Chapter 17 Microeconomics/prisoner dilemma

Collusion

an agreement among firms in a market about quantities to produce or prices to charge

Whatever effect is higher is the one that will play a bigger role in how much to produce

as said...

Profit

(price-AC)*Q

More on this cournot equilibrium

...Jake?

payoff matrix

A table showing the risks and rewards of alternative decision options....basically the table of what is the choices

Cournot Assumption

Assumption in which each firm determines its profit-maximizing production level assuming that the other firms' output will not change and is fixed... neither firms will try to change

Major U.S. Anti Trust Laws

Before 1840: collusions not enforceable also no legal 1890: Sherman pict made collusion illegal 1914: Clayton act: increased penalty for collusion if buyers sued they could receive trickle damages

Prisoner Dilemma

Bonnie + Clyde (two separate bank robbers) can both choose to confess or not to confess, if they collude they are in the best scenario but they don't... likely they both confess

Incentive to Cheat

Even if you agree to cooperate through collusion or a commitment strategy, you still have a strong incentive to cheat on the agreement... if firm 1 cheats his profit rises b/c price is above MC, which leads firm 2 to cheat (this is known as competition)

Industry Q

Firm 1 Q+Firm 2 Q

Why can't these/collusions and cartels not be met

SELF-INTERESTS, which leads them to hitting the nash equilibrium

Oligopoly goal

To have most profit possible... They want to end up where monopoly is but every time they move away from M (price and Q where monopoly produces) they make LESS AND LESS profit

Dualpoly

Two firms (simple for of oligopoly)

Nash equilibrium

a situation in which economic actors interacting with one another each choose their best strategy GIVEN the strategies that all other acts have chosen

Dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

No Nash equilibrium

can't predict situation, if no dominant strategy, and there is no clear place they want to be when acting alone

cartel

groups of firms acting in unison, essentially a monopoly

More than 1 Nash equilibrium

if there isn't a clear choice for one, but a dominant strategy for the other

What does this max profit at monopoly mean

it gives the the incentive to collude; if firms are somewhere other than M, each firm would have a higher profit if they could and reach point M... both splitting the work

Sum of profits for dualpoly

it is maximed at point M (the same monopoly price)

tying

mechanism to expand market power... offers two products at a single price... not successful (Microsoft and Windows)

Resale Price Maintenance

price fixing imposed by a manufacturer on wholesale or retail resellers of its products to deter price-based competition

output effect

price>MC, 1 more sold gallon raises profit

Cournot equilibrium

profit max when MR=MC, if MR>MC increase Q... if MR< MC decrease Q

price effect

raising prod. increases amount sold which will lower the price and decrease profit on all other sold

predatory pricing

selling a product below cost to drive competitors out of the market... not successful

Oligopoly

small number of firms, but big firms some sell exact or similar products firms are interdependent (each one can influence prices and affect competitors)

Game theory

the study of how people behave in strategic situations... related to oligopoly, you need to think of what you do and predict what someone else will do

Dominant strategies

there can be situations where one does have dominant strategy and the other one doesn't and vice versa or neither does

if there is no dom. strategy

try to predict strategy through Nash equilibrium (box where players do not want to leave when acting alone