Chapter

8: Market Power
Oligopoly

Playconomics, LHS 1
 Market Power: Oligopoly

Deni8on:
Oligopoly is a market structure that features a
small number of rms.

Playconomics, LHS 2
 Market Power: Oligopoly
Small number of rms strategic interac8ons:
The ac8ons of one rm has direct eects
on the other rms (and vice-versa)
in making its own decision, a rm tries to
an8cipate what the other rms are about to do!

Playconomics, LHS 3
 Market Power: Oligopoly

Deni8on:
A Dominant Strategy represents a strategy that
is preferred by a player irrespecFve of the
strategy selected by the other player.

Playconomics, LHS 4
 Simultaneous Games

Deni8on:
A Simultaneous Game is a type of game in which
players move simultaneously or, alternaFvely,
they are unaware of the other players acFons.

Playconomics, LHS 5
 A Simple Entry Game:
Social Network Industry (1)

A's dominant strategy is not entry

F's dominant strategy is not exit

Playconomics, LHS 6
 A Simple Entry Game:
Social Network Industry (2)

Playconomics, LHS 7
 A Simple Entry Game:
Social Network Industry (2)

Playconomics, LHS 8
 A Simple Entry Game:
Social Network Industry (2)

Assumes Ra8onality: Google believes that

Facebook is (Facebook acts
with the objecFve of max. its prot)
Playconomics, LHS 9
Prisoners Dilemma Game

Playconomics, LHS 10
Prisoners Dilemma Game

Not Pareto
is realized outcome Op8mal
(total earnings = $140bil.)
coopera8on outcome
(total earnings = $200bil.)
Playconomics, LHS 11
 Prisoners Dilemma Game

The

Adam Smiths Invisible Hand Principle fails!

Playconomics, LHS 12
 Cartel Game

Deni8on:
Cartels represent private agreements aimed at
increasing the prot of the cartel members by
reducing compe;;on in the market.

by or
Playconomics, LHS 13
 Cartel Game

Cartels are illegal nearly everywhere (prohibited

under compe;;on law)
cartel members
to keep the other members in line

Playconomics, LHS 14
 Cartel Game

is
collec8vely op8mal BUT
Playconomics, LHS 15
Cartel Game

is the
realized outcome
Playconomics, LHS 16
 CoordinaFon Games

Deni8on:
Coordina8on Games are a type of games that
capture those situaFons where the players
benet from coordina;ng their decisions.

Playconomics, LHS 17
 Ba_le of the Sexes

Deni8on:
BaRle of the Sexes is a game in which players
dier over which acFvity they would prefer to
engage in, but they sFll prefer engaging in the
same acFvity over going alone.

Playconomics, LHS 18
CoordinaFon Games:
BaAle of the Sexes

Playconomics, LHS 19
 Ba_le of the Sexes

Deni8on:
A Strategy Prole denotes a set of strategies,
one for each player.

(Theatre, Stadium); (Stadium, Theatre);
(Stadium, Stadium); (Theatre, Theatre)

Playconomics, LHS 20
 CoordinaFon Games:
BaAle of the Sexes

Both strategy proles are of the game

A/B do
Both strategy proles are Nash equilibria of the game!

Playconomics, LHS 21

 CoordinaFon Games:
BaAle of the Sexes

Both strategy proles are Nash equilibria of the game!

How to choose?

Playconomics, LHS 22
 CoordinaFon Games:
BaAle of the Sexes

more fair in terms of the distribuFon of uFls

& gives collec;vely more (30 vs. 17) BUT
(its an open quesFon)

Playconomics, LHS 23