O

def concerned wth the markets industries partial the finis compete wth
:
working of ✗ ,
mi or
way
each other .

objectives :
improved understanding of static
dynamic problems faced by furies
✗ :

1) internally :
organizing production the
firm theory of firms
within :
.

2) externally : how
Jains compete in marketplace theory of markets
:
.

HAVARD SCHOOL .

Regressions on a cross section

industries
of :

performance =
f ( concentration barriers
,

to
entry )

structure -
Conduct _

Performance
Paradigm .

Nash
By

I
Big question of IO .

1) Is there market power ?

2) How do fairies acquire ✗ maintain market power ?

3) what are
implications of market
power ?

41 Is there a role for public policy regarding market power ?

Which concentrated
Fg :
industry is more
sum sum of square .

ML 0.2 0.2 0.2 0.2 =) CRA 0.8 HHI 0.16

higher higher market
: : :

OR
'

M2 0.1 HHI 0.28

power .

: 0.5 0.1 0.1 Chu :

0.8 .
.
.

shows concentration .

OLIGOPOLY :

1) Quantity competition .
Assume that finis compete by choosing output .

% units
if fain 1
produces YL units ✗ firm 2 produces .

total Q
supplied : Ye + Ya Market P :
Plye -1yd

Suppose that the market inverse D function is : Plast ) = 60 -

Yi

total cost ( Ys ) Ca ( Ya )
function is : CL =
y} i =
1592 -1
922 .

Given what's the output level that 's profit ?

yi , be maximizes
fun 1

then , forgiven ya , fwm 1 's

profit function is it ( ye ; ya ) =
(60 -

ye
-

ye ) yes -

yet .

fumes
"

Y reactor curve .
, '
IT
Rely e)
60
dye Lye 0
-

tgyz
=

y,
-
-
=

Yes 15
-

= =

60
Yes 15
try 92 *
-
=
_ .
.

2 furies are
competing ( same products)
↑
inverse Q relationship % Qfz ↓ .

11,25
_

' ' 7

15 45 Yes

So level solves F-qm

mining output
fwm 1 's profit *
given ya maxi
-

:
:
,

45 91
Y
-

2 =

d 'T 4
60
Lys ya dye 0
-
- -
=
= .

891 45 15
1492
-
-

y
=
,

eg fun
1 's best response to
ya is yes Rely 2) bi
1492
-

4
: : = =
.

l5yÉy
P Q 8
Y 2 =

IT
byz ; yet 160 ye yal ga 13
yes
-
-
-

=
=

TC
TR
Cournot -
Mash
eqm
( yit ; yit ) ( 13 ; 8)
'
IT 0 60
ye dyz -15 Lya
-
-
= = -
=

45
1491
*
Ya
-

=
.

Best response
of friend :
ya =
Rzlys ) =
✓
 * An egm is reached when each Jim 's output level is a best response to the other firm 's Y level .

then neither wants to deviate from its output level .

A
pair of Y levels 19% ; 9% ) is a Cournot -

Mash eqm
if
legit ) bye )
*
*
Re 92 R2 *
y, g
Which doin
= =
.
'

vé
eqm .

to
Compute a- mi eqm .

Is :

Ihay Yes
? 13 ;
yet = 8 Is = 338 .

I 2 : 128 .

⑧ 11-1 ( a) ( 60 ye /ye Yi 338 Clonslant) how combinations so that its 338

gli y ye many
- - -
= = =
.

60 2
338
Yei
a
ye ye ye ye ye
-
- =
-
=

338
2912 Mag lay
"

=) Yz
60 + 70
-

yes
'
yes 2
=
ve , , .

ye
-

ITI ↑ ↓ vice versa

ya ✗ .

the lain
tgti.rs fain 2 .

⑧ Iso -

profit curves for fain I

P = 60 -

yt
Yz Ct =
921
C2 YE
profits ↑ :

bye -1

Ysr = 15 -
Ya

4
10 = Ñ, I

1 YE = 95 -
y
4
1

12
Ye
.
5
 11-22=128
collab output P ↑ ↑ both
↓ benefit
.

IT
% .

Collusion :
there are economic incentives
for both
Janis to cooperate by lowering their output .

Ti 338 that collude said to form

"
cartel
= .

pins are a .

cartel how should

if Janis form a
,
they do it ?

91
Suppose I fuins want to Max total it
✗ divide between them .
Their
goal is to choose

cooperatively output levels

ye ✗ ya
that Max .

h-mly.si ya ) ( ye ( yr ) / /
ya ) ply I t + ) ce ca
yes
-

9.* ya
-

=
.

Yi *

*
y:

Yi Yet
"
%

Collusion the path of output pairs that maximize

fwm 's profit while the other firm at least its cnleqmñ
giving
: one

must cartel 's

1
of these output pairs maximise
joint profit .

fill with profits

'

in .
'

CHEAT
91cm = 13 yeah = 12,5 yes

8 =
42cm ( 338 , -128) ( 377 ,
110 )

5 =
9% ( 337,5 ; 132) ( 375, 112,5)

CHEAT
8. 12 42
.

%
a

Rz 1917 - -
-

yin -
-
-
- -

-1
,

1 ! >
yes
Yem Rely in)
 THE ORDER OF PLAY .

level 1st then to this choice ?

1) Jim 1 chooses output × faint responds
leader follower

which the
2) Competition is a sequential game in output levels are
strategic variables .

11-1 (
gli y
a) =
( 60 ye - -

ye /yes -

Yi = 338 / laijhain IT
hang 1 .

May R2
( 60 ) ye @
45 -91 2
338
ye ye ye
-
-
=
-
=
.

4
45
-
YI
=

7 60 9 338
4 yi 912 912
ye ; ye -1
-
-

- = .

g-

ye -475%2 =
338 .

reaction
=)
¥ 1,75 ye =
O > lhayrcio I
ni the
quantity game ,
when the
game
/order
of
7,77
-

yz =

then leader
play sequential
} Know
is
garris .

=)
yes = 13,93
May kin ptiuh @ Imax : 339,51 follower loses .

'
advantage
attack , quick Rt negative
decision
_

sloped
STACKELBERG GAME .

backward induction strategy .

Solve the case where fain Header
starts wth the
follower fin leftover
is that 1st mover ad aswell
game
.

show Stachel eqmnlhisoñ .

fill in the matrix ulh all output of

the
game
.

HW : e) Solve the case where fwm 2 leader , 1

follower

922
%
45
Ihay YI 15 voio 11-2 IT 2
ya 15
ye
t
LYE
-

= = -

g
'
1st
Iz 45 15 +
tgyz byz 0
ya 8,57 mover
gains ad
-

= - = =
≈ .

12,86
find ñz Max =) yes =

Show nth Tlzkad

2) Stackelberg eqm 1801T .
= 128,57 > Iim = 128 .

Isle" "
= 330 . 6 < IT 1cm = 338 .

2 tri I saw
8.57 - -
.

y
I
'
1 Itrc I save

*
7,77 - -

t - - - - -
-

1 !

12.86 1392
 3) fill withe matrix .

fine
yemc = yec yecheat yekad yisfollow

Jim &
y ,M ? 338 ; 128 337,5 ; 132

Yzc =
377 , 110 375 , -112,5 378,125; 1135

yzchea! 375 ; 132,03 back to ON

yifollow ,
339,5 ; 120,68

galea ! 330,6 ; 628,5T

{ the
{
P1 -4 P1
2h LPs + P2 12
IRL -11k 12-101-11-2 12
Laz -11k)
- -
-
= . =

Q2 = 24 -

LK + Ps
Pz 12 10kt
type 12-1201 -16 102 t
type
- -

= =

2 4

11 Compete Q :
find Nash eqm Caph frankly { Per
=
18 -

Ille
-

talk
lglain
TCL Pg Cle 1/2 brin P1
ITS TRL AL 24
-2-301 { dz
-
-
-

: = :
.

= 2401 -

2-3021
-

garde -12dL -4 Pa =

24-2-30 -1301
, .
Cig gain tiny
*↑

235 -

43dL
-

f. Q2 = 0

=) Q1 = 23,5 :
§ -1302 :}
de 141
{ A2
= -

8 ( RF)
bmlt A2 141
tgde
-

: :

8
 lan.hr frank gia
'

b) Compete in Price : Q1 =
24 -
LPs + Pz TCI =
0,5dL = 12 -

P1 -10,5Pa .

'
lani biiir
Az =
24 -
LK -1 PL Tcz =
0,5A 2 = 12 -

Pz + 0,5 PL . gia

11-1 =
124 -
LPs + A) PI -

( 12 -
Pe + 0,5Pa )
2%2 PI Pz
24ps -1 12 -1 Ps
{ Pz
-
= - -

Lpi Pek 24ps Ps

12Pa 12
t + -1
-

- -

= .

11-1
'
(PL ) : -4ps t Pa + 25=0 .

Pʰ =

4ᵗʰ +
ᵗÉ Nash
eqm :(
Pe ; Pz) = 18,33 ; 8,33) . (IT 1; 11-2 ) :
( 122, Fi 124ft .

Cult IRM
:
Pz =

GPs +
of giaihi .

A) Iso -

IT curve :
-

2 Psi + Pape + wipe -

0,5Pa -12 = 122,7 .

( profit)
Pz 134,7 + 2PÉ 25 P1
=) wit
-

⇐,
Pz
=

ra

P1 -

0,5 .

P :
Gig ✗a
tmuitiagtag

BERTRAND GAMES

homogenous good P 60
ye Suppose P set is
higher than Mcc
by firms their
-

ye
-

common
-
: =
. .

1 thin can
slightly lower sell Psy to all buyers
cost constant ate
lath firm 's marginal production a ↑ IT
-

. .

set The which

-
All
firms their P
simultaneously .

only common P
prevents undercutting is c.

this is the
only Nash
eqm .

Question : is there a Mash

eqm .

This is called the Bertrand Paradox .

Masheqmwth differentiated products .

-1
- - -

TWO -
PLAYER GAME
- duopoly .

's matrix
game payoff
Player B shonntst
player A 's payoff is .

B 's 2nd
L R Coordination
game
.

" "i " "i "

_
has dominant strategy
player A
.

D 10:01 Hit ) Jim B

advertise don't advertise

Tnichoidiit .
vémaigbay .

fain A advertise 10,5 15,0

Vietget Air
don't advertise 6,8 10,2
-

§ Milo Litt
player B- doesn't have dominant
strategy .

É -

U
I
3,9
R
1,8
¥9 15,2 8118
player A

D 0,0 2,1

THE PRISONER 'S DILEMMA .

g
Clyde what
playarewehkelytoseeforlhis game ?
C S : silence .

S -5 ; -5 -30 ; -1 C :

confess .

Bonnie
C -1; -

so -

to ; -

to

friend
wispy Sweet
Khica 'd how
chieiik.to?r--NashegmlguiennhatAdoes,Bchooseslhe best /
'

Crispy -5, -5 Milo

friml
Sweet 10 /
to -5,5
 SEQUENTIAL GAME EG .

Player B
L R
U 3,19 Li 8

Player A
p 0; 0 2; I
 " • " * F- ✗ 1 I
is Seis " " " " "
ngimh 6
cty 4
cty cloak bi
'
" to do
'

w so
"
" " : :
'

St Sit Ss
Ck 4 :
-1 + Sa &
cty 5 di
l titi
concentration rate
St
,
tip tug 4dg oui
ngihlñbnh ?

tog doahlhungiuh :
St : 50 dis
* :
"
% =
""

Toij market
power :
Ck4 : Wl t we t Ws + we a. a. µ , µ , ,
,, , , , auto

Wn =
Sn

ST

y Se -14 645% 0,625

= =

g, too %
0/625
0,7
0,85
0,7
0,85

2 the '

so Herfndahl -
Hirschman IHHI)
F- ✗ 2
Ing ah 3dg ST Nato
-

: =

Gianni the;
fair ctyi.trgnjah.la Si
duty Moto
Icty 30 do 51
'

HHI Ewi
'
Wi toooo ✗ we
§ ; w<
¥
=
=
=
, .
= =

g,
.

"
bra .tn: sina.in
try ngoik
'

HHI to ; toooo ) HHI ? %

' '

ma ma ws = .

toirta.itdy.bg ngainh f. + f. ¥)
Mai HAI : toooo Chu ? HAI -
-
toooo ✗
+

0 was
cty .