Introduction to Microeconomics - Monopolistic Competition, Game Theory, and Industrial Organization

Flashcards covering the core concepts of Monopolistic Competition, Game Theory principles including Nash Equilibria, and Industrial Organization models such as Cournot and Bertrand competition.

Monopolistic Competition

A market structure where many firms operate with easy entry and exit, but each firm has market power because they sell their own specific, differentiated product.

Product Differentiation

The process firms use to distinguish their products from competitors through quality, location, brand/style, service, and features.

Allocative Inefficiency

A condition in monopolistic competition where $P > MC$, meaning not everyone who values the good more than its cost of production gets to have it.

Productive Inefficiency

Also known as the excess capacity problem, this occurs when firms operate below the optimal scale, meaning they could produce more cheaply if they had a larger scale, but demand doesn't support it.

Game Theory

The study of strategic decision-making involving players (decision makers), strategies (available choices), payoffs (outcomes), and information.

Dominant Strategy

A strategy that always gives the player the best payoff regardless of what the other players choose to do.

Nash Equilibrium

A set of strategies where no player can improve their outcome by unilaterally changing their strategy; everyone is doing their best given what others are doing.

Prisoner's Dilemma

A game where individual rationality leads to an outcome where both players confess, even though mutual cooperation (not confessing) would yield a better outcome for both.

Mixed Strategy Nash Equilibrium (MNE)

An equilibrium where players randomize over their available strategies, making their opponents indifferent between their own choices.

Sequential Games

Games where one player moves first and later players observe earlier moves before deciding; this often involves a first-mover advantage.

Industrial Organisation (IO)

The study of how market structure affects firm behaviors and economic outcomes.

Oligopoly

A market structure dominated by a few firms with high barriers to entry, where firms are interdependent and must consider rivals' strategic reactions.

Cournot Competition

A model named after Antoine Cournot where firms simultaneously choose quantities and take their rivals' quantities as given when deciding.

Bertrand Competition

A model named after Joseph Bertrand where firms simultaneously choose prices and consumers buy from the cheapest firm.

Bertrand Paradox

The result in price competition with identical products where even with only two firms, the price is driven down to marginal cost ($P = MC$), identical to perfect competition.

Stackelberg Competition

A model of sequential quantity competition where a leader firm chooses its quantity first, and a follower firm chooses its quantity after observing the leader's move.

Collusion

When firms coordinate to act like a joint monopoly to divide the market or fix prices, though it is often unstable due to the individual incentive to cheat.

Tacit Collusion

Coordination between firms without explicit agreements, such as following a dominant firm's prices or matching rivals' moves.

Payoff Matrix

A table that shows the payoffs for each player based on their strategies in a game; it helps illustrate the outcomes of different strategy combinations.

Dominated Strategy

A strategy that results in a worse payoff than another strategy, regardless of what the other players do; rational players will not choose dominated strategies.

Best Response

The strategy that yields the highest payoff for a player, given the strategies chosen by other players.

Zero-Sum Game

A situation in game theory where one player's gain is exactly balanced by the losses of other players; the total payoff remains constant.

Mixed Strategy

A strategy that involves randomizing over two or more different strategies to keep opponents uncertain and potentially improve outcomes.

Imperfect Information

A situation in games where players do not have complete knowledge of the other players' actions or payoffs; this uncertainty impacts strategy.

Subgame Perfect Equilibrium

A refinement of Nash Equilibrium applied in dynamic games, ensuring that players' strategies constitute a Nash Equilibrium in every subgame.

Backward Induction

A method used in game theory to solve sequential games by reasoning backwards from the end of the game to determine optimal strategies.

Reputation Effects

The impact of a player’s past decisions on their future interactions; establishing a good reputation can influence other players' strategies.

Cooperative Game

A game where players can form coalitions and agree on strategies or payoffs, often leading to mutually beneficial outcomes.