microecon - 15.2

payoff matrix

A _______ is a table that shows the payoffs for every possible action by each player for every possible action by the other player.

duopoly

A ________ is a market in which there are only two producers that compete. Duopoly captures the essence of oligopoly.

collusive agreement; cartel

A _________ is an agreement between two (or more) firms to restrict output, raise the price, and increase profits. Such agreements are illegal in the United States and are undertaken in secret. Firms in a collusive agreement operate a ________.

collusive agreement

A ___________ is an agreement between two​ (or more) producers to form a cartel to restrict​ output, raise the​ price, and increase profits.

cheat

All firms in a collusive agreement face the same strategies. Their payoff is high if they all​ comply, but the payoff to any one firm that cheats is even higher if all the other firms comply. This motivates each firm to _______ on the agreement.

Rules Strategies Payoffs Outcome

All games have four common features:

chicken

An economic game of _______ can arise when R&D creates a new technology that cannot be patented. Both firms can benefit from the R&D of either firm.

1. Both comply. 2. Both cheat. 3. Trick complies and Gear cheats. 4. Gear complies and Trick cheats.

Because each firm has two strategies, there are four possible combinations of actions for the firms:

economic profit.

Each firm agrees to produce 2,000 units and to share the _________ The blue rectangle shows each firm's economic profit.

monopoly

Firms in a cartel act like a ________ and maximize economic profit.

No, it can't because each prisoner can figure out that there is a best strategy for each of them. Each knows that it is not in his best interest to deny.

For the prisoners, the equilibrium of the game is not the best outcome. If neither confesses, each gets a 2-year sentence. Can this better outcome be achieved?

best for him

If a player makes a rational choice in pursuit of his own best interest, he chooses the action that is _______, given any action taken by the other player.

Nash equilibrium

If both players are rational and choose their actions in this way (in pursuit of his own best interest), the outcome is an equilibrium called a ________—first proposed by John Nash.

worse

In a collusive​ agreement, the dominant strategy for both firms is to cheat on the agreement. When both firms cheat on the​ agreement, the outcome is _______ than if both firms held to the agreement.

prisoners' dilemma game

In the ________, two prisoners, Each is held in a separate cell and cannot communicate with the other.

prisoners' dilemmas

Other oligopoly games include advertising and research and development (R&D) games. These games are also _________.

the payoff matrix:

Suppose that either Apple or Nokia spends $9 million developing a new touch-screen technology that both would end up being able to use, regardless of which firm spends the $9 million.

falls

Suppose the cheat increases its output to 3,000 units. Industry output increases to 5,000 and the price _______.

cheat

The Nash equilibrium is that both firms _______. The quantity and price are those of a competitive market, and firms make zero economic profit.

dilemma

The ________arises as each prisoner contemplates the consequences of his decision and puts himself in the place of his accomplice.

monopoly

The cartel's marginal cost curve is the horizontal sum of the MC curves of the two firms. The marginal revenue curve is like that of a __________.

loss; economic profit

The complier incurs an economic ________. The cheat increases its _______.

one firm to do the R&D. But we cannot tell which firm will do the R&D and which will not.

The equilibrium for this R&D game of chicken is for

cheat

The equilibrium strategy for each firm in a​ duopolists' dilemma is to _______on the agreement to raise prices and profits.

MC1 = MR

The firms maximize economic profit by producing the quantity at which _______.

Comply Cheat

The strategies that firms in a cartel can pursue are to

Both firms make zero economic profit—the same as in perfect competition.

What happens if both firms cheat?

increase

When each firm produces 2,000 units, the price is greater than the firm's marginal cost, so if one firm increased output, its profit would ________.

1. Both confess. 2. Both deny. 3. Art confesses and Bob denies. 4. Bob confesses and Art denies.

With two players and two actions for each player, there are four possible outcomes:

Game theory

______ is a tool for studying strategic behavior, which is behavior that takes into account the expected behavior of others and the *mutual recognition of interdependence.*

Strategies

_______ are all the possible actions of each player. Art and Bob each have two possible actions: 1. Confess to the larger crime. 2. Deny having committed the larger crime.

two cars speeding towards each other

analogy for the game of chicken