1. 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.

2. 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.

3. Cournot Equilibrium No entry Homogeneous products Single period
Demand Example: Q = p
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.

4. Figure 6.1 P $1 MC = $.28 Residual Demand: q1 = 1000-1000P - 240
Market Demand: Q = P
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.

5. 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.

6. 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.

7. 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.

8. 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.

9. Cournot Vs. Monopoly
For our example Demand: Q = p 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.

10. Cournot Vs. Competition
For our example Demand: Q = P 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.

11. 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.

12. 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.

13. Bertrand Equilibrium
For our example Demand: Q = p 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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
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.

23. 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.

24. 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.

25. 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.