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