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Class 22 Oligopoly and Game Theory

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11 views12 pages

Class 22 Oligopoly and Game Theory

Uploaded by

Muhammed Aslam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Oligopoly

Game Theory
Implications of Prisoners’
dilemma for Oligopolistic pricing
and Kinked Demand Curve
Price Signaling and Price
Leadership
• Price signaling: Form of implicit collusion in which
a firm announces a price increase in the hope that
other firms will follow suit.
• Price leadership: Pattern of pricing in which one
firm regularly announces price changes that other
firms then match.
The Dominant Firm Model

•Dominant firm: Firm with a large share


of total sales that sets price to maximize
profits, taking into account the supply
response of smaller firms.
Game Theory
• Game :Situation in which players (participants) make strategic
decisions that take into account each other’s actions and responses.
• Payoff: Value associated with a possible outcome.
• Strategy: A strategy is thus a course of action or a policy which a
player or a participant in a game will adopt during the play of the
game.
• Optimal strategy: Strategy that maximizes a player’s expected payoff.
• Game Theory: the game theory seeks to explain what is the rational
course of action for an individual who is faced with an uncertain
situation, the outcome of which depends not only upon his own
actions but also upon the actions of others who too confront the
same problem of choosing a rational strategic course of action.
• Cooperative game: Game in which participants can negotiate
binding contracts that allow them to plan joint strategies.
• Noncooperative game :Game in which negotiation and
enforcement of binding contracts are not possible.
• Payoff matrix: Table showing profit (or payoff) to each firm
given its decision and the decision of its competitor.
• Prisoners’ dilemma: Game theory example in which two
prisoners must decide separately whether to confess to a
crime; if a prisoner confesses, he/she will receive a lighter
sentence and his/her accomplice will receive a heavier one, but
if neither confesses, sentences will be lighter than if both
confess.
Payoff matrix for prisoners’
dilemma
Pricing Game
Dominant strategy
• Dominant strategy: Strategy that is optimal no matter what an
opponent does.
Equilibrium
• Equilibrium in dominant strategies: Outcome of
a game in which each firm is doing the best it
can regardless of what its competitors are doing.
Equilibrium

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