Topic 8 Part 1 30 May 2013 Date A ntitrust Economics 2013 David S Evans University of Chicago Global Economics Group Elisa Mariscal CIDE ITAM CPI Overview Role of Oligopolies in the Economy ID: 1001656
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1. Topic 8: Oligopoly and game theoryTopic 8 | Part 1 30 May 2013Date Antitrust Economics 2013David S. EvansUniversity of Chicago, Global Economics Group Elisa MariscalCIDE, ITAM, CPI
2. Overview
3. Role of Oligopolies in the Economy3
4. The “rough” spectrum of competition
5. Firms act largely independently of each other in competition and monopoly but not in oligopoly
6. A small number of firms dominate many industries
7. Concentration in selected US industriesSource: US Economic CensusIndustry4 largest companies8 largest companies20 largest companiesMotor Vehicle82.4%91.8%98.8%Aircraft Manufacturing62.3%78.1%88.0%Soft Drinks47.5%55.6%77.9%Breweries89.7%93.4%95.2%Tobacco83.4%93.3%99%
8. Oligopoly industries are ripe for competition issues
9. Economic models of oligopoly account for strategic interactions among firms
10. Modeling interactions among firms and people is tricky
11. Game Theory and Strategic Behavior11
12. “Game theory” provides insights into many problems involving interactions
13. Basics of game theory
14. Components of games
15. The “payoff matrix” describes the gamePlayer 2Player 1Player 1 gets 6 and Player 2 gets 3 if Player 1 moves Down and Player 2 moves LeftLEFTRIGHTUP(5,5)(3,6)DOWN(6,3)(4,4)(player 1 payoff, player 2 payoff)
16. Optimal strategies with simple one-period non-cooperative gamePlayer 2Player 1LEFTRIGHTUP(5,5)(3,6)DOWN(6,3)(4,4)(player 1 payoff, player 2 payoff)
17. The “dominant strategy” is a key conceptPlayer 2Player 1LEFTRIGHTUP(5,5)(3,6)DOWN(6,3)(4,4)
18. The dominant strategies point to game equilibriumPlayer 2Player 1LEFTRIGHTUP(5,5)(3,6)DOWN(6,3)(4,4)(player 1 payoff, player 2 payoff)
19. The cost of not cooperating Player 2Player 1LEFTRIGHTUP(10=5,5)(9=3,6)DOWN(9=6,3)(8=4,4)
20. The prisoner’s dilemma gamePlayer 2Player 1Do not ConfessConfessDo not Confess(1,1)(40,0)Confess(0,40)(20,20)Prisoner 2 goes free and prisoner 1 gets 40 years.(player 1 payoff, player 2 payoff)
21. The Nash equilibriumJohn Forbes Nash (1928)
22. Games don’t always have just one equilibriumHeSheBalletFootballBallet(3,2)(1,1)Football(0,0)(2,3)(Her Payoff, His Payoff)
23. What to do when there are many equilibria?
24. End Part 1, Next Class Part 2