# We refer to player 1 as the sender and to player 2 as the receiver.

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 7 Signaling Games 7.1 What is Signaling? The concept of signaling refers to strategic models where one or more informed agents take some observable actions before one or more uninformed agents make their strategic decisions. This leads to situations where the uninformed agent care about the actions taken by the informed agent not only because the actions a ect payo s directly, but also because the action taken say something about the type of the player. This in turn creates incentives to select actions to send the right signal about type. 7.2 The Basic Signaling Game Consider the following setup: There are two players. We refer to player 1 as the sender and to player 2 as the receiver. Player 1 has private information about his type. We denote the type space by and write for a generic element. The set of available actions for the sender is A 1 ; so a (pure) strategy is function s 1 with s 1 () 2 A 1 for every type : We let p denote the (prior) probability distribution over the senders type space. Player 2, the receiver, observes the action chosen by the sender and then take some action in A 2 : A pure strategy for player is a function s 2, where s 2 (a 1 ) 2 A 2 for every a 1 2 A 1 Utility functions, u 1 (a 1 ; a 2 ; ) for the sender u 2 (a 1 ; a 2 ; ) for the receiver, 2

2 7.3 Equilibrium Sometimes, it is su cient to look at Nash equilibria. However, there are times where the set of Nash equilibria includes i) way to many possibilities; ii) some quite unreasonable equilibria. The reason is that the Nash equilibrium concept has no restrictions on o the equilibrium path play. We therefore want to do something in the spirit of backwards induction/subgame perfection, which is a bit trickier in games with incomplete information. In essence, we want equilibria to satisfy two sorts of criteria: 1. Sequential Rationality. Whenever an agent is called to play, the agent does something optimal (to re ne away Nash equilibria supported by play that is suboptimal o the path). 2. Consistency of beliefs. What is optimal often depends on what an agent believes about the opponent(s), and we want to rule out an agent thinking something that is contradicted by the equilibrium strategies (coordination assumption much in the same spirit as the rational expectations part of Nash equilibrium). There are several equilibrium concepts that capture these two ideas to a smaller or larger extent. The de nition below is not my favorite version, but we ll stick to it in this course because it is easier to de ne than the more appealing versions: De nition 1 A (pure) perfect Bayesian Equilibrium in a signaling game (of the form described above) is a strategy pro le s and a system of beliefs such that 1. s 1 () solves max a 1 2A 1 u 1 (a 1 ; s 2 (a 1 ) ; ) for all 2 2. s 2 () solves max a2 2A 1 P2 (ja 1) u 2 (a 1 ; a 2 ; ) for all a 1 2 A 1 3. (ja 1 ) satis es Bayes rule whenever applicable (i.e., whenever you can avoid dividing by zero) 3

3 (0,0) (1,2) (-2,-2) (2,3) e e e e e,, p L1 [1/2] [1/2] jn R1 t,,, Q q QQQ (-1,0) t 1-p L2 R2 1-q (2,3) (-1,2) Figure 1: A Simple Signaling Game 7. Example (R 1 L 2 ; at ) ; (p; q) = (0; 1) is Perfect Bayesian Bayes rule p = Pr [t 1 jl] = = = 0 q = Pr [t 1 jr] = Pr [Ljt 1 ] Pr [t 1 ] Pr [Ljt 1 ] Pr [t 1 ] + Pr [Ljt 2 ] Pr [t 2 ] Pr [Rjt 1 ] Pr [t 1 ] Pr [Rjt 1 ] Pr [t 1 ] + Pr [Rjt 2 ] Pr [t 2 ] = = 1 CHECK! (L 1 L 2 ; bb) ; (p; q) = ( 1 2 ; q) is a PBE if q 2 5 (free to specify beliefs at unreached information sets, but must be done so that they support equilibrium strategies). CHECK! (R 1 R 2 ; ct ) is a Nash equilibrium, but not a PBE.

4 8 Job Market Signaling and Commitment 8.1 A Simple Version of the Static Spence Model Consider the following formulation of the job market signalling model due to Spence; Types are given by 2 f1; 2g 0 is the probability that = 1 A Worker may choose (i.e. commit to) any education of length t 0 The utility is given by u (w; t; ) = w t Game: 1) Worker choose education. 2) Firms compete Bertrand for workers and get a pro t = w if it manages to attract the worker. Let (t) denote the probability that rms asses that = 1. In (a perfect Bayesian) equilibrium, the rms must both optimize given beliefs, implying that w (t) = 2 (t) Separating Equilibria Given that we restrict attention to equilibria where rms behave optimally after any t 0 is follows that t 1 = 0 in any separating (perfect Bayesian) equilibrium: the reason is that if t 1 > 0 and the low productivity worker deviates to t = 0; then (0) 2 [0; 1] ) w (0) 0 1 > 1 t 1 = w (t 1 ) t 1 : 5

5 We conclude that the deviation is pro table. In words the logic is simply that the low type reveals to be the worst possible worker. Clearly, it cannot be worth anything to the low productivity worker to do so, so the worker must take the least costly action. By consistency of beliefs so w (t 2 ) = 2 (t 2 ) = = 0 (t 2 ) = 2: In order for type 1 to be better o at t 1 = 0 than with t 2 it must be that, w (t 1 ) w(t 2 ) t t 2, t 2 1 and for type 2 to be better of with t 2 than with t 1 = 0 it must be that w (t 2 ) t 2 2 w(0) 2 t 2 2 1, t (2) 2 Hence, if 1 t 2 2 neither type has an incentive to pretend to be the other, and by considering beliefs; 8 < 0 if t = t 2 (t) = : 1 if t 6= t 2 it is immediate that neither type has a pro table deviation. In fact, it is su cient to use beliefs 8 < 0 if t t 2 or e (t) = : 1 if t < t (2) ; which you can verify by drawing a graph. e is nicer than because beliefs are monotonic in education. 6

6 8.1.2 Pooling Equilibria To support as large a set of education levels as pooling equilibria, suppose that t 1 = t 2 = t is a pooling equilibrium and let beliefs be 8 < (t) = : 0 if t = t ; 0 if t 6= t which obviously is consistent with Bayes rule where relevant. The best deviation for both types is then to t = 0 and this is not pro table for the low productivity/high cost of education type if 2 0 t 1: Clearly, the high productivity type has no incentive to deviate if the low productivity type has no incentive to deviate, so any can be supported as a pooling equilibrium. 0 t The Role of Commitment The insight with the job market signalling model is that it shows that the premium paid to workers with higher education doesn t necessarily mean that education increases productivity. It could, as is the case in the model, simply be that education allows more highly productive workers screen themselves out. However, if we think of education as something that happens in real time we may complain that once the low productivity worker has decided not to educate, then the rms know that it must be a high productivity worker if they observe strictly positive education. Hence, the rms should bid for the worker immediately after the low productivity worker has been screened out, which, it seems, would destroy any separating equilibrium. There are models addressing this issue and, while there are some subtleties, the separation in the Spence model is rescued essentially by randomizations where there is a small probability (! 0 as period length! 0) that the low type pools with the high type. 7

7 Limit Pricing Consider the following environment: There are two periods and a market for a homogenous good with inverse demand p(q) = 1 q in each period (i.e., a non-durable good) Two rms, labeled I (incumbent) and E (entrant) incumbent has marginal cost c I 2 fc L ; c H g entrant has marginal cost c E Incumbent (the sender) is a monopolist in the rst period. Sets some q I Entrant (the receiver) observes the realized q I and decides whether or not to enter. For simplicity it is assumed that once the receiver has decided whether or not to enter the incomplete information magically gets resolved. Firms compete Cournot in second period if there is entry Incumbent acts a monopolist in second period if no entry Cost of entry given by K: The monopoly and cournot pro ts are readily computed as in the following table (recall that the asymmetric information disappears after entry). Entrant enters and c = c L Entrant enters and c = c H Entrant stays out Pro t for incumbent c L (1 2c L + c E ) 2 = (1 c L ) 2 = Pro t for incumbent c H (1 2c H + c E ) 2 = (1 c H ) 2 = Pro t for entrant (1 2c E + c L ) 2 = K (1 2c E + c H ) 2 = K 0 YOU SHOULD CHECK THESE CALCULATIONS! To make things interesting we assume that (1 2c E + c H ) 2 = > K > (1 2c E + c L ) 2 =; meaning that under symmetric information the entrant would enter if and only if the incumbent would be a high cost rm. 8

8 .0.1 Separating Equilibria In a separating equilibrium, the entrant will (as would be the case with symmetric information) enter if and only if the incumbent has a high cost. Let q L and q H denote the quantities chosen by the low and the high cost type respectively. Observe that a necessary condition is that (1 q L c L ) q L + (1 c L) 2 (1 q H c H ) q H + (1 2c H + c E ) 2 (1 q H c L ) q H + (1 2c L + c E ) 2 (1 q L c H ) q L + (1 c H) 2 (IC-L) (IC-H) The rst condition states that a low cost rm should not be tempted to select the quantity of a high cost rm, the second the opposite. Next we observe that; q H = (1 c H) 2 in any Perfect Bayesian equilibrium (not true in a Nash equilibrium). Reason: The worst case scenario for a high cost type is entry. There will be entry after q H : Hence, if q H 6= (1 c H) 2 there would be a pro table deviation for the high cost rm. The reason why this is not true in every Nash equilibrium is that the entrant in A Nash equilibrium may play something di erent than the Cournot duopoly equilibrium o the equilibrium path. For example, let q L ; q H be the equilibrium outputs in the rst period and consider a strategy where the entrant stays out if and only if q = q L ; where the entrant enters and plays the Cournot quantity if q = qh ; and where the entrant enters and plays q E = 1 if q =2 fql ; q Hg : This strategy would give the incumbent a pro t=0 if q =2 fql ; q Hg, implying that this construction can support a range of values for q H based on the non-credible threat by the entrant to ood the market in case the incumbent plays the wrong rst period quantity. Symmetrically, (1 2c L+c E ) 2 is the worst possible second period payo for the low cost type)if the low cost type would choose the static monopoly quantity in the rst period, it must get a payo of at least (1 c L ) 2 + (1 2c L + c E ) 2 (1 q H c L ) q H + (1 2c L + c E ) 2 : (1)

9 Taking these considerations together, this leads us to focus on the following necessary incentive compatibility constraints where we have; (1 q L c L ) q L + (1 c L) 2 (1 c H ) 2 + (1 2c H + c E ) 2 (1 c L) 2 + (1 2c L + c E ) 2 (1 q L c H ) q L + (1 c H) 2 ; 1. replaced the right hand side in the IC constraint for L by using (1) 2. substituted q H = (1 c H) 2 into the IC constraint for H: Let L and H be the value of keeping the entrant out for the low and high cost incumbent, that is L = (1 c L) 2 H = (1 c H) 2 (1 2c L + c E ) 2 (1 2c H + c E ) 2 ; One can check that L may be smaller or larger than H depending on c E. The way to understand this is that as c E increases, eventually one reaches a point where the duopoly pro t equals the monopoly pro t for the low cost rm. At this cost, the entrant will still produce a strictly positive quantity against the high cost rm, so the high cost rm still has a strict gain from the entrant staying out. On the other hand side, it is easy to check that for c E = c L ; then L > H ; so here the larger payo under monopoly dominates. We solve this as real economists: Assumption L H De ne, M L = (1 c L) 2 M H = (1 c H) 2 L (q) = (1 q c L )q H (q) = (1 q c H )q; 50

10 so that the necessary incentive constraints may be written for short as H M H H (q L ) L M L L (q L ) In Figure 2 the range of separating equilibrium quantities q L is illustrated in terms of these two inequalities. To draw the picture, note that the cost of eliminating entry M J J (q L ) has a minimum of zero at the static monopoly quantity, which is a higher quantity for the low cost rm. Using the fact that d dq ( L(q) H (q)) = (1 2q c L ) (1 2q c H ) = c H c L > 0; one checks that M L L (q) and M H H (q) intersects at most once. It should be clear from the gure that L H is a su cient (but not necessary) condition for the range of separating equilibria to be nonempty. 6 h H (q) M H i h L (q) M L i L H - q H separating equilibria q L q Figure 2: A Continuum of Separating Equilibria in the 2-type Limit Pricing Model Finally, to support a quantity q L in the range indicated in the gure as a separating equilibrium (where the high cost rm chooses its static monopoly output in the rst period) 51

11 in the simplest possible way we let the beliefs o the equilibrium path be as pessimistic as possible. That is, if the entrant thinks that any quantity other than q L must be evidence that the rm is a high cost rm, so that 8 < 1 if q = q L (c = c L jq) = : 0 otherwise ; then any deviation q for the low cost rm gives a payo (1 q c L ) q H + (1 2c L + c E ) 2 (1 c L) 2 + (1 2c L + c E ) 2 : so deviating to the monopoly output is the best deviation under these beliefs. Moreover, from the point of view of the high cost rm any q = q L gives a pro t (1 q c H ) q + (1 2c L + c E ) 2 ; under these beliefs, which obviously is maximized for q = q H : In words, if the only quantity that deters entry is q L ; then the best rst period quantity for the high cost rm must be either q L or the static monopoly quantity..0.2 Remarks 1. The analysis above shows that it is a possibility that a relatively e cient incumbent rm engages in limit pricing (higher quantity=lower price) to signal to potential entrants that they ll be so strong competitors that they better keep out of the market 2. Note that in the equilibrium constructed nobody is fooled. However, an e cient rm would be mistaken for a not so e cient rm should they deviate. 3. The example also shows that limit pricing (sometimes considered predatory behavior ) may actually bene t consumers (although one would have to consider more carefully exactly what the alternative is id one would think of this as a serious policy-related exercise) by lowering the price. 52

12 . There is in general also a continuum of pooling equilibria (as well as semi-pooling). This huge multiplicity of equilibria is typical for (simple) signaling games and has led to a monstrous literature on equilibrium selection. I personally think that re nements beyond standard sequential rationality arguments is a suspect idea and that we have to live with the multiplicity. I may talk a little bit about this re nements literature, mainly to illustrate what I think is wrong with the whole idea. However, to some extent the multiplicity is an artefact of the very simplicity of the model (just a few types) and at least when we look for pure separating equilibria, this is mitigated by a richer (continuous) type space. 53

### Oligopoly. Chapter 10. 10.1 Overview

Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires

### ECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition

ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself

### Price Discrimination: Exercises Part 1

Price Discrimination: Exercises Part 1 Sotiris Georganas Royal Holloway University of London January 2010 Problem 1 A monopolist sells in two markets. The inverse demand curve in market 1 is p 1 = 200

### New Technology and Profits

Another useful comparative statics exercise is to determine how much a firm would pay to reduce its marginal costs to that of its competitor. This will simply be the difference between its profits with

### Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

ECON9 (Spring 0) & 350 (Tutorial ) Chapter Monopolistic Competition and Oligopoly (Part ) Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

### Oligopoly and Strategic Pricing

R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small

### Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

### The Basics of Game Theory

Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #7 The Basics of Game Theory Friday - November 5, 2004 OUTLINE OF TODAY S RECITATION 1. Game theory definitions:

### Games Played in a Contracting Environment

Games Played in a Contracting Environment V. Bhaskar Department of Economics University College London Gower Street London WC1 6BT February 2008 Abstract We analyze normal form games where a player has

### Nash Equilibrium. Ichiro Obara. January 11, 2012 UCLA. Obara (UCLA) Nash Equilibrium January 11, 2012 1 / 31

Nash Equilibrium Ichiro Obara UCLA January 11, 2012 Obara (UCLA) Nash Equilibrium January 11, 2012 1 / 31 Best Response and Nash Equilibrium In many games, there is no obvious choice (i.e. dominant action).

### Competition and Regulation. Lecture 2: Background on imperfect competition

Competition and Regulation Lecture 2: Background on imperfect competition Monopoly A monopolist maximizes its profits, choosing simultaneously quantity and prices, taking the Demand as a contraint; The

### EconS 503 - Advanced Microeconomics II Handout on Cheap Talk

EconS 53 - Advanced Microeconomics II Handout on Cheap Talk. Cheap talk with Stockbrokers (From Tadelis, Ch. 8, Exercise 8.) A stockbroker can give his client one of three recommendations regarding a certain

### Game Theory: Supermodular Games 1

Game Theory: Supermodular Games 1 Christoph Schottmüller 1 License: CC Attribution ShareAlike 4.0 1 / 22 Outline 1 Introduction 2 Model 3 Revision questions and exercises 2 / 22 Motivation I several solution

### Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings

### 6.207/14.15: Networks Lecture 15: Repeated Games and Cooperation

6.207/14.15: Networks Lecture 15: Repeated Games and Cooperation Daron Acemoglu and Asu Ozdaglar MIT November 2, 2009 1 Introduction Outline The problem of cooperation Finitely-repeated prisoner s dilemma

### Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by

Introduction General equilibrium analysis looks at how multiple markets come into equilibrium simultaneously. With many markets, equilibrium analysis must take explicit account of the fact that changes

### Prizes and patents: using market signals to provide incentives for innovations

Prizes and patents: using market signals to provide incentives for innovations V.V. Chari, Mikhail Golosov, and Aleh Tsyvinski March 1, 2009 Abstract Innovative activities have public good characteristics

### Quality differentiation and entry choice between online and offline markets

Quality differentiation and entry choice between online and offline markets Yijuan Chen Australian National University Xiangting u Renmin University of China Sanxi Li Renmin University of China ANU Working

### Oligopoly: Cournot/Bertrand/Stackelberg

Outline Alternative Market Models Wirtschaftswissenschaften Humboldt Universität zu Berlin March 5, 2006 Outline 1 Introduction Introduction Alternative Market Models 2 Game, Reaction Functions, Solution

### University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly

1 Introduction University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly There are many real life examples that the participants have non-negligible influence on the market. In such markets, every

### Economics of Insurance

Economics of Insurance In this last lecture, we cover most topics of Economics of Information within a single application. Through this, you will see how the differential informational assumptions allow

### UCLA. Department of Economics Ph. D. Preliminary Exam Micro-Economic Theory

UCLA Department of Economics Ph. D. Preliminary Exam Micro-Economic Theory (SPRING 2011) Instructions: You have 4 hours for the exam Answer any 5 out of the 6 questions. All questions are weighted equally.

### Week 7 - Game Theory and Industrial Organisation

Week 7 - Game Theory and Industrial Organisation The Cournot and Bertrand models are the two basic templates for models of oligopoly; industry structures with a small number of firms. There are a number

### 2. Suppose two Cournot duopolist rms operate at zero marginal cost. The market demand is p = a bq. Firm 1 s best-response function is

Econ301 (summer 2007) Quiz 1 Date: Jul 5 07 Instructor: Helen Yang PART I: Multiple Choice (5 points each, 75 points in total) 1. In the long run, a monopolistically competitive rm (a) operates at full

### Do not open this exam until told to do so.

Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Winter 004 Final (Version ): Intermediate Microeconomics (ECON30) Solutions Final

### 2. Information Economics

2. Information Economics In General Equilibrium Theory all agents had full information regarding any variable of interest (prices, commodities, state of nature, cost function, preferences, etc.) In many

### Midterm March 2015. (a) Consumer i s budget constraint is. c i 0 12 + b i c i H 12 (1 + r)b i c i L 12 (1 + r)b i ;

Masters in Economics-UC3M Microeconomics II Midterm March 015 Exercise 1. In an economy that extends over two periods, today and tomorrow, there are two consumers, A and B; and a single perishable good,

Chapter 3 Adverse Selection Adverse selection, sometimes known as The Winner s Curse or Buyer s Remorse, is based on the observation that it can be bad news when an o er is accepted. Suppose that a buyer

### Games of Incomplete Information

Games of Incomplete Information Jonathan Levin February 00 Introduction We now start to explore models of incomplete information. Informally, a game of incomplete information is a game where the players

### 0.0.2 Pareto Efficiency (Sec. 4, Ch. 1 of text)

September 2 Exercises: Problem 2 (p. 21) Efficiency: p. 28-29: 1, 4, 5, 6 0.0.2 Pareto Efficiency (Sec. 4, Ch. 1 of text) We discuss here a notion of efficiency that is rooted in the individual preferences

### Finance 360 Problem Set #8 Solutions

Finance 360 Problem Set #8 Solutions ) Consider the game of chicken. Two players drive their cars down the center of the road directly at each other. Each player chooses SWERVE or STAY. Staying wins you

### Economics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic.

Economics II: Micro Fall 009 Exercise session 5 VŠE 1 Review Optimal production: Independent of the level of market concentration, optimal level of production is where MR = MC. Monopoly: Market with a

### Labor Economics, 14.661. Lecture 3: Education, Selection, and Signaling

Labor Economics, 14.661. Lecture 3: Education, Selection, and Signaling Daron Acemoglu MIT November 3, 2011. Daron Acemoglu (MIT) Education, Selection, and Signaling November 3, 2011. 1 / 31 Introduction

### Paid Placement: Advertising and Search on the Internet

Paid Placement: Advertising and Search on the Internet Yongmin Chen y Chuan He z August 2006 Abstract Paid placement, where advertisers bid payments to a search engine to have their products appear next

### Cournot s model of oligopoly

Cournot s model of oligopoly Single good produced by n firms Cost to firm i of producing q i units: C i (q i ), where C i is nonnegative and increasing If firms total output is Q then market price is P(Q),

### Capital Structure. Itay Goldstein. Wharton School, University of Pennsylvania

Capital Structure Itay Goldstein Wharton School, University of Pennsylvania 1 Debt and Equity There are two main types of financing: debt and equity. Consider a two-period world with dates 0 and 1. At

### Oligopoly markets: The price or quantity decisions by one rm has to directly in uence pro ts by other rms if rms are competing for customers.

15 Game Theory Varian: Chapters 8-9. The key novelty compared to the competitive (Walrasian) equilibrium analysis is that game theoretic analysis allows for the possibility that utility/pro t/payo s depend

### NONCOOPERATIVE OLIGOPOLY MODELS

NONCOOPERATIVE OLIGOPOLY MODELS 1. INTRODUCTION AND DEFINITIONS Definition 1 (Oligopoly). Noncooperative oligopoly is a market where a small number of firms act independently but are aware of each other

### ECON 40050 Game Theory Exam 1 - Answer Key. 4) All exams must be turned in by 1:45 pm. No extensions will be granted.

1 ECON 40050 Game Theory Exam 1 - Answer Key Instructions: 1) You may use a pen or pencil, a hand-held nonprogrammable calculator, and a ruler. No other materials may be at or near your desk. Books, coats,

### Optimal insurance contracts with adverse selection and comonotonic background risk

Optimal insurance contracts with adverse selection and comonotonic background risk Alary D. Bien F. TSE (LERNA) University Paris Dauphine Abstract In this note, we consider an adverse selection problem

### Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets

Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Nathaniel Hendren January, 2014 Abstract Both Akerlof (1970) and Rothschild and Stiglitz (1976) show that

### Monopolistic Competition, Oligopoly, and maybe some Game Theory

Monopolistic Competition, Oligopoly, and maybe some Game Theory Now that we have considered the extremes in market structure in the form of perfect competition and monopoly, we turn to market structures

### CHAPTER 6 MARKET STRUCTURE

CHAPTER 6 MARKET STRUCTURE CHAPTER SUMMARY This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit

### 6.207/14.15: Networks Lectures 19-21: Incomplete Information: Bayesian Nash Equilibria, Auctions and Introduction to Social Learning

6.207/14.15: Networks Lectures 19-21: Incomplete Information: Bayesian Nash Equilibria, Auctions and Introduction to Social Learning Daron Acemoglu and Asu Ozdaglar MIT November 23, 25 and 30, 2009 1 Introduction

### Oligopoly and Trade. Notes for Oxford M.Phil. International Trade. J. Peter Neary. University of Oxford. November 26, 2009

Oligopoly and Trade Notes for Oxford M.Phil. International Trade J. Peter Neary University of Oxford November 26, 2009 J.P. Neary (University of Oxford) Oligopoly and Trade November 26, 2009 1 / 11 Oligopoly

### EC508: Microeconomic Theory Midterm 3

EC508: Microeconomic Theory Midterm 3 Instructions: Neatly write your name on the top right hand side of the exam. There are 25 points possible. Your exam solution is due Tuesday Nov 24, 2015 at 5pm. You

### Microeconomics II. ELTE Faculty of Social Sciences, Department of Economics. week 9 MARKET THEORY AND MARKETING, PART 3

MICROECONOMICS II. ELTE Faculty of Social Sciences, Department of Economics Microeconomics II. MARKET THEORY AND MARKETING, PART 3 Author: Supervised by February 2011 Prepared by:, using Jack Hirshleifer,

### Market Equilibrium and Applications

Market Equilibrium and Applications I. Market Equilibrium In the previous chapter, we discussed demand and supply, both for individual consumers and firms and for markets. In this chapter, we will combine

### ECON 459 Game Theory. Lecture Notes Auctions. Luca Anderlini Spring 2015

ECON 459 Game Theory Lecture Notes Auctions Luca Anderlini Spring 2015 These notes have been used before. If you can still spot any errors or have any suggestions for improvement, please let me know. 1

### Competitive Market Equilibrium

Chapter 14 Competitive Market Equilibrium We have spent the bulk of our time up to now developing relationships between economic variables and the behavior of agents such as consumers, workers and producers.

### Chapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation

Chapter T he economy that we are studying in this book is still extremely primitive. At the present time, it has only a few productive enterprises, all of which are monopolies. This economy is certainly

### Microeconomic Theory Jamison / Kohlberg / Avery Problem Set 4 Solutions Spring 2012. (a) LEFT CENTER RIGHT TOP 8, 5 0, 0 6, 3 BOTTOM 0, 0 7, 6 6, 3

Microeconomic Theory Jamison / Kohlberg / Avery Problem Set 4 Solutions Spring 2012 1. Subgame Perfect Equilibrium and Dominance (a) LEFT CENTER RIGHT TOP 8, 5 0, 0 6, 3 BOTTOM 0, 0 7, 6 6, 3 Highlighting

### Perfect Bayesian Equilibrium

Perfect Bayesian Equilibrium When players move sequentially and have private information, some of the Bayesian Nash equilibria may involve strategies that are not sequentially rational. The problem is

### 6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games

6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games Asu Ozdaglar MIT February 4, 2009 1 Introduction Outline Decisions, utility maximization Strategic form games Best responses

### c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

### Price Dispersion. Ed Hopkins Economics University of Edinburgh Edinburgh EH8 9JY, UK. November, 2006. Abstract

Price Dispersion Ed Hopkins Economics University of Edinburgh Edinburgh EH8 9JY, UK November, 2006 Abstract A brief survey of the economics of price dispersion, written for the New Palgrave Dictionary

### Lecture 11: Oligopoly and Strategic Behavior

Lecture 11: Oligopoly and Strategic Behavior Few Firms in the Market: Each aware of others actions Each firm in the industry has market power Entry is Feasible, although incumbent(s) may try to deter it.

Advanced Microeconomics Static Bayesian games Harald Wiese University of Leipzig Harald Wiese (University of Leipzig) Advanced Microeconomics / 7 Part E. Bayesian games and mechanism design Static Bayesian

### The E ect of Trading Commissions on Analysts Forecast Bias

The E ect of Trading Commissions on Analysts Forecast Bias Anne Beyer and Ilan Guttman Stanford University September 2007 Abstract The paper models the interaction between a sell-side analyst and a risk-averse

### Lecture 28 Economics 181 International Trade

Lecture 28 Economics 181 International Trade I. Introduction to Strategic Trade Policy If much of world trade is in differentiated products (ie manufactures) characterized by increasing returns to scale,

### Table 10.1: Elimination and equilibrium. 1. Is there a dominant strategy for either of the two agents?

Chapter 0 Strategic Behaviour Exercise 0. Table 0. is the strategic form representation of a simultaneous move game in which strategies are actions. s b s b s b 3 s a 0; 3; 4; 3 s a ; 4 0; 3 3; s a 3 ;

### Optimal Auctions. Jonathan Levin 1. Winter 2009. Economics 285 Market Design. 1 These slides are based on Paul Milgrom s.

Optimal Auctions Jonathan Levin 1 Economics 285 Market Design Winter 29 1 These slides are based on Paul Milgrom s. onathan Levin Optimal Auctions Winter 29 1 / 25 Optimal Auctions What auction rules lead

### Online shopping and platform design with ex ante registration requirements

Online shopping and platform design with ex ante registration requirements Florian Morath Johannes Münster y December 5, 2014 Abstract We study platform design in online markets in which buying involves

### 9.1 Cournot and Bertrand Models with Homogeneous Products

1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,

### 7. EXTERNALITIES AND PUBLIC GOODS

7. EXTERNALITIES AND PUBLIC GOODS In many economic situations, markets are not complete. Certain actions of a rm or a consumer may a ect other economic agents welfare but are not market transactions. These

### Pricing Cloud Computing: Inelasticity and Demand Discovery

Pricing Cloud Computing: Inelasticity and Demand Discovery June 7, 203 Abstract The recent growth of the cloud computing market has convinced many businesses and policy makers that cloud-based technologies

### Learning to Play 33 Games: Neural Networks as Bounded-Rational Players Technical Appendix

Learning to Play 33 Games: Neural Networks as Bounded-Rational Players Technical Appendix Daniel Sgroi 1 Daniel J. Zizzo 2 Department of Economics School of Economics, University of Warwick University

### Oligopoly. Chapter 25

Chapter 25 Oligopoly We have thus far covered two extreme market structures perfect competition where a large number of small firms produce identical products, and monopoly where a single firm is isolated

### Extreme cases. In between cases

CHAPTER 16 OLIGOPOLY FOUR TYPES OF MARKET STRUCTURE Extreme cases PERFECTLY COMPETITION Many firms No barriers to entry Identical products MONOPOLY One firm Huge barriers to entry Unique product In between

### Moral Hazard. Itay Goldstein. Wharton School, University of Pennsylvania

Moral Hazard Itay Goldstein Wharton School, University of Pennsylvania 1 Principal-Agent Problem Basic problem in corporate finance: separation of ownership and control: o The owners of the firm are typically

### Theory of the Firm. Itay Goldstein. Wharton School, University of Pennsylvania

Theory of the Firm Itay Goldstein Wharton School, University of Pennsylvania 1 Boundaries of the Firm Firms are economic units that make decisions, produce, sell, etc. What determines the optimal size

### Central Bank Lending and Money Market Discipline

Central Bank Lending and Money Market Discipline Marie Hoerova European Central Bank Cyril Monnet FRB Philadelphia November 2010 PRELIMINARY Abstract This paper provides a theory for the joint existence

### Common sense, and the model that we have used, suggest that an increase in p means a decrease in demand, but this is not the only possibility.

Lecture 6: Income and Substitution E ects c 2009 Je rey A. Miron Outline 1. Introduction 2. The Substitution E ect 3. The Income E ect 4. The Sign of the Substitution E ect 5. The Total Change in Demand

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes

### Mikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Mikroekonomia B by Mikolaj Czajkowski Test 12 - Oligopoly Name Group MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The market structure in which

### FINAL EXAM, Econ 171, March, 2015, with answers

FINAL EXAM, Econ 171, March, 2015, with answers There are 9 questions. Answer any 8 of them. Good luck! Problem 1. (True or False) If a player has a dominant strategy in a simultaneous-move game, then

### Buyer Search Costs and Endogenous Product Design

Buyer Search Costs and Endogenous Product Design Dmitri Kuksov kuksov@haas.berkeley.edu University of California, Berkeley August, 2002 Abstract In many cases, buyers must incur search costs to find the

### 3.4. Bertrand Model Bertrand Model

atilde achado 1 In Cournot, firms decide how much to produce and the market price is set such that supply equals demand. But the sentence price is set is too imprecise. In reality how does it work exactly?

### Lecture 4: Nash equilibrium in economics: monopolies and duopolies

Lecture : Nash equilibrium in economics: monopolies and duopolies We discuss here an application of Nash equilibrium in economics, the Cournot s duopoly model. This is a very classical problem which in

### Jeux finiment répétés avec signaux semi-standards

Jeux finiment répétés avec signaux semi-standards P. Contou-Carrère 1, T. Tomala 2 CEPN-LAGA, Université Paris 13 7 décembre 2010 1 Université Paris 1, Panthéon Sorbonne 2 HEC, Paris Introduction Repeated

### Market Power, Forward Trading and Supply Function. Competition

Market Power, Forward Trading and Supply Function Competition Matías Herrera Dappe University of Maryland May, 2008 Abstract When rms can produce any level of output, strategic forward trading can enhance

### When other firms see these potential profits they will enter the industry, causing a downward shift in the demand for a given firm s product.

Characteristics of Monopolistic Competition large number of firms differentiated products (ie. substitutes) freedom of entry and exit Examples Upholstered furniture: firms; HHI* = 395 Jewelry and Silverware:

### Equilibrium: Illustrations

Draft chapter from An introduction to game theory by Martin J. Osborne. Version: 2002/7/23. Martin.Osborne@utoronto.ca http://www.economics.utoronto.ca/osborne Copyright 1995 2002 by Martin J. Osborne.

economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

### CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS

CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS LUÍS VASCONCELOS y Abstract. I analyze a simple model of hold-up with asymmetric information at the contracting stage.

Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Volatility Trading Strategies 1 Volatility Trading Strategies As previously explained, volatility is essentially

Buying shares and/or votes for corporate control Eddie Dekel and Asher Wolinsky 1 July 2010 1 Dekel is at the Department of Economics, Tel Aviv University and Northwestern University, Evanston, IL 60208,

### The Real Business Cycle Model

The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the co-movements in the uctuations

### Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

### I. Noncooperative Oligopoly

I. Noncooperative Oligopoly Oligopoly: interaction among small number of firms Conflict of interest: Each firm maximizes its own profits, but... Firm j s actions affect firm i s profits Example: price

### Information Exchanges Among Firms and their Impact on Competition*

Information Exchanges Among Firms and their Impact on Competition* Kai-Uwe Kühn Xavier Vives Institut d'anàlisi Econòmica (CSIC) Barcelona June 1994 Revised December 1994 *We are grateful to Paco Caballero,

### MONOPOLIES HOW ARE MONOPOLIES ACHIEVED?

Monopoly 18 The public, policy-makers, and economists are concerned with the power that monopoly industries have. In this chapter I discuss how monopolies behave and the case against monopolies. The case

### Market Structure: Duopoly and Oligopoly

WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting

### Examples on Monopoly and Third Degree Price Discrimination

1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market

### Answers to Chapter 8 Exercises

Answers to Chapter 8 Exercises Review and practice exercises 8.1. Bertrand in the real world. The Bertrand model of price competition suggests that, under a given set of conditions, firms make zero economic

### Backward Induction and Subgame Perfection

Backward Induction and Subgame Perfection In extensive-form games, we can have a Nash equilibrium profile of strategies where player 2 s strategy is a best response to player 1 s strategy, but where she

### Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics

Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics Dr. Markus Thomas Münter Collège des Ingénieurs Stuttgart, June, 03 SNORKELING