ECON-528 Module 7

A cartel is a group of suppliers that colludes to operate like a monopolist.

cartel

 

Collusion is an explicit or implicit agreement to avoid competition with a view to increasing profit.

A conjecture is a belief that one firm forms about the strategic reaction of another competing firm.

A game is a situation in which contestants plan strategically to maximize their profits, taking account of rivals’ behaviour.

A strategy is a game plan describing how a player acts, or moves, in each possible situation.

A Nash equilibrium is one in which each player chooses the best strategy, given the strategies chosen by the other player, and there is no incentive for any player to move.

A dominant strategy is a player’s best strategy, whatever the strategies adopted by rivals.

A payoff matrix defines the rewards to each player resulting from particular choices.

A binding commitment is an agreement, entered into voluntarily, that restricts future actions.

A credible threat is one that, after the fact, is still optimal to carry out.

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Oligopoly Problem: Conjectural Interdependence

  1. Collusive Arrangements
  2. Game Theory

 

Collusion: Three tasks

  1. Find the optimal Pfix (P*fix <= Pm)t1
  2. Devise some quota mechnism (Qfix < Qc)

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3. Policing Mechanism
– Detect cheaters
– Deter cheaters

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Games:

  1. Cooperative games: players can sign binding contracts
  2. Non-cooperative games: players cannot sign binding contracts
    1. Extensive form games: sequential play game (tree diagrams) Ex – Chess
    2. Normal form games: simultaneous play game Ex – prisoner’s dilemma

 

Nash Equilibrium is a great predictor of how people behave.

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