Topic 5

Question 1

Game Theory: Game

Answer 1

Models strategic interaction (oligopoly)

Question 2

Game Theory: Players

Answer 2

Decisions makers (Sellers)

Question 3

Game Theory: Strategies

Answer 3

Player can make certain choices (pricing decisions)

Question 4

Game Theory: Information

Answer 4

Best strategy depends on what they know (Past behaviour?)

Question 5

Game Theory: Timing

Answer 5

When they make the decision (Simulataneous/sequential)

Question 6

Game Theory: Payoffs

Answer 6

Strategies determine how weel players do (Profits)

Question 7

Strictly dominant strategy

Answer 7

Highest payoffs, regardless of opponent strategy

Question 8

Signify best response and equilibria

Answer 8

Underline for best response
Star for equilibria

Question 9

Nash Equilibrium

Answer 9

No player can do better than chosen strategy, given their beliefs of how other players will play

Question 10

Nash Equilibrium Requirements

Answer 10

• Each player must play best response against conjecture of how others will play
• Conjectures must be correct

Question 11

Backwards Induction

Answer 11

Start at end of game to solve for best responses, then work back to beginning

Question 12

Coordination Game

Answer 12

Two nash equilibria

Question 13

Monopolistic Competition Assumptions

Answer 13

1. Buyers are price takers
2. Buyers and sellers have complete information
3. Sellers are price makers
4. Entry is free

Question 14

Monopolistic Competition: Size and numbers of sellers

Answer 14

Many, small

Question 15

Monopolistic Competition: Barriers to entry

Answer 15

Low

Question 16

Monopolistic Competition: Product substitutability

Answer 16

Differentiated

Question 17

Types of product differentiation

Answer 17

Horizontal - same quality, different tastes (Audi vs Mercedes)
Vertical - better quality, same tastes (Mercedes vs Ford)

Question 18

Monopolistic Competition: What affects equilibrium and price

Answer 18

Number of sellers, higher number means less buyers to go around, leading to sellers demand curve shifting left

Question 19

Monopolistic Competition: LR equilibrium

Answer 19

Sellers can freely enter the market
Factors are variable
Equilibrium ensures incumbent sellers don’t leave, potential sellers don’t enter
Normal Profit

Question 20

Models of Oligopoly

Answer 20

Bertrand and Cournot

Question 21

Bertrand Oligopoly assumptions

Answer 21

1. Two firms in market
2. Further entry into market is blocked
3. Firms have constant MC, c and no fixed costs
4. Firms produce homogenous products
5. Market demand: Q=a-P (Q is total demand when lowest price of A and B is P where a>0)

Question 22

Bertrand Oligopoly: Due to Homogenous products, who do buyers purchase from?

Answer 22

From cheapest seller. If same price, supply is halved for each

Question 23

Bertrand-Nash equilibrium

Answer 23

No firm wants to change it’s price, holding other firm’s price constant

Question 24

Bertrand Oligopoly: Firm A believes Firm B will set at P1. What happens if Firm A sets above, at, and below P1?

Answer 24

Above - sells nothing
At - Sells 0.5Q1
Below - Sells more (Q2)

Question 25

Bertrand Oligopoly: Best option if other firm price above monopoly price

Answer 25

Set at monopoly price

Question 26

Bertrand Oligopoly: Best option if other firm price below monopoly price but above MC?

Answer 26

Set at slightly less than other firm

Question 27

Bertrand Oligopoly: Best option when other firm sets price below MC?

Answer 27

Set price at MC

Question 28

Bertrand Paradox

Answer 28

Two extremes - monopoly to perfect competition. Unrealistic in real life

Question 29

How to break Bertrand Paradox?

Answer 29

1. Product Differentiation 2. Capacity Constraints 3. Incomplete info about prices and search costs 4. Repeated interaction

Question 30

Oligopoly assumptions

Answer 30

1. Buyers price takers 2. Sellers and buyers have complete information 3. Sellers are price makers 4. Entry is blocked

Question 31

Cournot Oligopoly Assumptions

Answer 31

1. Two sellers in market, make decisions simultaneously 2. Further entry into market completely blocked 3. Produce Homogenous products 4. Market inverse demand: P=a-Q

Question 32

Residual demand curve

Answer 32

Firms demand curve, given output of its rivals (market demand it's rival hasn't supplied)

Question 33

Cournot model: Determines output

Answer 33

Marginal output rule

Question 34

Cournot model: Determines Firm A's residual demand curve

Answer 34

B's output. More B output=A residual demand curve closer to origin

Question 35

Cournot Nash Equilibrium

Answer 35

No firm wants to change output level, holding other firm's output constant, given by point where two best response functions intersect

Question 36

Conditions for Collusion

Answer 36

1. Sellers must interact repeatedly 2. Sellers must be aware of each others strategies

Question 37

Grim Trigger Strategy

Answer 37

Firms cooperate, but if one deviates, both firms play deviate forever, as there's now no incentive to deviate

Question 38

Short term benefit of collusion calculation

Answer 38

Difference between deviating and collusion

Question 39

Long term benefit of collusion calculation

Answer 39

Calculated in terms of present value δ=1/(1+r) Xδ=Period 1 Xδ^n=Period n

Question 40

Expected discounted value tends towards

Answer 40

Xδ/(1-δ), therefore Xδ/(1-δ)=X/r