(REAL-WORLD APPLICATION) You are NOT required to read the oligopoly chapter in the textbook, but you already know quite a lot about it from our discussion of strategic interactions using game theory n weeks 2-3. This market structure is between monopoly and monopolistic competition, with only a nandful of firms having a high degree of market power. Let's refresh your memory with the following example. Assume that the Australian low-cost airline industry consists of two firms and their situation can be represented by the following payoff matrix. Tigar Air Low Price More Advertising Nothing 10, 10 Nothing Low Price 0, 16 2, 14 12, 4 8, 8 Jetstar 16,0 14, 2 6, 6 More Advertising 4, 12 a. Before solving the game, put yourself in the position of Jetstar and write down your action. Then independent of that, put yourself in the position of Tiger Air and write down your action. b. State all the dominated strategies in the full game, by which strategy they are dominated, and whether weakly or strictly. c. Solve the game by dominance, what is the equilibrium outcome by dominance, if any? d. What are the pure strategy Nash equilibria of this game? e. Assume that the two firms are able to cooperate with each other. Could this result in a better outcome? If yes, what is the outcome? f. Are the firms able to cooperate with each other? Why or why not? g. If the firms play this game repeatedly, what do you think may happen?
(REAL-WORLD APPLICATION) You are NOT required to read the oligopoly chapter in the textbook, but you already know quite a lot about it from our discussion of strategic interactions using game theory n weeks 2-3. This market structure is between monopoly and monopolistic competition, with only a nandful of firms having a high degree of market power. Let's refresh your memory with the following example. Assume that the Australian low-cost airline industry consists of two firms and their situation can be represented by the following payoff matrix. Tigar Air Low Price More Advertising Nothing 10, 10 Nothing Low Price 0, 16 2, 14 12, 4 8, 8 Jetstar 16,0 14, 2 6, 6 More Advertising 4, 12 a. Before solving the game, put yourself in the position of Jetstar and write down your action. Then independent of that, put yourself in the position of Tiger Air and write down your action. b. State all the dominated strategies in the full game, by which strategy they are dominated, and whether weakly or strictly. c. Solve the game by dominance, what is the equilibrium outcome by dominance, if any? d. What are the pure strategy Nash equilibria of this game? e. Assume that the two firms are able to cooperate with each other. Could this result in a better outcome? If yes, what is the outcome? f. Are the firms able to cooperate with each other? Why or why not? g. If the firms play this game repeatedly, what do you think may happen?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:(REAL-WORLD APPLICATION) You are NOT required to read the oligopoly chapter in the textbook, but
you already know quite a lot about it from our discussion of strategic interactions using game theory
in weeks 2-3. This market structure is between monopoly and monopolistic competition, with only a
handful of firms having a high degree of market power. Let's refresh your memory with the following
example. Assume that the Australian low-cost airline industry consists of two firms and their situation can
be represented by the following payoff matrix.
Tigar Air
Nothing
Low Price
More Advertising
0, 16
6, 6
Nothing
10, 10
2, 14
Jetstar
Low Price
16, 0
12, 4
More Advertising
14, 2
4, 12
8, 8
a. Before solving the game, put yourself in the position of Jetstar and write down your action. Then
independent of that, put yourself in the position of Tiger Air and write down your action.
b. State all the dominated strategies in the full game, by which strategy they are dominated, and
whether weakly or strictly.
c. Solve the game by dominance, what is the equilibrium outcome by dominance, if any?
d. What are the pure strategy Nash equilibria of this game?
e. Assume that the two firms are able to cooperate with each other. Could this result in a better
outcome? If yes, what is the outcome?
f.
Are the firms able to cooperate with each other? Why or why not?
g. If the firms play this game repeatedly, what do you think may happen?
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