Ind Org 021225
Page 1: Course Logistics
Exam Information: Test from Friday will be graded during the week.
Grading Policy: Final grade may be curved.
Exam Review: Contact the TA via the syllabus to discuss exam results.
Next Section: Introduction to game theory as a fundamental concept for Industrial Organization (I.O.).
Game Theory Coverage: Will cover both strategic and extensive forms.
Page 2: Oligopoly Overview
Definition: Oligopoly consists of a few firms (2-5) in a market, unlike monopoly or perfect competition.
Characteristics: Industries typically have fewer firms than perfect competition.
Barriers to Entry: May create oligopolistic market structures.
Page 3: U.S. Airline Industry (May 2024)
Overview: U.S. carriers operate a total of 105 million seats.
Top 10 U.S. Airlines (by seats):
American
Southwest
Delta
United
Alaska
Spirit
Frontier
JetBlue
Allegiant
Hawaiian
Market Share: Top 4 airlines account for 33% of U.S. capacity.
American Airlines: 22,003,673 Seats
Delta: 19,258,864 Seats
Southwest: 19,643,485 Seats
United: 15,874,547 Seats
Page 4: Oligopoly Industry Structure
Strategic Interaction: Oligopoly involves the strategic decisions made by firms in relation to competitors.
Focus Areas: Understanding output quantity, pricing strategies, and impacts on economic welfare.
Page 5: Game Theory's Role in Industrial Organization
Model Development: Various models like Cournot and Bertrand to analyze strategic interactions.
Significance: Game theory enhances the accuracy of analysis in I.O. topics.
Page 6: Game Theory in Economics Classes
Cartel Dynamics: Discusses incentives for cheating within a cartel structure.
Prisoner's Dilemma: Use of this framework to study cartel behaviors and outcomes.
Page 7: Cartel Example – World Diamond Market
Market Data:
Price, Demand, Total Marginal Revenue, Marginal Cost of diamond market analyzed.
Quantities and revenues presented for different price points.
Key Figures: Interaction of price and demand across outputs.
Page 8: Market Graph Analysis
Graph Insights: Depicts demand, marginal revenue, and marginal cost for diamonds.
Visualization: Trends in price against number of diamonds sold.
Page 9: Competitive Equilibrium of Diamonds
Conditions: Characterized by many small sellers and identical products.
Equilibrium Findings:
Quantity = 12,000 diamonds
Price = $1,000
Total Revenue = $12 million
Profit = $0
Page 10: Monopoly Equilibrium for Diamonds
Single Seller Scenario: Monopoly with barriers influences pricing.
Equilibrium Findings:
Quantity = 6,000 diamonds
Price = $7,000
Total Revenue = $42 million
Profit = $36 million
Page 11: Duopoly Cartel Dynamics
Seller Setup: Two dominant sellers with identical products.
Equilibrium Statistics:
Total quantity sold = 6,000 diamonds
Market price = $7,000
Revenue per seller = $21 million
Profit per seller = $18 million
Page 12: Cheating Cartel Scenario
Seller Actions: Russia and South Africa's actions in diamond market explored.
Outcomes:
Total quantity = 7,000 diamonds
Market price = $6,000
Revenue for Russia = $24 million; Profit = $20 million
Revenue for South Africa = $18 million; Profit = $15 million
Page 13: Response to Cheating
Retaliation Example: South Africa responding to Russian cheating in production.
New Dynamics:
Total quantity = 8,000 diamonds
Market price = $5,000
Revenue for both parties = $20 million; Profit = $16 million
Page 14: Dynamic Changes in Production
Continuing Competition: Russia increases diamond output to 5,000.
Market Outcomes:
Total quantity = 9,000 diamonds
Market price = $4,000
Profits analyzed for both sellers.
Page 15: Stable Cartel Dynamics
Equilibrium Reached: Discussion on stability when firms avoid excess production.
Revenue Consistency: Both firms maintaining total output at 4,000 diamonds to sustain profits.
Page 16: Prisoners’ Dilemma Matrix
Nash Equilibrium Context: Evaluates collusive strategies versus cheating decisions in matrix form.
Framework: Assessing outcomes based on each player’s choice to collude or defect.
Page 17: Game Theory Framework
Game Structure: Analysis of player strategies (collude or defect) in the diamond example.
Dynamic Play: Differentiation between one-shot and repeated game strategies.
Page 18: Information Structures in Games
Perfect vs Imperfect Information: Understanding how the knowledge of player actions influences the game's outcome.
Game Characteristics: Symmetric vs asymmetric structure affecting strategy dynamics.
Page 19: Interactive Participation
Group Dynamics: Encouraging analysis through participation in decision consequences.
Page 20: Strategy & Equilibrium Concepts
Dominant Strategies: Definition and implications when players have clear best choices.
Nash Equilibrium: Conditions for achieving best outcomes based on opponents' strategies.
Page 21: Zero Sum Game Example
Competitive Analysis: Two ice cream trucks serving customers - crucial strategic placement mutual exclusivity.
Page 22: Static Zero Sum Game Exploration
Equilibrium Inquiry: Investigating dominant strategy and equilibrium existence in a matrix format.
Page 23: Static Non-Zero Sum Game
Profits Evaluation: General Electric vs. Westinghouse case analyzing pricing strategies and resulting profits.
Page 24: Escape Scenario in Prisoner’s Dilemma
Nash Equilibrium Outcome: Instances showing shifts in strategy under severe pressure.
Page 25: Evaluating Poor Strategies
Payoff Orientation: Matrix analyzing poor decisions and their impacts on profits for two competing firms.
Page 26: Dominated Strategies Effects
Equilibrium Search: Relationships between different strategies indicated through domination elimination.
Page 27: New Game Dynamics
Exploration of Mixed Equilibrium: Matrix exemplifying behavior under steady-state conditions.
Page 28: Mixed Strategy Analysis for Burger Game
Example Adoption: McDonald's and Burger King's mixed strategy outcomes amidst incomplete information in their operational choices.
Page 29: Algebra in Mixed Strategy Equilibria
Mathematical Framework: Equating the firms' probabilities to derive consistency in strategies and equilibrium determination.
Page 30: Advanced Mixed Strategy Equilibrium Calculations
Profit Equations: Employing calculus to determine maximum expected profits amongst competitors.
Page 31: Further Inquiry into BK Solutions
Problem Solving: Deepening exploration on resolving strategies among players.
Page 32: Sequential Games Overview
Current Trends: Transition from static to sequential ongoing games reflecting real-time decisions among firms.
Page 33: Strategic vs Extensive Game Forms
Nash Equilibrium Identification: Complex equilibrium analysis through the strategic representation of decisions.
Page 34: Extensive Form in Entry Deterrence
Game Representation: Monopolist's strategies to deter competitor entry elucidated in formal terms.
Page 35: Entry Deterrence Dynamics
Profit Scenarios: Evaluating monopolist responses to potential competitive market entries and strategies.
Page 36: Credibility Analysis
Rational Strategy Discussion: Exploring whether monopolists can credibly threaten collaboration to deter market entry.