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Chapter 9-1 Game theory, A branch in economics, originally from…

- - - - Few firms and no entry
      - Differentiated goods
    - - Few sellers, similar or identical products and no threat to entry
      - To determine how markets identify as Oligopoly --->
        
        Contentration Ratio
        
        defined as the percentage of market share of supplied by its four largest firm
        
        The higher the ratio, the less competition
        
        Oligopoly is usually higher concentration
      - Oligopoly Behaviour
        
        due to less # of firms, they act strategically, key feature is tension between cooperation & self intrest
        
        Best outcome= cooperation or collusion to act as monopoly and control the market
        
        There is temptation for self interest to unilaterally deviate
        
        if they unilaterally deviate, they drive down profit
        
        They would like to form and collude, but due to commitment problem they cannot sometimes
      - Doupoly
        
        An Oligopoly market structure with only 2 firms
        
        EX: PepsiCola, Du-Etisalat, Boeing-Airbus. etc
        
        Oligopoly EX: Hydration companies, Airline companies, Automobile etc
        
        1 possible outcome is form a cartel or collide to act as an monopoly
        
        This cooperation results in highest joint profit of firms
        
        Collusion vs self intrest
        
        Both firms would be better off if they cooperate, either cartel or collude
        
        However, each firm has incentive to unilaterally deviate
        
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        Both firms deviate unilaterally and thus driving profit down, which is a form of prisoner dilemma
        
        Equilibrium for Doupoly
        
        Doupoly price is > Monopoly price but has greater competitve price
        
        profit is < Monopoly profits but greater than competitive
        
        Surplus is > than monopoly but less than competitve
    - - Many firms sell products similar products and can enter and exit, EX: cereals,
- - - - Combination of actions taken throughout the game
    - - combination of strategies taken by all players until end
  - - - a strategy that has highest payoff for a player, taken into consideration all strategies
    - - strategy that has the higher payoff than other strategies
    - - a strategy that always yields lower payoffs
        
        A strategy is a dominated strategy, if it never has been the best response
    - - Dominant strategy outcome (equilibrium)
        
        when every player plays its dominant strategy no matter what
        
        EX: both Companies advertise as they both have incentive to do so
      - Nash Equilibrium
        
        a combination of strategies in which each players play in their best interest: is essentially where they naturally end up
        
        Is an outcome where no player has incentive to deviate from their choice
        
        outcome that best responses of all players coincide
        
        Every dominant strategy has an Nash Equilibrium
        
        Vice versa, Nash doesn't need to be dominant strategy
      - Game can have:
        
        Nash equilibrium
        
        No Nash equilbirum
        
        2 Nash equilibrium
      - Prisoner's Dilemma
        
        A game which every player has a dominant strategy, and when each plays dominant strategy, the the payoff is lower if it was dominated strategy. or not played at all
        
        there is inherent commitment problem in choosing the mutually beneficial strategies
        
        Provides insight into the difficulty in maintaining cooperation
        
        there is issue of credibility and commitment
        
        Economics of Cartels
        
        Cartel
        
        A Formal coalition of firms that agree to restrict output or control price to increase economic profit
        
        In real world people They develop do not confess easily, such as Mafia
        
        Repeated Game
        
        Tit-for-tat strategy
        
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        Employing Commitment Devices (change the payoffs)
        
        Commitment Problem
        
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        Commitment device
        
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        Collusion
        
        Is when firms informally agree to restrict output or control price to same end
        
        Tragedy of Common
        
        commitment problem cuasing socially inefficient outcome
        
        Example: Fishing in a Lake, jumping on the false bandwagon
        
        Ex: Why people shout at parties