Презентация Simultaneous games. Oligopoly. (Lecture 2) онлайн
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Слайды и текст к этой презентации:
№1 слайд
Содержание слайда: Lecture 2
Simultaneous games: Oligopoly
№2 слайд
Содержание слайда: Oligopoly
Extreme forms of market structure are uncomplicated:
Monopoly: one producer, no strategic interaction
Perfect competition: many producers, price is given, no strategic interaction
Oligopoly: the industry is dominated by a small number of large firms. Intermediate case, between perfect competition and monopoly.
Smartphones industry
Oil producers
Accounting Big 4
Boeing and Airbus
№3 слайд
Содержание слайда: Strategic interactions and oligopoly
When making strategic decisions (on prices, quantity, advertising, innovation etc.) the oligopolist must consider the actions/reactions of its competitors.
Payoff interdependency: A producer’s payoff depends on what the other producers do.
Use of game theory.
Application of NE to oligopoly theory. Analysis of the decision of how much to produce (quantity).
№4 слайд
Содержание слайда: Demand and costs
Demand: The market price is a function of the total quantity produced in the industry, e.g:
e.g:
Costs: Suppose that the marginal cost is 0.28
№5 слайд
Содержание слайда: Monopoly
The monopolist chooses Q to maximize profit:
Outcome:
Low output to keep prices high and maximize profit.
№6 слайд
Содержание слайда: Perfect competition
Many producers, the price is given.
In equilibrium, Q is such that P=MC, i.e. P=0.28. Producers make zero profit.
P = 1 − 0.001Q = 0.28, hence Q = 720,
Quantity is higher under perfect competition than under monopoly.
№7 слайд
Содержание слайда: The Cournot model
What is the Cournot model?
Model of industry structure where producers’ strategic decision is about how much to produce.
Two producers, Firm 1 and Firm 2 (oligopoly).
Produce the same good
Sell on the same market
One market price, which depends on the total output
No entry
Simultaneous game
Example: oil producing countries
№8 слайд
Содержание слайда: Demand
The more producers jointly produce, the lower the market price
№9 слайд
Содержание слайда: Costs and profit
Suppose that the marginal cost is 0.28:
Profit of Firms 1 and 2:
№10 слайд
Содержание слайда: Discrete choices
Suppose there are just three possible quantities that each firm i=1,2 can choose qi = 180, 240 or 360.
There are 3x3=9 possible outcomes. For example, if firm 1 chooses q1=180, and firm 2 chooses q2=240, then:
№11 слайд
Содержание слайда: Discrete choices
№12 слайд
Содержание слайда: Continuous choices
Discrete games are not suitable to analyze the decision of how much to produce
Producers are not limited to just 3 levels of production.
Quantity is a continuous variable, not a discrete one.
We now assume that producers can produce any quantity.
How much to produce?
More units sold means more volume, but lower price.
Essential to take into account the other producer’s behavior.
№13 слайд
Содержание слайда: Continuous choices
Simplifying the profit function:
№14 слайд
Содержание слайда: Best responses
We find the Nash equilibrium by deriving the best response functions.
To maximize profit, differentiate and set equal to zero:
Do the same for Firm 2:
№15 слайд
Содержание слайда: Best responses
№16 слайд
Содержание слайда: Best responses
№17 слайд
Содержание слайда: Best responses
№18 слайд
Содержание слайда: Nash equilibrium
Nash Equilibrium is where best responses meet.
Firm 1’s equilibrium strategy is his best response to Firm 2’s equilibrium strategy which is also his best response to Firm 1’s equilibrium strategy.
Joint best response, and no incentive for producers to choose a different action.
№19 слайд
Содержание слайда:
№20 слайд
Содержание слайда: Nash equilibrium
№21 слайд
Содержание слайда: Effect of market structure
№22 слайд
Содержание слайда: Effect of market structure
Cournot with more than 2 producers:
№23 слайд
Содержание слайда: Effect of market structure
Having fewer producers is associated with:
Lower total output
Higher prices
Higher profitability
Empirical evidence shows that profitability is on average higher in highly concentrated industries.
№24 слайд
Содержание слайда: Cartel
Wouldn’t the two producers be better off cooperating rather than competing? YES
Both producers could maximize joint profit by jointly producing the monopolist output level: Q=360, i.e. 180 for each producer.
The monopolist profit (129.6) is then shared between the two producers (i.e. 64.8 for each, instead of 57.6 if they play the NE).
№25 слайд
Содержание слайда: Cartel
“The OPEC cartel agreed on Wednesday to reduce production by 2.2 million barrels a day, the group’s largest cut ever, in an effort to put a floor on falling oil prices.
…Mr. Khelil (OPEC’s president) said the group wanted to “eliminate” an overhang of oil inventories …and aimed to push prices up to $70 to $80 a barrel.
“We have…excessive stocks that could really lead to a collapse in prices,” Mr. Khelil said during a chaotic and confused news conference after the meeting.
(NY Times, December 17, 2008)
№26 слайд
Содержание слайда:
№27 слайд
Содержание слайда: Cartel stability
Each producer makes more profit by deviating from the cartel quantity. For instance, if Firm 1 sticks to the cartel quantity of 180, Firm 2’s best response is:
The cartel problem is a Prisoner’s dilemma situation: it is collectively rational to cooperate (“optimal” outcome), but it is individually rational to defect (NE).
№28 слайд
Содержание слайда: Cartel stability
“The coffee bean cartel, the Association of Coffee Producing Countries, whose members produce 70% of the global supply, will shut down in January after failing to control international prices. [...] Mr Silva also said the failure of member countries to comply with the cartel’s production levels was a reason for the closure.”
(BBC News, October 19, 2001)
№29 слайд
Содержание слайда: Cartel stability
To summarize…
Producers have incentive to form cartels, but cartels are unstable.
Q: How to explain the fact that some cartels are quite stable, unlike what is predicted in the Cournot model?
List of cartel violations in the European Union
http://ec.europa.eu/competition/cartels/cases/cases.html
№30 слайд
Содержание слайда: Comparative statics
If Firm 1’s marginal cost is 0.25 rather than 0.28, how does it affect the outcome?
Equilibrium:
№31 слайд
Содержание слайда: Summary
Nash equilibrium and continuous choices.
Oligopoly and quantity competition: Cournot model.
Trade-off between high output and low price, or low output and high price.
Strategic interactions yield a unique NE, with intermediate output level.
The cartel solution is more profitable but not stable.
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