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16 Cards in this Set

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Cartels and Collusion
Cartel: Formal agreement between producers that determines how much output each is allowed to produce.
Illegal in US
EX> OPEC (prisoners dilemma)

Collusion: In oligopolies it is beneficial to collude (cooperate to raise profits) to determine how much to produce.
Game Theory
Examines the interdependence of players decisions.
Outcomes depend not only on your decisions but the people around you.
EX> military, politics, econ, math
Dominant Strategy
Regardless of what the other player chooses I will always choose the same strategy.
Prisoner's Dilemma
1. Each player has an incentive regardless of what the other player does to cheat (playing red when you've agreed to play black)
2. When both players cheat, both are worse off then if neither had cheated.
Nash Equilibrium
Given the other players actions, I will not deviate from my strategy.
EX> you choose red, I will choose red.

Different from dominant strategy: With Nash you are given the other persons action, not Dominate Strategy
Two-Part Pricing
1. Consumers charged a fixed fee.
2. Per-unit charge for each unit purchased.
3. Fixed Fee is pure profit. All expenses are covered in per-unit charge, so extract all CS.
Oligopoly
A common market structure.

An industry with only a small number of producers.

Imperfect Competition
HHI
Measure of industry concentration.
Square of market shares.
Used by Department of Justice to determine whether firms should merge or not.
EX> 3 Firms > 60% 25% 15%
HHI=(60)^2+(25)^2+(15)^2
HHI=4450

1,800 > HHI > 1,000 - Mildly competitive
HHI < 1,000 - Highly competitive (more towards perfectly competitive)
HHI > 1,800 - Oligopoly (Hard to merge)
*Highest it can be is 10,000*
Duopoly
Oligopoly with 2 firms.
Rules of Game Theory
1. Two players with two decisions
2. Max profit is the goal
3. Simultaneous Decisions
4. Common knowledge
Overcoming Prisoners Dilemma
1. Repeated Interaction: Tit for Tat: player 2 plays what player 1 played in the previous round repetitively. Used to punish people who deviate but gives them a chance to go back to the agreement.
2. Grim Trigger: If you deviate ONE time I will never go back to the agreement. Severe!!
Cooperative Equilibrium
Choosing the option to make the most money for each player intentionally (Illegal - collusion).
Profit-Maximizing Mark-up
When price=MC the mark-up factor is 1 (PC Markets). There is no mark-up in prices.
Mark-up Factor
Can help decide between PC market and Monopoly.
Will never be less than 1.
Price Discrimination Rule
Comparing two groups whom are charged different prices to see whose demand is more elastic (price sensitive).
Payoff / Payoff Matrix
Payoff: The reward received by a player in a game, such as the profit earned by an oligopolist.

Payoff Matrix: Shows how the payoff to each of the participants in a two player game depends on the actions of both. Helps analyze interdependence.