I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) MonopolyFour Market TypesMarket Structure

Large similar companies competing with each.

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*

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But also companies and businesses that dont compete, but organize together.

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Can be used to explain more then just business, but lots of human interactions.

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not build build bombs bombs RUSSIA USA USA has to decide to build bombs or not, coupled with the decisions of Russia to do the same

not build bombs build bombs Very safe

dangerous

Safe

Not safe

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not build build bombs bombs RUSSIA USA

not build bombs build bombs Very safe

dangerous

Safe

Not safe

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RUSSIA not build build bombs bombs USA Russia has the same decisions as the USA, to build or not build, coupled with Americas decision

not build bombs build bombs

Very safe

Safe

Dangerous

Not safe

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RUSSIA not build build bombs bombs USA

not build bombs build bombs

Very safe

Safe

Dangerous

Not safe

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RUSSIA not build build bombs bombs USA Based on these decisions both have to make they both decide their own best decision is to build bombs

not build bombs build bombs Very safe

Very safeDangerous

SafeSafe

DangerousNot safe

Not safe

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RUSSIA not build build bombs bombs USA

not build bombs build bombs Very safe

Very safeDangerous

SafeSafe

DangerousNot safe

Not safe

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III.) OligopolyMarket StructureHard to enter/exit marketCompetitiveGoods are similarNot efficient allocation

Few(interdependence)Few substitutes but firms have price controlLarge barriers to enter / exitP > MRP > MCP > ACLR econ profits

Characteristics Perfect CompetitionMonopolistic CompetitionOligopolyMonopoly# of sellersMany (price takers)Many(a few price makers)One( no substitutes) Substitution of Product sold Only one product type from all sellersImperfect substitutes No SubstitutesBarriers to entry into marketNo barriers to enter/ exitWeak barriers to enter/ exitAlmost impossible for others to enter marketPricing vs MC and MRP =MC=MRP>MRP>MCP>MRP>MC

Efficiently Efficient with zero econ profit P = ACP = ATC and zero econ profits in LRP> ATC big LR profits

Interdependence- A decision to on how to act depends on the actions of others.III.) OligopolyWhen a small number of firms compete in a market, they are interdependent in the sense that the profit earned by each firm depends on the firms own actions and on the actions of the other firms.

Before making a decision, each firm must consider how the other firms will react to its decision and influence its profit.

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1. Cooperation- Good old fashion market forces fighting!III.) OligopolySince there is interdependence there are two main possibilities:2. Competition To come together and act as one, similar to a monopoly.

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Collusionan agreement among firms in a market about quantities to produce or prices to chargeWhen a small number of firms share a market, they can increase their profit by forming a cartel and acting like a monopoly.

III.) OligopolyJust a fancy economist word for cooperation Example:American Airlines and Air China, two airplane companies decide to come together and both raise prices for their customers.1. Cooperation

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III.) OligopolyFirms collude (collusion) and form a cartel. - is a group of firms acting together to limit output, raise price, and increase economic profit.

CartelExample:OPEC oil companies of the middle east - Cartels are illegal but they do operate in some markets.- Despite the temptation to collude, cartels tend to collapse.1. Cooperation Collusion

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Temptation to Collude

It is very temping to collude and raise the prices on everyone but

Collusion vs. Self-Interest

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EXAMPLE: Cell Phone Duopoly in Small town

EXAMPLE: Cell Phone Duopoly in Small townSmall town has 140 people in itThe product being sold: cell phone service with unlimited anytime minutes and free phoneSmall towns demand schedulethe table on the leftTwo firms: T-Mobile, V-Mobile(duopoly: an oligopoly with two firms)Each firms costs: FC = $0, MC = $100

PQ$0140513010120151102010025903080357040604550

*To understand the behavior of oligopoly, we will consider an oligopoly with just two members a duopoly.

The textbooks example (water) is simpler, because it uses zero marginal cost (as well as zero fixed cost). This is appropriate, because students will not have the instructors assistance when reading the textbook.

But in class, with the instructors guidance, a slightly more complex example is appropriate. The added complexity in this example is non-zero marginal cost. (However, fixed costs are still zero.)

Students probably think cell phones are more interesting than water, so they may like this example better than the one in the textbook.

To keep the example manageably simple, we assume unlimited anytime minutes & free cell phone. Without either of these assumptions, then the product consumers buy would not have a single well-defined price, but the price would vary based on how many minutes the customer used, or what kind of phone the customer wanted with her service plan.

Regarding the zero fixed cost assumption: This merely makes the math easier. As students will recall from Chapter 13, fixed costs are sunk costs and do not affect decisions or outcomes.

0Revenue for the whole market EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0Revenue for the whole market Cost for the whole market EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0Revenue for the whole market Cost for the whole market Profit for the whole market EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0Competitive outcome:P = MC = $10Q = 120Profit = $0Monopoly outcome:P = $40Q = 60Profit = $1,800Revenue for the whole market Cost for the whole market Profit for the whole market EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0One possible duopoly outcome:CollusionT-Mobile and V-Mobile could agree to each produce half of the monopoly output:For each firm: Q = 30, P = $40, profits = $900

EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0One possible duopoly outcome:CollusionT-Mobile and V-Mobile could agree to each produce half of the monopoly output:For each firm: Q = 30, P = $40, profits = $900

T-Mobile and V-Mobile agree to fix the market and form a: CartelThe two companies will spilt the costs and the amount sold in the town.EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0One possible duopoly outcome:

2 firms Collude: Agree to form a Cartel:For each firm: Q = 30P = $40profits = $900

EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0Duopoly outcome with this agreement: Each firm agrees to produce Q = 30, earns profit = $900.EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0Duopoly outcome with this agreement: Each firm agrees to produce Q = 30, earns profit = $900.

If T-Mobile reneges on the agreement and produces Q = 40, what happens to the market price? T-Mobiles profits? Is it in T-Mobiles interest to renege on the agreement?EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0If both firms stick to agreement, each firms profit = $900

If T-Mobile reneges on agreement and produces Q = 40:Market quantity = 70, P = $35T-Mobiles profit = 40 x ($35 10) = $1000T-Mobiles profits are higher if it reneges.EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0If both firms stick to agreement, each firms profit = $900

If T-Mobile reneges on agreement and produces Q = 40:Market quantity = 70, P = $35T-Mobiles profit = 40 x ($35 10) = $1000T-Mobiles profits are higher if it reneges.V-Mobile will conclude the same, so both firms renege, each produces Q = 40:Market quantity = 80, P = $30Each firms profit = 40 x ($30 10) = $800EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0Both companies self interest is to break their promise to each other:T-Mobiles idea: Q = 40P = $35profits = 40 x ($35 10) = $1000

EXAMPLE: Cell Phone Duopoly in Small townRecap

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

0V-Mobile will have the same idea as T-Mobile

Market outcome:Q = $80P = $30profits = 40 x ($30 10) = $800

EXAMPLE: Cell Phone Duopoly in Small townBoth want to cheat to do better, but if they do both end up worse

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

Collusion vs. Self-InterestBoth firms would be better off if both stick to the cartel agreement.

But each firm has incentive to renege on the agreement.

Lesson: It is difficult for oligopoly firms to form cartels and honor their agreements in the long run.0

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The Equilibrium for an Oligopolya situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen 0Nash equilibrium:

Our duopoly example has a Nash equilibrium in which each firm produces Q = 40.

Given that T-Mobile produces Q = 40, V-Mobiles best move is to produce Q = 40.

Given that V-Mobile produces Q = 40, T-Mobiles best move is to produce Q = 40.

*

0If both firms stick to agreement, each firms profit = $900

If T-Mobile reneges on agreement and produces Q = 40:Market quantity = 70, P = $35T-Mobiles profit = 40 x ($35 10) = $1000T-Mobiles profits are higher if it reneges.V-Mobile will conclude the same, so both firms renege, each produces Q = 40:Market quantity = 80, P = $30Each firms profit = 40 x ($30 10) = $800EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

A Comparison of Market Outcomes- oligopoly Q > monopoly Q , but < competitive Q.- oligopoly P > competitive P, but < monopoly P. 0firms in an oligopoly individually choose production to maximize profit.Things to Note:

*Our cell phone duopoly example demonstrates that the noncooperative oligopoly outcome falls in between the monopoly and competitive outcomes.

A Comparison of Market Outcomes- oligopoly Q > monopoly Q , but < competitive Q.- oligopoly P > competitive P, but < monopoly P. 0firms in an oligopoly individually choose production to maximize profit.Things to Note:Increasing output has two effects on a firms profits:

Output effect: If P > MC, selling more output raises profits.

Price effect:Raising production increases market quantity, which reduces market price and reduces profit on all units sold.- If output effect > price effect = the firm increases production. - If price effect > output effect = the firm reduces production.

*Our cell phone duopoly example demonstrates that the noncooperative oligopoly outcome falls in between the monopoly and competitive outcomes.

0As the number of firms in the market increases:- the price effect becomes smaller.- the oligopoly looks more and more like a monopolistically competitive market.- P approaches MC- the market quantity approaches the socially efficient quantity. (allocative efficient)A Comparison of Market Outcomes

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Game Theory

Game Theory - The tool used to analyze strategic behavior that recognizes mutual interdependence and takes account of the expected behavior of others.III.) OligopolyWhat Is a Game?All games involve three features:

- Rules- Strategies- Payoffs

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Game Theory - The tool used to analyze strategic behavior that recognizes mutual interdependence and takes account of the expected behavior of others.III.) Oligopoly- A game between two prisoners that shows why it is hard to cooperate, even when it would be beneficial to both players to do so.Prisoners Dilemma

*

Prisoners Dilemma ExampleThe police have caught Bonnie and Clyde, two suspected bank robbers, but only have enough evidence to imprison each for 1 year.

The police question each in separate rooms without the other knowing what is said to the other one and they are offered each the following deal:

If you confess - and implicate your partner, you go free.If you do not confess - but your partner implicates you,

you get 20 years in prison.If you both confess, - each gets 8 years in prison.

0

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Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsBonnie gets 20 years0

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes free0

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde gets 20 years0

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde goes freeClyde gets 1 yearClyde gets 20 years0

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

The Prisoners DilemmaDominant Strategy when it is a players best action regardless of the action taken by the other player.Depending on the payoffs, a player may or may not have a dominant strategy.

*

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde goes freeClyde gets 1 yearClyde gets 20 yearsConfessing is the dominant strategy for both players.08 is better than 20

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde goes freeClyde gets 1 yearClyde gets 20 yearsConfessing is the dominant strategy for both players.0Free is better than 1

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde goes freeClyde gets 1 yearClyde gets 20 yearsConfessing is the dominant strategy for both players.08 is better than 20

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde goes freeClyde gets 1 yearClyde gets 20 yearsConfessing is the dominant strategy for both players.0Free is better than 1

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

The Prisoners Dilemma

is the result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players.

- Also ignoring the effects of his or her action on the payoffs received by those other players.Dominant Strategy when it is a players best action regardless of the action taken by the other player.Depending on the payoffs, a player may or may not have a dominant strategy.Nash Equilibrium also known as a non-cooperative equilibrium,

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Prisoners Dilemma ExampleConfessRemain silentConfessRemain silentBonnies decisionClydes decisionBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsBonnie gets 1 yearBonnie goes freeClyde goes freeClyde gets 1 yearClyde gets 20 yearsNash equilibrium: both confess0Confessing is the dominant strategy for both players.

**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

Outcome: - Bonnie and Clyde both confess, each gets 8 years in prison. - Both would have been better off if both remained silent.

-But even if Bonnie and Clyde had agreed before being caught to remain silent, the logic of self-interest takes over and leads them to confess.

0The Prisoners DilemmaIn the prisoners dilemma, where mutual trust gets each one out of the dilemma, confessing is the rational choice.

**The prisoners dilemma illustrates why cooperation is so difficult even when it is in both players mutual interest.

Oligopolies as a Prisoners DilemmaWhen oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in a prisoners dilemma. 0Our earlier example:T-Mobile and V-Mobile are duopolists in Smalltown.

The cartel outcome maximizes profits: Each firm agrees to serve Q = 30 customers.

Here is the payoff matrix for this example

**The term payoff matrix is fairly standard in microeconomics, so it may be worth mentioning to your students.

However, the textbook does not use this term, so you may wish to delete it from this presentation. If so, please note that the term appears in two different places in this presentation once on this slide, and once on the bottom of the slide containing the instructions for Active Learning 3.

T-Mobile & V-Mobile in the Prisoners DilemmaQ = 30Q = 40Q = 30Q = 40T-MobileV-MobileT-Mobiles profit = $900Verizons profit = $900T-Mobiles profit = $1000T-Mobiles profit = $800T-Mobiles profit = $750Verizons profit = $750Verizons profit = $800Verizons profit = $1000Each firms dominant strategy: renege on agreement, produce Q = 40.0

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0If both firms stick to agreement, each firms profit = $900

If T-Mobile reneges on agreement and produces Q = 40:Market quantity = 70, P = $35T-Mobiles profit = 40 x ($35 10) = $1000T-Mobiles profits are higher if it reneges.V-Mobile will conclude the same, so both firms renege, each produces Q = 40:Market quantity = 80, P = $30Each firms profit = 40 x ($30 10) = $800EXAMPLE: Cell Phone Duopoly in Small town

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10.

T-Mobile & V-Mobile in the Prisoners DilemmaQ = 30Q = 40Q = 30Q = 40T-MobileV-MobileT-Mobiles profit = $900Verizons profit = $900T-Mobiles profit = $1000T-Mobiles profit = $800T-Mobiles profit = $750Verizons profit = $750Verizons profit = $800Verizons profit = $1000Each firms dominant strategy: renege on agreement, produce Q = 40.0

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The players: American Airlines and United Airlines

The choice: cut fares by 50% or leave fares alone- If both airlines cut fares, each airlines profit = $400 million- If neither airline cuts fares, each airlines profit = $600 million - If only one airline cuts its fares, its profit = $800 millionthe other airlines profits = $200 millionDraw the payoff matrix, find the Nash equilibrium.*Another Prisoners Dilemma Example:

*The title I have given this game (the fare wars game) might be too much of a hint about what happens in the Nash equilibrium. Feel free to change it to something like airfare pricing strategies.

Nash equilibrium:both firms cut faresCut faresDont cut faresCut faresDont cut faresAmerican AirlinesUnited Airlines$600 million$600 million$200 million$800 million$800 million$200 million$400 million$400 million0Another Prisoners Dilemma Example:

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The players: Airbus and Boeing

The choice: Each firm has two strategies. It can produce airplanes at the rate of:- 3 a week- 4 a week

*Another Prisoners Dilemma Example:

*The title I have given this game (the fare wars game) might be too much of a hint about what happens in the Nash equilibrium. Feel free to change it to something like airfare pricing strategies.

Dominant Strategy produce 44 a week3 a week4 a week3 a weekAirbusBoeing$360 million$360 million$300 million$400 million$400 million$300 million$320 million$320 million0Nash equilibrium:4 a weekAnother Prisoners Dilemma Example:

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Not Cheat CheatNot CheatCheatPlayer APlayer B$20,0000$200,000$-85,000$-75,000$200,000$15,000$10,0000Another Game Theory ExampleNash equilibrium:cheat

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No Dominant Strategy for either one.Diet RegularDietRegularCokePepsi$150 million$150 million$300 million$500 million$500 million$300 million$250 million$250 million0Nash equilibrium:both produce dietAnother Prisoners Dilemma Example:

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Dominant Strategy for both AdvertiseAdvertise Not AdvertiseAdvertiseNot AdvertiseCokePepsi5050-108080-1020200Another Game Theory ExampleNash equilibrium:Advertise

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No Dominant StrategyNot Cheat CheatNot CheatCheatPlayer APlayer B$00$200,000$75,000$75,000$200,000$75,000$75,0000Another Game Theory ExampleNash equilibrium:both not cheat

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Dominant Strategy for both AdvertiseAdvertise Not AdvertiseAdvertiseNot AdvertiseFirm AFirm B8090401001005070800Another Game Theory ExampleNash equilibrium:Advertise

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No Dominant StrategyAdvertise Not AdvertiseAdvertiseNot AdvertiseFirm AFirm B7968578100Another Game Theory Example

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Other Examples of the Prisoners Dilemma

Member countries try to act like a cartel, agree to limit oil production to boost prices & profits. But agreements sometimes break down when individual countries renege. 0Ad WarsTwo firms spend millions on TV ads to steal business from each other. Each firms ad cancels out the effects of the other, and both firms profits fall by the cost of the ads.OPEC Organization of Petroleum Exporting Countries

**The first example, ad wars, is not mentioned in the textbook.

An interesting note: When Congress banned cigarette advertising on television in 1971, cigarette manufacturers profits rose. Prior to the ban, cigarette companies were stuck in a Nash equilibrium in which all were spending heavily on TV ads to steal business from each other. The ban, in effect, forced cigarette manufacturers to switch to the cooperative outcome in which none advertises on TV.

The next three examples (OPEC on this slide, arms race & common resources on the next slide) are discussed in much more detail in the textbook. Instead of covering these same examples in detail in this PowerPoint, I chose to present different examples, so that students who read the book still have a reason to attend class (and vice versa).

However, its still useful to mention the books examples here, and briefly discuss them if you wish, so they will be familiar to students when students read the chapter.

Other Examples of the Prisoners Dilemma

All would be better off if everyone conserved common resources, but each persons dominant strategy is overusing the resources.0Arms race between military superpowersEach country would be better off if both disarm, but each has a dominant strategy of arming.Common resources

**The first example, ad wars, is not mentioned in the textbook.

An interesting note: When Congress banned cigarette advertising on television in 1971, cigarette manufacturers profits rose. Prior to the ban, cigarette companies were stuck in a Nash equilibrium in which all were spending heavily on TV ads to steal business from each other. The ban, in effect, forced cigarette manufacturers to switch to the cooperative outcome in which none advertises on TV.

The next three examples (OPEC on this slide, arms race & common resources on the next slide) are discussed in much more detail in the textbook. Instead of covering these same examples in detail in this PowerPoint, I chose to present different examples, so that students who read the book still have a reason to attend class (and vice versa).

However, its still useful to mention the books examples here, and briefly discuss them if you wish, so they will be familiar to students when students read the chapter.

Tit for TatPlaying the game over and over, not just onceSkipped in this PPT for now

The EndThank You

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*To understand the behavior of oligopoly, we will consider an oligopoly with just two members a duopoly.

The textbooks example (water) is simpler, because it uses zero marginal cost (as well as zero fixed cost). This is appropriate, because students will not have the instructors assistance when reading the textbook.

But in class, with the instructors guidance, a slightly more complex example is appropriate. The added complexity in this example is non-zero marginal cost. (However, fixed costs are still zero.)

Students probably think cell phones are more interesting than water, so they may like this example better than the one in the textbook.

To keep the example manageably simple, we assume unlimited anytime minutes & free cell phone. Without either of these assumptions, then the product consumers buy would not have a single well-defined price, but the price would vary based on how many minutes the customer used, or what kind of phone the customer wanted with her service plan.

Regarding the zero fixed cost assumption: This merely makes the math easier. As students will recall from Chapter 13, fixed costs are sunk costs and do not affect decisions or outcomes. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *

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*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. *Our cell phone duopoly example demonstrates that the noncooperative oligopoly outcome falls in between the monopoly and competitive outcomes. *Our cell phone duopoly example demonstrates that the noncooperative oligopoly outcome falls in between the monopoly and competitive outcomes. *

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**This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

***This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing.

***This slide is animated carefully as follows:

1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not.

2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not.

At this point, it may be worth mentioning that Bonnies best move is to confess, regardless of Clydes decision hence, confess is Bonnies dominant strategy.

3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not.

4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not.

Regardless of Bonnies decision, Clydes best move is to confess.

Both players have a dominant strategy of confessing. **The prisoners dilemma illustrates why cooperation is so difficult even when it is in both players mutual interest. **The term payoff matrix is fairly standard in microeconomics, so it may be worth mentioning to your students.

However, the textbook does not use this term, so you may wish to delete it from this presentation. If so, please note that the term appears in two different places in this presentation once on this slide, and once on the bottom of the slide containing the instructions for Active Learning 3. **

*Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes.

Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter Firms in Competitive Markets.

Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve.

It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student:

We can estimate MR at Q=60 as follows:Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. **

*The title I have given this game (the fare wars game) might be too much of a hint about what happens in the Nash equilibrium. Feel free to change it to something like airfare pricing strategies.*

*The title I have given this game (the fare wars game) might be too much of a hint about what happens in the Nash equilibrium. Feel free to change it to something like airfare pricing strategies.*

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**The first example, ad wars, is not mentioned in the textbook.

An interesting note: When Congress banned cigarette advertising on television in 1971, cigarette manufacturers profits rose. Prior to the ban, cigarette companies were stuck in a Nash equilibrium in which all were spending heavily on TV ads to steal business from each other. The ban, in effect, forced cigarette manufacturers to switch to the cooperative outcome in which none advertises on TV.

The next three examples (OPEC on this slide, arms race & common resources on the next slide) are discussed in much more detail in the textbook. Instead of covering these same examples in detail in this PowerPoint, I chose to present different examples, so that students who read the book still have a reason to attend class (and vice versa).

However, its still useful to mention the books examples here, and briefly discuss them if you wish, so they will be familiar to students when students read the chapter. **The first example, ad wars, is not mentioned in the textbook.

An interesting note: When Congress banned cigarette advertising on television in 1971, cigarette manufacturers profits rose. Prior to the ban, cigarette companies were stuck in a Nash equilibrium in which all were spending heavily on TV ads to steal business from each other. The ban, in effect, forced cigarette manufacturers to switch to the cooperative outcome in which none advertises on TV.

The next three examples (OPEC on this slide, arms race & common resources on the next slide) are discussed in much more detail in the textbook. Instead of covering these same examples in detail in this PowerPoint, I chose to present different examples, so that students who read the book still have a reason to attend class (and vice versa).

However, its still useful to mention the books examples here, and briefly discuss them if you wish, so they will be familiar to students when students read the chapter.