

to wait
G Initial release of product , DD inelastic Once market with .

inelastic DD yield maximum profit price lowered to ,

appeal to general market with more elastic DD .

*more deets on notes 8 pg 35

coupons & rebates → means for PD

G many consumers don't redeem coupons as they place
higher value on time than money .

↳ seller can target discount at more price elastic consumer

segment
*
Determine UAlUE_ Of coupon
1. Estimate of DD for diff groups & obtain
elasticity .

value of marginal cost .

Geg elasticity for coupon users = -5 , non users = -2.5

-

MC = 0.8
2. Apply rule of thumb of
pricing
GP ,
= MC / fit E) = 0.8/(1-5) = 1

Pz = MC/ ( I -1¥) = 0.8 / ( it ¥5 ) = 1. 33

sinceyou dont know who to charge $1 /$1.33 charge ,

$1.33 d issue $0.33 coupon .

Two part tariff consumers charged entry & usage fee

: .

G see per unit charge at MC . compute CS , charge fixed

fee = CS * more deets on notes 8 pg 41 - 42
Monopolistic competition : Firms can enter freely ,
have
its own brand or version of differentiated product .

↳Quite a few firms sell differentiated products Mkt

,
.

power over its own variety ( limited) products are

.

highly substitutable but not perfect substitutes ,

✗ED not infinite

large but .

↳ Free entry profit 0

& exit : LR =

Horizontal differentiation : Goods are different but same

price consumers buy based on preferences
,

vertical differentiation : Goods are different & all

consumers prefer one to another if sold at same
price Goods of different
.
qualities .

sustainable competitive advantages . . .

-
Scale land scope ) economies
G Avg cost tr as→ Avg cost + as variety
.
.

qty produced Mes of goods produced Mes

-

Dynamics Network effects

-

G learning by doing G social media

↳ Branding
↳ Reputation
-

Relationships
G legal
↳Behavioral
statutory protection
-

G Imposed bygov / regulator

G licensing
↳ Intellectual property patents -

G lobbying & regulatory capture

 In the SR ,

MR MC to Max profit
= .

P > Mcat equilibrium : exercise .

market power .

P > AC :
, yellow area as profits

In the LR , profits attract new firms

withcompeting brands .

Firm market share Ives DD curve ,

shifts downward
F- Ac 0 profit in LR even though
it has monopoly power .

PC MC

GP = MC 0 profit point is at point of

.
GP > MC ,
: DWLpresent at
yellow
minimum average cost shaded area 0 profit point
. on left
Of minimum cost
average .

i. In both markets , entry occurs until profits driven to zero .

Is MC socially desirable market structure ? YES !

DWL will small
G monopoly power is small also be
,
.

↳
Inefficiency balanced against benefit of product diversity
Gains from product diversity is large Outweigh inefficiency
.
Oligopoly : A few firms compete with one another
.
entry by
new firms is impeded .

↳ Products may or may not be differentiated

G Few firms account for most/ all of total production
↳ prevalent form of market structure
↳Almost all earn substantial profits in LR due to barriers to
entry .

eg scale
. economies unprofitable for more than a few firms
.

patents / access to tech exclude potential competitors

spend money for name recognition d market reputation
discourages entry by new firm
incumbent firms take strategic actions to deter entry
GFirm sets priced output based on strategic considerations
regarding behaviour of competitors .

Nash equilibrium : set of strategies or actions where each

firm does the best it can given competitor 's actions .

Duopoly : Market where 2 firms compete with each other .

Cournot oligopoly firms simultaneously choose :
how
much to
supply to the market
↳ Homogenous products, simultaneous choice , non cooperative -

G Each firm sets output Q

taking outputlevel of competitors ,

as given to maximise
profits .

G Firms do not choose price , price set by market Qd=Qs .

steps : * more deets on notes pg 30

a

1. Determine best response to rival 's strategy given any ,

Qz about rival what is best response Q ? (reaction functn , ,

2.Take seat of firm 2. form reaction function of firm 2 .

3. Given 2 reaction functions make sensible conjecture ,

about rival 's strategy .

Exercise example :

2 firms
producing homogenous products ,

F- 30 Q = 30-19 -49, )
-
,

FC = VC = 0 ( MC MC 2=0 ) ,
=

Firm 1 reaction function : Firm 2 reaction function :

IT , = TR ,
-

TC ,
=
(30-(91-192)) 9 ,
-

0 Tlz =TRz TC, = (30 19 -192 )) 92

- -

,
-
O
d -1T /dq
. ,
= 30 -
29 ,
-

92 (MR) d-11 /dqz.

= 30 -

9 ,
-

292 ( MR)
30 29 -92 = 0
-
, 30 -

9 ,
-

292=0
q, 15 0.59-a 15 0.59
=
qz =
- -
z

Cournot Nash equilibrium : q , =

92=10 0=20 D= $10.1T = -112=100
.
.
,
If the two firms collude & act as monopoly .
.
.

F- 30 Q , MC = 0 MR = 30 ZQ MR = MC
-

,
-
.

30 20=0 Q = 15 , P = 15
-
,

IT = 15 ✗ 15 = 225
IT, = IT z = 225 ÷ 2 =
112.5 ( vs Hour not 100) =

Cournot competition lower profit than monopoly (collude)

↳
Perfectly collusive →A output by 1 firm depress profit of
other firm
G Cournot → effect of T in output on its own profits only
G: Cournot overproduce relative to monopoly
' '

Bertrand Duopoly compete simultaneously by selecting

:

prices ( homogeneous )☒¥iing firm

products
GQ = 30 P.MG = MC 2--3
-
takes whole market .

Firms compete to lower price if equal price,firms

till D= MC .
:P
. .
=
pz MC = =
$3 Split market by half .

*
-112=0 Bertrand paradox
Q= 27 .
9 ,
=
92 = 13.5 : IT , =
explanation
notes 9 pg 36

Price competition with differentiated products

↳ fixed cost $20 $0 variable costs QF 12-2Pit Pz
.
.
.

Q2 = 12 -
2Pa -1-17
Firm 1 profit :P ✗ Q - 20 =P, ( 12 -
ZP -1Pa) -20
,

= 12 P 2 P? T P Pz 20
,
-
,
-

Firm 1 profit Max price : .

d IT / DP = 12 417 t Pz
. .
-

MR = MC 12 HP 1- Pz = 0 -
,
-

Firm 1 reaction curve :p = 3-1 # Pz ,

Firm 2 reaction curve : Psi : 3T¥ P .

Nash equilibrium in price
G Each firm does the best it can
given competitor 's price and no
incentive to change price at $4 .

↳ Bertrand Nash equilibrium -

P = Pz = $4
,

9 = 92 8 Tl = ITz = 12
,
=
, .

*
Dynamic 1 Sequential ) Oligopoly : one firm chooses before
the other .

G Cournot -

Stackelberg : firms
choose qty
sequentially
GBertrand
Stackelberg -
: firms choose

Cournot Stackelberg : 2 firms homogenous

price sequentially
products
-

F- 30 -
Q = 30 -
fait 9 a)Mcz =0) FC = VC = Of MC =
, ,
G leader chooses level of output that maximise
profit given
follower reacts to what leader does .

Firm 2 (follower ) : Firm I 1 leader ) :

follows best response IT = TR TC 130 q 9279 -0
. , .
-
.
= - -
,

qz = I 5-
0 59 , .
=/30 -9 115 , - -

0.59 Bq
.
,

Cournot Stackelberg =
159 ,
-

0.5912
equilibrium : da ✗dq . , : 15 -
ou
9. = 15 92=75 Q -22.5 : qi 15
-

,
=
, .

F- 7- 5. IT =/ 12.5, 56.25 ltfirstmovetadvantageexistsl

. Tiz =

homogenousproducts-Q-30-P.ME
Bertrand stake1berg : 2 firms ,
-

Mca = $3 ,
=

Firm 2 : Pz =P $0.01 when P > MC $3 Otherwise Pz = $3

,
- -
-

Firm 1 : Given firm 2 P = $3 *NO first/ second mover

. ,

Both firms charge $3 and get advantage

competitive outcome
For QUANTlTY_ competition ..
.

ql leader ) > alfollower ) : 1st MOVER ADVANTAGE

a- ( leader ) > a- (follower )
-

For PRlCE_ competition ( homogenous products)

.. .

PC Kader )= PCfollower) : NI ist / 2nd mover advantage

H Kader ) IT /follower) = 0
=

payoff : value associated with a possible outcome

Best response : strategy of one
player that result in best
payoffs given combination of other
player's strategies
Non cooperative game : Negotiation
-
& enforcement of
binding contracts are not possible
Nash equilibrium :
G no
player in game has incentive to deviate
G each player 's strategy is BESTRESPONSE_ to other player 's
strategies Player unable to do strictly better by unilaterally
.

switching strategy .

One shot simultaneous

, move game :
↳
simultaneously decide strategy
Gone choose
strategy from row ; other choose from column)
' '

G First
entry
is
payoff
ot-wpayer.secondis.CO/UMnP#T6
) ,
17
dominant *Example of strat on notes 10 pg 19-22
.

Dominant strategy optimal no matter what opponent does

:

G Inferior strategies are called dominated strategies .

↳ when
every player has a strictly dominant strategy outcome .

is dominant strategy equilibrium

-

Iterated dominant equilibrium : ask which strategy will not be

played as it is dominated then cancel out Do notadopt
dominated strategy * Deets d F-g. on notes 10 pg 23-27
.
,
.
Maximin strategy equilibrium : Best outcome among the worst
possible outcomes that arises from strategy .
Maximum of
minimum PAYOUTS *more deets & -

example on notes 10 pg 30-3 '

skepticisms :

↳ very little justification for equilibrium concept of rational

player . HOW bad is fatal to different people .

G Acceptable for risk-averse behaviour but inconsistent&

fragile equilibrium concept
as an .

How to solve Nash equilibrium ?

1. Find one player 's best response to each Of the possible
strategies played by the other Circle the payoffs of the .

player that result from the best response and given

play of the other .

2. Repeaton 2nd player combination of .

strategies that
result in 2 circles in one box is Nash -

equilibrium
☒ More Eg . On notes 10
pg 36-39
confess
④ dont confess
confess ④ -10
④ dont confess -10 -1 I
. ⑥ ,
-

÷ Nash
equilibrium is ( confess confess) ,

*Nash equilibrium does not

necessarily correspond to
outcome that maximise profit of players
aggregate .

Repeated game : Actions are taken & playoffs received over

and over again .

G cooperate? yield higher profits future A long run gain ,

G sustain cooperation with promise of future rewards and

threat of future punishment .
End Of period, problem : As relationship ending threat &
' '
- -
.

promises of future behaviourgoing to disappear .

G If everyone
going to know relationship end at somepoint .

cooperation is hard to sustain .

Tie for Tat strategy : Repeated game strategy where player

responds in kind to opponent 's previous
play .
cooperating
with cooperative opponents and retaliating against
Uncooperative ones * more deets on notes 11 pg 8- 10
.

cooperation more likely if players are patient interaction

.. .
,

between players are frequent cheating easy to detect a

,

one time gain from cheating is relatively small .

sequential game : Players move in turn responding to ,

each other 's actions & reactions .

↳ Different timing in moves

G HOW rival will react to actions
↳ HOW to manipulate rivals choice to your favour .

↳ Nash equilibrium not unique * Example on notes 11 pg

↳ Not all make equally good sense 14-17

Backward induction :
start from the last stage

MY *
of the
game and find best
node branch response to each previous
action .

Gthe equilibrium is subgame

perfect equilibrium CSPE) . .

SDE Must be Nash equi Ii -

.

but Nash equi ii. may not

-

be SPE .
Strategic moves : Alter beliefs & actions of others in direction
favourable to yourself * Examples on notes 11 Pg 24-28
↳ Establish & use a reputation
Having the right kind of reputation gives strategic
advantage .

May be advantageous to behave irrationally for several

F-g.

plays to increase LR profits substantially .

↳ Reduce your option *Examples on notes 11 pg 31 34 -

G Change
payoff structure : Entry deterrence
Incumbent firm make investment to increase capacity
before new firm enters → Irrevocable commitment d
.

change payoff matrix since profit reduced by investment

Threat is now credible a rational for new firm to stay out .

☒
Examples on notes 11 pg 36-38
Platform markets * Examples on notes 11
pg 41-47
G competitive strategies . ..

•
convince early adopters
sign
up bonuses promotional pricing
•

↳ Network effects : value of products Tes according to

the number of other users
multi sided platform : enable direct interactions between
-

two or more distinct sides each side affiliated with

.

platform .

Asymmetric information parties possess different

:

information about a transaction .

↳ may cause inefficiencies & social welfare loss

Hidden information : One side of transaction knows type or

characteristic while other side does not .

↳ potential
inefficiency problem is Adverse selection !
'

G Bad ones drive out good ones d market disappears

↳ F-g. Used cars sell for less due to asymmetric informant
about their quality as sellers know more about the
car than
buyer : Buyer will always be suspicious of
. .

its
quality *Example on notes 12 pg 10-14
.

Uncertain quality reduces buyer 's willingness to pay .

more low
quality goods and fewer high-quality goods
in the market .

GEG . Insurance & solution *on notes 12

pg 15--16

G Importance of reputation & standardisation sellers of ,

high quality Goes have big incentive to build reputation

-

and standardisation solves lemon problem .

G Mitigate adverse selection through .. .

•
where uninformed side provides
screenings appropriate
incentive scheme so that informed side reveals true type
•
Signaling where informed side sends signal about their
type when believed to be credible resolves
own . .

adverse selection problem *Examples on notes 12 aft pg 19

.

Hidden action : One side of transaction take an action that

affects the other side but cannot directly observe
↳ potential
inefficiency
'
is Moral Hazard
'
problem
↳ Moral hazard occurs when
party with more information
about its actions has tendency / incentive to behave
inappropriately from perspective of party with less info,
causing undesirable outcome .
↳
Design the right
incentive schemed be the best interest
of informed side to take desirable action
principal agent problem :
-

↳ principal employs one or more

agents to achieve
objective leg Shareholder )
.

↳ Agent is employed by principal to achieve principal 's

objective leg firm managers)
.

G Problem is when agents pursue their own goals rather

than goals of principals