ECON 1123 Edition 1st Lecture 23 Outline From Previous Lecture Lecture 22 I Monopolistic Competition A Short Run Economic Profits B Long Run Zero Economic Profits C Monopolistic Versus Pure Competition II Oligopoly A Definition B Cartel C Price Leadership Dominant Firm Competitive Fringe Outline Lecture 23 I Game Theory A Prisoner s Dilemma B Nash Equilibrium II Summary of Market Structures A Pure Competition B Monopolistic Competition C Oligopoly D Pure Monopoly Lecture 23 Notes III Game Theory In oligopoly firms are mutually interdependent Mutual interdependence the behavior of one firm depends on the reactions of the firms Game theory models this Game variables 1 Degrees of cooperation can vary from no co operation up to complete cooperation 2 Number of players 2 up to n 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 3 Simultaneous or sequential decision making 4 Information completion complete incomplete asymmetric 5 Discreet or continuous strategies 6 One off or repeated games 7 Zero sum versus non zero sum games strategies Zero sum amount won amount lost Non zero sum Mutual winnings for the players John Van Neumann and Morganstern Theory of Games and Economic Behavior Revolutionized Economic thinking C Prisoner s Dilemma A non cooperative one off game with two players who have complete information about outcomes payoffs when deciding to confess or not Rational decision making results in inferior outcomes for both players prisoners Assume solitary confinement the players cannot communicate Outcome Matrix Don t Confess Don t Confess Bonnie Confess 1 year for bonnie and clyde 3 years for Clyde 0 years for Bonnie 0 years for Clyde 3 years for Bonnie 2 years for bonnie and clyde Clyde Confess In Clyde s view he confesses in Bonnies view she confesses If they could have talked to each other they could have gotten out of prison in a year Instead they got 2 years each which is an inferior outcome Examples of this in business advertise do not advertise introduce new product do not introduce D Nash Equilibrium Nash Equilibrium mathematical proof that an n player game where each player chooses his her optimal strategy given that all other players have done the same pursued their optimal strategies HAS A SOLUTION Economists know that even very complex games have a solution IV V Summary of Market Structures Pure Competition Monopolistic Competiton Oligopoly Pure Monopol y Firms many many few one Product homogeneou s differentiated Homogeneous or differentiated unique Barriers to Entry no no yes yes Strategic Interdependenc e no no yes Not applicabl e Key Summary Characteristic Price taker Product differentiatio n Mutual Interdependenc e One Firm Industry REVIEW The final is cumulative How do individual firms determine supply theory of the firm what type of firm How do individuals consumers determine demand constrained utility maximization If your budget increases your budget constraint will shift to the right This will shift market demand right as well