Econ 101 1st Edition Lecture 17 Outline of Last Lecture I. Chapter 10 application: Are monopolies bad?II. 10.4 Price DiscriminationIII. Chapter 11: Monopolistic CompetitionIV. 9.1 Preview of the four Market StructuresV. 11.1 The Effects of Market EntryVI. 11.2 Monopolistic CompetitionVII. 11.3 Trade-offs with entry and Monopolistic CompetitionVIII. 11.4 Advertising For Product DifferentiationOutline of Current Lecture II. Strategic Behavior by the OligopolyIII. Oligopoly and Strategic BehaviorIV. What is an Oilgopoly?V. 12.1 Cartel Pricing and the Duopolists’ DilemmaVI. 12.2 Overcoming the Duopolists’ DilemmaCurrent LectureI. Strategic Behavior by the Oligopolya. 9.1 Preview of the for market structures in chapter 9-12b.II. Oligopoly and Strategic Behaviora. Oligopoly: A market served by a few timesb. Game Theory: The study of decision making in strategic situationsIII. What is an Oligopoly?These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. Concentration Ratio: The percentage of the market output produced by the largest firmsb. An oligopoly, a firm with just a few firms, occurs for 3 reasonsi. Government barriers to entryii. Economies of scale in productioniii. Advertising campaignsc. Because there’s very few producers, they can act like a monopolyIV. 12.1 Cartel Pricing and the Duopolists’ Dilemmaa. Duopoly: A market with two firmsb. Cartel: A group of firms that act in unison, coordinating their price and quantity decisionsi. I.e. oil pricesc. Profit = (price – average cost) x quantity per firmd. Price Fixing: An arrangement in which firms conspire to fix pricese. The firms can choose to cooperate or to notf. The Incentive to Cheat on the Cartel Agreement (game theory)i. It is very tempting for a firm to agree to set a cartel price (engage in price-fixing) and then to cheat on the governmentg. Dominant Strategy: An action that is the best choice for a player, no matter what the other player doesh. Duopolists’ Dilemma: A situation in which both firms in a market would be betteroff if both chose the high price, but each chooses the low pricei. Nash Equilibrium: An outcome of a game in which each player is doing the best he or she can, given the action of the other playersj. Game Tree: A graphical representation of the consequences of different actions in a strategic settingk.V. 12.2 Overcoming the Duopolists’ Dilemmaa. Low-Price Guarantee: A promise to match a lower price of a competitorb. Low price guarantees Increases Pricesc.d. Formal or Informal cheating on a price-fixing agreementi. A duopoly pricing strategyii. A grim-trigger strategy1. Grim-Trigger Strategy: A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profitiii. A tit-for-tat strategy1. Tit-For-Tat: A strategy where one firm chooses whatever price the other firm chose in the preceding
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