1. Using Game Theory to Model Non-Cooperative Oligopoly

2. High OutputLow Output High Output Firm 1 Low Output Firm 2 $57, 57$54, 72 $72, 54$65, 65 Payoff Matrix for High Output/Low Output Game

3. Representation of HO/LO Game Firm 2 LO HO LO HO LO $57 $54 $72 $65 Payoff to firm 1 Dominant strategy for firm 1: produce High Output Dominant strategy for firm 2: produce High Output Market outcome: firms 1 and 2 choose HO → joint payoff= $114 HOLO HO Firm 1 LO Firm 2 $57, 57 $54, 72 $72, 54 $65, 65 Firm 1

4. Representation of HO/LO Game No collusion Both firms 1 and 2 choose HO → joint payoff = $114 HO LO HO Firm 1 LO Firm 2 $57, 57 $54, 72 $72, 54 $65, 65 With collusion Both firms 1 and 2 choose LO→ joint payoff = $130

5. 5,510, 0 2,2 0, 10 Payoff Matrix for Prisoners’ Dilemma Prisoner 2 TalkDon’t talk Talk Don’t Talk Prisoner 1

6. Representation of Prisoner’s Game Prisoner 2 Don’t talk Talk Don’t talk Talk Don’t talk 5 years 10 years 0 years 2 years Payoff for prisoner 1 Dominant strategy for prisoner 1: Talk 5, 510, 0 2, 2 0, 10 Prisoner 2 TalkDon’t talk Talk Don’t Talk Prisoner 1 Dominant strategy for prisoner 2: Talk Market outcome: both prisoners choose Talk→ joint payoff = 10 yrs.

7. Representation of Prisoner’s Game 5, 510, 0 2, 2 0, 10 Prisoner 2 TalkDon’t talk Talk Don’t Talk Prisoner 1 No collusion Both prisoners choose Talk→ joint payoff = 10 yrs. With collusion Both prisoners choose Don’t Talk→ joint payoff = 4 yrs.

8. AdvertiseDon’t advertise Advertise Firm A Don’t Advertise Firm B $10, 5$6, 8 $15, 0$20, 2 Payoff Matrix for Advertise/Don’t Advertise Game

9. Representation of Advertising Game Firm B DA A A A $10 $6 $15 $20 Payoff to firm A Dominant strategy for firm A: none AdvertiseDon’t advertise Advertise Firm A Don’t Advertise Firm B $10, 5$6, 8 $15, 0 $20, 2

10. Representation of Advertising Game Firm A DA A A A $5 $0 $8 $2 Payoff to firm B AdvertiseDon’t advertise Advertise Firm A Don’t Advertise Firm B $10, 5$6, 8 $15, 0 $20, 2 Dominant strategy for firm B: advertise If Firm A realizes this, best strategy for firm A: advertise Market outcome: A & B advertise→ joint payoff = $15

11. Firm Mover (Stakelberg) Games: Should a Monopolist Pursue This Entry Deterrent Strategy? Monopolist’s profit w/o entry = $100 million If Entry: market becomes a duopoly with total profit $80 million: $40 million each Monopolist considering an entry-deterrent strategy which raises costs (both the monopolist’s and the entrant’s) by $50 million.

12. Raise Costs Don’t raise costs Enters Monopolist Does not enter Entrant $-10, -10$40, 40 $50, 0$100, 0 Payoff Matrix for Entry-Deterrent Strategy Game

13. Monopolist Don’t raise Raise Enters Does not enter Enters Does not enter - $10,-$10 $50, $0 $40, $40 $100, $0 Representation of Entry-Deterrent Game Raise CostsDon’t raise costs Enters Monopolist Does not enter Entrant $-10,-10 $40, 40 $50, 0 $100, 0 Best strategy for monopolist: Raise costs → entrant does not enter and mon. profit = $50 EntrantPayoffs