Non-Cooperative Oligopoly “Few” Firms Product Types Identical Chapter 6 Heterogeneous Chapter 7 No Entry Firms pick price or quantity only This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Non-Cooperative Game Theory 2 or more players maximizing individual payoffs Each firm is aware of the other’s decision and the way those decisions affect proft. Nash Equilibrium Cournot Equilibrium: Nash in quantity choice Bertrand Equilibrium: Nash in price choice This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Cournot Equilibrium No entry Homogeneous products Single period Demand Example: Q = 1000-1000p Cost of firm I = .28*qi (i = 1,2) This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Figure 6.1 P $1 MC = $.28 Residual Demand: q1 = 1000-1000P - 240 Market Demand: Q = 1000-1000P Output 240 480 760 1000 Residual Marginal Revenue This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Finding Firm 1’s best response Reaction functions are also called: Best Response Functions Finding Firm 1’s best response This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Finding Firm 2’s best response This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Graphing the Best Response Functions This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Calculating Cournot Equilibrium This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Cournot Vs. Monopoly For our example Demand: Q = 1000-1000p Cost = .28*q This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Cournot Vs. Competition For our example Demand: Q = 1000-1000P Supply: P = .28 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Figure 6.3 Profit Possibility Frontier Cournot Stackleberg 57.6 32.4 Stackleberg Efficient Point, Bertrand 57.6 64.8 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Cournot with n-firms Firm’s output = 720/(n+1) Industry output = 720n/(n+1) Price = 1/n + .28 Profit of firm = 5.184/(n+1)2 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Bertrand Equilibrium For our example Demand: Q = 1000-1000p Cost = .28*q What is demand for firm 1? This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Stackleberg Leader-Follower This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Stackleberg Calculations Maximize Firm 1’s profit given that firm 2 will follow the rule: q2=360 – q1/2. Cost = .28q This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Multi-period Game Complexities Simultaneous move games Single period Super games Finitely repeated games Sub-game perfection Sequential move games Credible strategies A supergame repeats a single period game infinitely, but with memory of previous rounds. This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Cournot: One Period vs Supergame Firm 1 240 180 $54.00 $57.6 240 $57.6 $72.00 Firm 2 $72.00 $64.80 In this table we restrict the firms to two choices: produce the Cournot output, or produce the symmetric joint-profit maximizing output. If the game is run as a single period exercise, then the Cournot output is a dominant strategy equilibrium. If the game is run as a supergame, then there are many possible equilibriums because punishment for producing the Cournot output is now possible. If the game is repeated a finite number of times, then Cournot is the outcome once again in any Sub-game perfect equilibrium. 180 $54.00 $64.80 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

High Definition TV Japanese Effort Low High US Effort 4* / 3** 4* / 3** 2* / 4** 3* / 2** 1* / 1** *payoff for US, **payoff for Japan This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

Commitment And Credibility High effort 1*,1** Japan Low effort High effort 3*,2** US High effort 2*,4** The US may have to commit R&D funds to firms to make this credible. Low effort Japan Low effort 4*,3** *payoff for US, **payoff for Japan This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

The path to credibility Establish a reputation Write contracts Cut off communication Burn bridges behind you This portion of the slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

Reputation Israel’s refusal to deal with hijackers Tax amnesty & the US Congress Mayflower Furniture “127 years without a sale” This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

Contracts Agree to penalties if you don’t follow through Complications Nick Russo: “$25,000 to the charity of your choice if you catch me eating in a restaurant.” Renegotiation http://www.stickk.com/ For a contract to work, the party that enforces the contract must have some independent reason to do so. This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

Cutting Off Communication Death and Cecil Rhodes Suppose that universities insist on $1.5 million to endow a chair…can endow one for less? It took an act of parliament to let Rhodes scholarships be given to women because it was in his will. This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

Burning Bridges Cortez burned his own ships upon arrival in Cempoalla, Mexico Cortez’s soldiers new they could not retreat or desert, and his foes new that they would fight to the death. This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.

Experimental Evidence Plott (1982) Cournot, Competitive Equilibrium, and joint profit maximum predict price well Which is better depends on exact setup Lave (1962) 2 period, 2 person, multi-period prisoner’s dilemma, no formal communication: joint profit maximum best predictor. Holt (1985) Tri-opoly, repeated 25 times: Outcome between Cournot and Joint profit maximum Tri-opoly, one-shot only: Cournot Outcome closest This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.