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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.
11A Appendix MonopolisticCompetitionand Oligopoly McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved AdditionalGameTheoryApplications Game theory explains mutual • interdependence and strategic behavior Collusion is beneficial to participants • Reduced uncertainty • Increased profits • May block entry LO8 11App-2 A OneTime Game: Strategies • A one-time game • A simultaneous game • A positive sum game • A firm’s dominant strategy LO8 11App-3 A OneTime Game: Strategies • Nash Equilibrium • Outcome from which neither firm wants to deviate • Current strategy viewed as optimal • Stable and persistent outcome LO8 11App-4 A OneTime Game Dramco’s Price Strategy LO8 International A National International Chipco’s Price Strategy •2 competitors •2 price strategies •Each strategy has a payoff matrix •Independent actions stimulate a response C $11 National B $11 $5 $5 $20 $20 D $17 $17 11App-5 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-6 Repeated Games • Game that recurs • May cooperate and not compete • • LO8 strongly Rival reciprocates Examples: Pepsi and Coke, Walmart and Target, Boeing and Airbus 11App-7 LO8 ThirstQ’s Advertising Strategy Promo Budget Normal Budget Promo Budget Normal Budget A $10 B $10 C $8 $8 $16 $16 D $12 $12 Normal Budget Promo Budget ThirstQ’s Advertising Strategy 2Cool’s Advertising Strategy Normal Budget Promo Budget 2Cool’s Advertising Strategy Repeated Games A $11 B $11 C $10 $10 $14 $15 D $13 $13 11App-8 FirstMover Advantages • The firm that moves first • May be better prepared • May preempt entry of rival • Rival must respond LO8 11App-9 FirstMover Advantages Big Box strategies LO8 Build A Don’t build Huge Box strategies Build Don’t build -$5 B -$5 C $0 $0 $12 $12 D $0 $0 11App-10 ... LO8 11App-6 Repeated Games • Game that recurs • May cooperate and not compete • • LO8 strongly Rival reciprocates Examples: Pepsi and Coke, Walmart and Target, Boeing and Airbus 11App-7 LO8 ThirstQ’s... LO8 11App-3 A OneTime Game: Strategies • Nash Equilibrium • Outcome from which neither firm wants to deviate • Current strategy viewed as optimal • Stable and persistent outcome LO8 11App-4 A OneTime Game... interdependence and strategic behavior Collusion is beneficial to participants • Reduced uncertainty • Increased profits • May block entry LO8 11App-2 A OneTime Game: Strategies • A one-time game