Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Oligopoly 0. Characteristics: i. A few large producers: competition among the few each firm has a large share of the market 4-firm concentration ratio: 4 largest firms = more than 40% of market. Half of US manufacturing industries!!! ii. Either homogenous [oil, steel, standardized products] or differentiated [cars, tires, cereals, cigarettes] iii. significant barriers to entry: start up costs, economies of scale, or intimidation factor of playing with the big boys iv. Mutual interdependence: actions of one firm have a large impact on other firms in the market 1. Strategic behavior: each firm takes into account the possible actions by rival firms -- how a firm “expects” other firms to react to its business decisions “game theory” attempts to model interdependent behavior of players. “Nash Equilibrium” John Nash in A Beautiful Mind… We’ll look at this next class. The resulting dilemma is whether to complete or collude Secret Collusion and Price Leadership i. a “non-collusive” agreement ii. firms do not officially set prices together, but they follow each other’s lead: “strategic behavior” iii. Airlines are a classic example iv. Leads to Relative Stability in Price prices tend to be stable kinked demand curve at market price if one firm raises price, other firms might not follow and the firm will lose revenue: elastic demand if one firm lowers price, other firms compelled to follow, so there ends up being no additional revenue to lowering price: inelastic demand v. Unless price wars begin: extreme price-cutting in order to stay in the market, firms will operate at a loss they may keep output high, even if costs rise they won’t pass on costs to customers goal is to ride out the price war until someone drops out; others pick up the market share who will survive? Larger firms, more capital, diversified vi. Since price competition is dangerous, these firms instead use non-price competition 2. Explicit Collusion and Cartels an agreement between firms to set price and/or quantity it is illegal because it creates a monopoly market if it is a formal, public agreement, we call it a cartel OPEC classic example Tends to be successful if: o the goods are homogenous o there are relatively few firms o effective communication and monitoring systems to identify cheating; 3. o stable supply and demand make quotas easy to allocate; o similar production costs so they make similar profits incentive to secretly cheat Game theory Used to explain the strategic behavior of oligopolistic firms. Model of the interdependent behavior of these firms. Similar to a card game: strategy depends on their hand in conjunction with the cards and plays of other participants. Three different strategies: 1. Dominant strategy: the one that is best for one player regardless of any strategy other players follow 2. Nash Equilibrium: the result when each player follows the dominant strategy. It does not always provide the best result for society. It is a non-cooperative equilibrium. 3. Cooperative outcome: the one you choose if cooperating (dominated by agreement, threat, cartel) Prisoner’s Dilemma: Nash Equilibrium in “A Beautiful Mind” https://www.youtube.com/watch?v=2d_dtTZQyUM Prisoner’s Dilemma: Dominant Strategy https://www.youtube.com/watch?v=YGyZX0VoRpI Golden Balls Video, https://www.youtube.com/watch?v=p3Uos2fzIJ0 https://www.youtube.com/watch?v=S0qjK3TWZE8 Play the Prisoner’s Dilemma: select the first one http://www.gametheory.net/applets/prisoners.html OPEC cartel cheating: http://www.nytimes.com/2016/02/17/business/energy-environment/opec-oil-production.html http://www.cnbc.com/2016/02/16/oil-prices-spike-on-reports-of-saudi-russia-output-cut-talks.html http://www.wsj.com/articles/saudi-oil-minister-production-wont-be-cut-to-reduce-global-supply-glut1456246011