Paper Name: Intermediate Microeconomics – II

Paper Code: BNHRCC410T

B.A. 4th Semester
Srijita Ghosh
Assistant Professor
Department of Economics
St. Xavier’s University, Kolkata

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 Course Outline
1. Market Structure and Game Theory: Monopolistic competition; Game theory and
oligopoly.

2. General Equilibrium, Efficiency and Welfare : Equilibrium and efficiency under

pure exchange and production; Overall efficiency and welfare economics,
Fundamental theorems of Welfare Economics.

3. Market Failure : Externality and solution – Pigouvian taxation and subsidy, Coase
solution; Public goods and markets with asymmetric information.

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 Reading / Reference Lists
1. Hal R. Varian, Intermediate Microeconomics, a Modern Approach ,8thedition, W.W. Norton and
Company, Affiliated East-West Press (India), 2010.
2. C. Snyder and W. Nicholson, Fundamentals of Microeconomics , CengageLearning(India), 2010.
3. David M. Kreps, A Course in Microeconomics, Princeton University Press, 1992
4. Jean Tirole, Theory of Industrial Organization, MITPress, 1988.
5. Robert Gibbons, A Primer in Game Theory, Princeton University Press, 1992.
6. Erik Rasmusen, Games and Information: An Introduction to Game Theory, Basil Blackwell, 1999.
7. K.Binmore, Fun and Games: A Text on Game Theory, Oxford University Press, 1991.
8. Anindya Sen, Microeconomics:Theory and Applications, Oxford University Press, 1999.
9. Pindyck and Rubinfeld, Microeconomics, 8th Edition, Pearson Education, 2017
10. Hal R. Varian, Microeconomic Analysis, 3rd edition, W.W. Norton and Company, 1992

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 Market Structure
and
Game Theory
(Part 1)

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 Types of Characteristics of the Market
Market No. of Firms Nature of the Entry Barriers
Product Produced
Perfectly Many Identical products Free entry
Competitive
Monopoly One Identical products Barriers to entry
Oligopoly Few Identical products Barriers to entry
(Homogeneous
products oligopoly)
Few Differentiated products Barriers to entry
(Differentiated
products oligopoly)
Monopolistic Many Differentiated products Free entry
competition

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 Oligopoly Market Structure

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 Oligopoly Market- Characteristics

• Few no. of firms

• Identical/ Differentiated products

• Barriers to entry- makes it difficult or impossible for new firms to enter.

Managing an oligopolistic firm is complicated because pricing, output,

advertising, and investment decisions involve important strategic
considerations.

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 Oligopoly Market

• In Oligopolistic market structure, there are small number of firms.

• Here, we are concerned with the strategic interactions that arise in an

industry.

• For simplicity, we will usually restrict ourselves to the case of two

firms; this is called a situation of duopoly.

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 Oligopoly Market

• In homogeneous products oligopoly markets, a small number of firms sell

products that have virtually the same attributes, performance characteristics,
image, and (ultimately) price.

• In differentiated products oligopoly markets, a small number of firms sell

products that are substitutes for each other but also differ from each other in
significant ways, including attributes, performance, packaging, and image.

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 Oligopoly Market with Identical Products

• Here we consider the case of two firms- Duopoly.

Choosing a Strategy

• If there are two firms in the market and they are producing a
homogeneous product, then there are four variables of interest.

• We consider three types of game here.

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 Oligopoly Market

They are-

1. Simultaneous game

2. Sequential game

3. Cooperative game

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 Simultaneous game

• When one firm makes its choices regarding price or quantity, it doesn’t
know the choices made by the other firm.

• In this case, it has to guess about the other firm’s choice in order to
make a sensible decision itself.

• Firms could each simultaneously choose prices or each simultaneously

choose quantities.
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 Sequential game

• When one firm decides about its choices for prices and quantities it
may already know the choices made by the other firm.

• If one firm gets to set its price before the other firm, we call it the
price leader and the other firm the price follower.

• Similarly, one firm may get to choose its quantity first, in which case it
is a quantity leader and the other is a quantity follower.

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 Cooperative game

• Two firms can jointly agree to set prices and quantities that
maximize the sum of their profits instead of competing
against each other.

• They can collude.

• This sort of collusion is called a cooperative game.

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