December 1, Review HW- Activity 3-16 on Monopolistic Competition 2.Lesson 3-10: Oligopoly & Game Theory 3.HW: Activity 3-17: Game Theory 4.Unit 3 Exam is Friday and Tuesday

Oligopoly A few dominant firms within the industry. Homogeneous (steel, lead, gasoline, oil, alcohol, airlines) or differentiated (cars, appliances, cereal, cigarettes) products. Large amount of market power = firms are price makers Interdependence: Each firms profit depends on the other firms’ pricing strategy, advertising, etc. Strategic behavior: self-interest behavior that takes into account reactions of others. Significant Entry barriers = Sustainable Long Run Profits. LO3 11-2

Game Theory Game Theory: Used to explain how 2 or more players make decisions when their own actions affect each participant. A player’s choice may depend on the strategy the player thinks the other players will choose. First, a payoff matrix: a table that shows the payoffs to each player from each possible strategy. Dominant Strategy: Strategy that is best for one player regardless of the strategy chosen by the other player. Dominated Strategy: Yields a lower payoff than the other strategy. Nash Equilibrium: Any combination of strategies that is the best for each player knowing what the other firm is doing; each player has no incentive to change strategy.

The Prisoner’s Dilemma Two prisoner’s, Bonnie and Clyde, have the option to confess or not confess to a crime they committed. Cops admit they have little evidence, only enough to prosecute a misdemeanor (one year prison term), so they are relying on a confession from one or both prisoner’s. They are held and questioned in different cells, unable to communicate with each other. They are told that if one prisoner confesses while the other remains silent, the prisoner confessing will go free and the prisoner remaining silent will serve 20 years. If both confess, both will serve 8 years. What will each prisoner say?

Bonnie gets 8 yearsBonnie gets 20 yearsBonnie goes freeBonnie gets 1 year Clyde gets 20 yearsClyde gets 8 yearsClyde gets 1 yearClyde goes free Bonnie’s decision ConfessRemain silent Clyde’s Decision Confess Remain silent The Prisoner’s Dilemma 5 Each player will play dominant strategy and the payoff will Be smaller than if each played the dominated strategy.

GM Discount Don’t Ford 210,180270,90 Ford vs. GM 120, ,210

GM Discount Don’t Ford 210,180270,90 Ford vs. GM again… 120, ,210

Burger King Advertise Don’t McDonald’s 60,60100,25 McDonald’s vs. Burger King 25,120 80,80

Chrysler Hybrid Regular Chevy 450,150500,250 Chevy vs. Chrysler 200, ,200