Lecture Economics (19/e) - Chapter 11-Appendix: Monopolistic competition and oligopoly

After completing this chapter, students will be able to: Relate why the demand curve of an oligopolist may be kinked, compare the incentives and obstacles to collusion among oligopolists, contrast the potential positive and negative effects of advertising, utilize additional game-theory terminology and applications.

Oligopoly

• Game theory explains mutual

interdependence and strategic

behavior

• Collusion is beneficial to participants

• A one-time game

• A simultaneous game

• A positive sum game

• A firm’s dominant strategy

• Nash Equilibrium

• Outcome from which neither firm wants to deviate

• Current strategy viewed as optimal

• Stable and persistent outcome

Dramco’s Price Strategy

$11

$11

$5

$20

$17

$20

International

National

•2 competitors

•2 price strategies

•Each strategy

has a payoff

matrix

•Independent

actions stimulate

• Credible Threats

believable by the other firm

• Empty Threats

• Game that recurs

• May cooperate and not compete

strongly

• Rival reciprocates

• Examples: Pepsi and Coke, Walmart and Target, Boeing and Airbus

ThirstQ’s Advertising Strategy

$10

$10

$8

$16

$12

$12

$16

$8

Promo Budget

Normal Budget

ThirstQ’s Advertising Strategy

$11

$11

$10

$14

$13

$13

$15

$10

Promo Budget

Normal Budget

• The firm that moves first

• May be better prepared

• May preempt entry of rival

• Rival must respond

Big Box strategies

-$5 -$5

$0

$12

$0

$0

$12

$0

Build

Don’t build First­Mover Advantages