Econ 4001.01 1st Edition Lecture 22Outline of Last Lecture II. Oligopoly III. Behavior in OligopolyIV. Oligopoly in Strategic EquilibriumV. Cournot Modela. Example of Cournot Model with Numbersb. Additional Information about Cournot ModelsVI. Stackleberg ModelVII. Bertrand Price CompetitionVIII. Oligopoly and Game theoryOutline of Current Lecture IX. Game Theory BasicsX. Cooperation in GamesXI. Strategies and OutcomesXII. Sequential GamesXIII. Introduction to Auctionsa. Types of AuctionsXIV. Establishment of Values in AuctionsXV. Market FailureXVI. Information AsymmetryXVII.Hidden Action problemsa. Adverse Selectionb. Moral HazardsCurrent Lecture- Game Theory Basicso Game- event featuring two or more players and their strategic interactionso Payoff- value “earned” by each participants based on their actions and actions of their rivalso Strategy- rule or plan of action for playing the gameo Optimal strategy- strategy that maximizes expected payoff for a player- Cooperation in Gameso Non-cooperative game: participants cannot share information with rivals/cannot form binding contracts Example: Prisoner’s Dilemma, Sealed Auction BidThese 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.o Cooperative game: participants can share information with rivals and can form binding contracts Example: Cartel operations, R&D (research and development) agreements- Strategies and Outcomeso Nash Equilibrium: Each player has an optimal strategyo Dominant Strategy: Each player has an optimal strategy, but one firm can becomedominant over another- Sequential Gameso Players move at the same time, so any of the four outcomes are possible, but if one firm moves first than it is a sequential gameo The players are able to base their decision based off the firm that moves first decision- Introduction to Auctionso An auction market is one in which goods or services are sold through a formal bidding processo Auctions are useful for items that are difficult to value, one-of-a-kind items, and infrequently sold itemso Auctions can save considerably on transaction costs and promote economic efficiency- Auction Formatso Open Outcry English Auction: Seller solicits progressively higher bids from group until one bidder remainso Open Outcry Dutch Auction: Seller offers item for a high price, then reduces priceuntil a buyer bidso Sealed-bid Auction: sale in which all bids are made at the same time, in secret. Seller is obligated to accept highest bid or bids- Establishment of Values in Auctionso Private value auction- Each bidder has his/her own information about the value of the item; these values are not known to the other bidders Example: Oil and Gas leases, Impressionist paintingo Common value auction- Item has an unknown value, which will be the same for all bidders once auction is completed Examples: number of pennies in a jar- Do Competitive Markets Always Work Best: Market Failureso Private Equilibrium is not optimal when.. It’s a monopoly Price Discrimination Colluding Oligopolies Monopolistic Competition- Other Examples of In-efficient Outcomeso Externalitieso Public Goodso Moral Hazard and Adverse Selectiono All of these can contribute to market failure- Information Asymmetry o A difference in access to relevant knowledge between two market participantso Hidden action: Moral hazard is the most importanto Hidden characteristics: Adverse selection- Hidden Action Problemso Moral Hazard: When a person whose action cannot be observed has an incentiveto engage in dishonest or tricky behavioro Principal: person for the agent is actingo Agent- Hidden Characteristics: Adverse Selectiono Situation I which one party has information about the product that can affect thevalue that other parties are unaware ofo Example: Used Car Market Value of the car depends on the condition that it is in, the driving habits of the owner, etc. These values are known to the seller but not always the buyero Adverse Selection in Insurance Markets Some people are healthy and exercise/others are not  Insurance companies don’t know which type of person you are so they charge an average Healthy people paying more mostly leave the market while the people in poor health stay in the