ECON 202 1nd Edition Lecture 30 Outline of Last Lecture I. Game Theorya. Golden Ballsb. The Prisoner’s Dilemmai. Nash EquilibriumOutline of Current Lecture II. Oligopolya. Characteristics of an Oligopic Industryb. Models of an Oligopolyi. Cournot – Nash ModelCurrent LectureCharacteristics of an Oligopic Industry1. A few firms, each large enough to influence price but not enough to dominate the industry completely2. Products are typically differentiated3. Entry is typically difficult4. Mutual Interdependencea. The decisions of a firm depend on the behavior of other firms in the industryModels of Oligopoly1. Cournot – Nash ModelAssumptions:1) Two Firms in the Industry (A and B or a Duopoly)2) Firms are considering which price to charge to maximize profit3) Firms can not collude (talk to each other)4) Both firms know the following informationThese 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.Firm Firm BFirm AWhat is Charged High Price Low PriceHigh Price $1000, $1200 $200, $1800Low Price $1600, $100 $600, $800The Dominant Strategy of both firms is to charge a LOW price. Therefore in a ONE-SHOT game, both firms would charge a LOW price.- If the game was played repeatedlya) Without a known end pointA tacit collusive solution is possible- This type of collusion is difficult to prove in court- If Firm A intentionally changes to charging a high price then they have tried to signal to firm B to also charge a high price so then both firms are making a high profitb) With a known EndpointA tacit collusive solution will never be achieved- Both firms will always charge a known priceSuppose that the “game” five times and both firms know that informationOn the last turn of the “game” both firms will go with their dominant strategy on the off chance that they will win. Working backwards from this: if both firms know that the other will choose to charge a low price in round five, that effectively makes round four the final choice, so both firms will choose to charge a low price. This will go on until the first round, therefore a tacit solution will never be
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