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Lecture Economics (19/e) - Chapter 11-Appendix: Monopolistic competition and oligopoly

After completing this chapter, students will be able to: Relate why the demand curve of an oligopolist may be kinked, compare the incentives and obstacles to collusion among oligopolists, contrast the potential positive and negative effects of advertising, utilize additional game-theory terminology and applications. | Monopolistic Competition and Oligopoly 11A Appendix McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Additional Game Theory Applications Game theory explains mutual interdependence and strategic behavior Collusion is beneficial to participants Reduced uncertainty Increased profits May block entry LO8 11App- A One-Time Game: Strategies A one-time game A simultaneous game A positive sum game A firm’s dominant strategy LO8 11App- A One-Time Game: Strategies Nash Equilibrium Outcome from which neither firm wants to deviate Current strategy viewed as optimal Stable and persistent outcome LO8 11App- A One-Time Game LO8 Dramco’s Price Strategy Chipco’s Price Strategy A B C D $11 $11 $5 $20 $17 $17 $20 $5 International International National National 2 competitors 2 price strategies Each strategy has a payoff matrix Independent actions stimulate a response 11App- Credible and Empty Threats Credible Threats A statement of coercion that is believable by the other firm Can establish collusive agreements A strong enforcer can prevent cheating Can generate higher profits May be countered with threat by rival Empty Threats A threat that is not believable by rival LO8 11App- Repeated Games Game that recurs May cooperate and not compete strongly Rival reciprocates Examples: Pepsi and Coke, Walmart and Target, Boeing and Airbus LO8 11App- Repeated Games LO8 ThirstQ’s Advertising Strategy A B C D $10 $10 $8 $16 $12 $12 $16 $8 Promo Budget Promo Budget Normal Budget Normal Budget 2Cool’s Advertising Strategy ThirstQ’s Advertising Strategy A B C D $11 $11 $10 $14 $13 $13 $15 $10 Promo Budget Promo Budget Normal Budget Normal Budget 2Cool’s Advertising Strategy 11App- First-Mover Advantages The firm that moves first May be better prepared May preempt entry of rival Rival must respond LO8 11App- LO8 Big Box strategies Huge Box strategies A B C D -$5 -$5 $0 $12 $0 $0 $12 $0 Build | Monopolistic Competition and Oligopoly 11A Appendix McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Additional Game Theory Applications Game theory explains mutual interdependence and strategic behavior Collusion is beneficial to participants Reduced uncertainty Increased profits May block entry LO8 11App- A One-Time Game: Strategies A one-time game A simultaneous game A positive sum game A firm’s dominant strategy LO8 11App- A One-Time Game: Strategies Nash Equilibrium Outcome from which neither firm wants to deviate Current strategy viewed as optimal Stable and persistent outcome LO8 11App- A One-Time Game LO8 Dramco’s Price Strategy Chipco’s Price Strategy A B C D $11 $11 $5 $20 $17 $17 $20 $5 International International National National 2 competitors 2 price strategies Each strategy has a payoff matrix Independent actions stimulate a response 11App- Credible and Empty Threats Credible Threats A .