Oligolpoly and Game Theory: Questions

1. For the payoff matrices below, find the NE and check for dominant strategies.

A.

Column
Left Right
Up 10,14 9,16
Row
Down 11,12 12, 14

NE: (Down, Right). DS: Down for Row and Right for Column.
B.

Column
Left Right
Up 15,20 6,16
Row
Down 11,12 12, 14
NE: (Up, Left) and (Down, Right). DS: 0.

C.

Column
Left Right
Up 2,2 1,3
Row
Down 3,1 1,1
NE: (Up, Right), (Down, Left), (Down, Right). DS: 0

For all the following questions, the market structure is an oligopoly where the market demand is
given by P=50−.5 Q M . Firms always have 0 fixed costs.

2. Suppose there are two firms competing in quantities, find the best response curves, NE
quantities, market price and profit. Assume both have MC=2.

BR1 = 48 – 0.5Q1, BR2 = 48 – 0.5Q2. Q1 = Q2 = 32, P = 18, π = 512

3. Suppose there are two firms competing in prices, find the NE prices and profit. Assume both
have MC=2.

P = MC = 2, Q = 96, π = 0
 4. Suppose the market structure is such that there is one dominant firm setting prices and the
fringe firms supply at that price according to their supply curve which is P=25+ QF .
a. Find the effective demand curve for the dominant firm. Does it have a kink? Find the
marginal revenue.

For price above the point where supply of fringe firms and market demand intersect (P’,Q’), there
will be no demand for the dominant firm. And below P=25, fringe firms do not supply, so there will
be the kink on effective demand curve at P=25. So effective demand for P<25, is same as the market
demand. We have to find the effective demand for 25 ≤ P ≤ P’ = 125/3. In this range, effective
demand is the difference between market demand (100-2P) and fringe firm supply (P-25), which is
Qe = 125-3P or P = 125/3 – Qe/3. Therefore, effective demand:

{
125
0 , P>
3
Qe = 125
125−3 P , ≥ P>25
3
100−2 P , P ≤ 25
The MR curve will be (125/3) – (2Qe/3) for 0<Q<50 and at Q=50, it will be a vertical line as shown
below.

b. Find the market price set by the dominant firm if MC =2. Find the total market
demand at that price and supply by fringe firms and by dominant firm.

MC=2 line will intersect the vertical portion of MR curve so Q e = 50, P = 50 – 0.5x50 = 25. Supply by
fringe firms at that price is zero, so total demand also equals 50.