Micro Exam 3 Ch 14, Nash Equilibrium and Game Theory
What must exist for price discrimination
1. Different people 2. market power 3. resale is impossible 4. society must accept
Characteristics of monopoly
1. Only 1 firm in the industry 2. No close substitutes 3. Very difficult or impossible for another firm to exist
Duopoly
2 firms
Oligopoly
3-5 firms, pharmaceutical company
Cartel
3-5 firms, working together, price fix, Opec Cartel
Sherman Antitrust Act of 1890
Allowed gov't to break up monopolies (better prices, innovation) Only gov't monopolies can exist (LP&L, post office)
Why do monopolies exist
barriers to entry 1. Single firm 2. exclusive rights, market power 3. very hard to enter market
Duopolist dilemma
both will choose lowest price and hit ME
Nash Equilibrium
dominant strategy will always prevail although not best for everyone, will reach ME at lowest, John Nash
Dominant strategy
each chooses personal best choice given what other firm does
Price discrimination
sell same goods at different prices to different groups sell at highest WTP (inelastic, must pay)
Natural monopoly
single seller in a market which has falling average costs over the whole range of output resulting from economies of scale. Often they are particularly significant industries such as the city water supply and have very high fixed costs and minimal variable costs. A natural monopolist can produce more cheaply than any two or more other firms. apple, blackberry
Game theory
study of strategic decision making, predict what other is doing
2 strategies involved in duopolist dilemma
tit for tat, grim trigger
prisoners dilemma
will rat each other out instead of remaining quiet to receive lesser sentence