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ECON 1123 1st Edition Lecture 23 Outline From Previous Lecture (Lecture 22)I. Monopolistic CompetitionA) Short Run Economic ProfitsB) Long Run Zero Economic ProfitsC) Monopolistic Versus Pure CompetitionII. OligopolyA) DefinitionB) CartelC) Price Leadership/Dominant Firm/Competitive FringeOutline Lecture 23I. Game TheoryA) Prisoner’s DilemmaB) Nash EquilibriumII. Summary of Market StructuresA) Pure CompetitionB) Monopolistic CompetitionC) OligopolyD) Pure MonopolyLecture 23 NotesIII. Game TheoryIn oligopoly, firms are mutually interdependent.Mutual interdependence- the behavior of one firm depends on the reactions of the firms –Game theory models thisGame variables:1. Degrees of cooperation (can vary from no co-operation up to complete co-operation)2. Number of players- 2 up to nThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.3. Simultaneous or sequential decision making4. Information completion complete-incomplete (asymmetric)5. Discreet or continuous strategies6. One-off or repeated games7. Zero sum versus non-zero sum games strategies Zero sum -> amount won= amount lostNon-zero sum->Mutual winnings for the playersJohn Van Neumann and Morganstern- Theory of Games and Economic Behavior (Revolutionized Economic thinking)C) Prisoner’s Dilemma- A non-cooperative, one-off, game with two players who have complete information about outcomes (payoffs) when deciding to confess or not- Rational decision making results in inferior outcomes for both players (prisoners) **Assume solitary confinement- the players cannot communicateOutcome Matrix:Don’t Confess Bonnie ConfessDon’t Confess 1 year for bonnieand clyde3 years for Clyde, 0 years for BonnieClydeConfess 0 years for Clyde, 3 years for Bonnie2 years for bonnie and clydeIn Clyde’s view, he confesses, in Bonnies view, she confesses-If they could have talked to each other they could have gotten out of prison in a year. Instead they got 2 years each which is an inferior outcome. Examples of this in business: advertise/ do not advertise, introduce new product/ do not introduceD) Nash EquilibriumNash Equilibrium- mathematical proof that an n-player game where each player chooses his/her optimal strategy, given that all other players have done the same(pursued their optimal strategies) HAS A SOLUTIONEconomists know that even very complex games have a solutionIV. Summary of Market Structures:Pure CompetitionMonopolistic CompetitonOligopoly Pure Monopoly# Firms many many few oneProduct homogeneousdifferentiated Homogeneous/or differentiateduniqueBarriers to Entryno no yes yesStrategic Interdependenceno no yes Not applicableKey Summary CharacteristicPrice taker Product differentiationMutual InterdependenceOne FirmIndustryV. REVIEW (The final is cumulative)- How do individual firms determine supply?- theory of the firm (what type of firm)- How do individuals consumers determine demand?-constrained utility maximization- If your budget increases your budget constraint will shift to the right. This willshift market demand right as

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