Hotelling’s Law;

Mixed Strategy
Games
FRIDAY’S PRESENTATIONS
But First…Price-Fixing…
ANTI-COMPETITIVE BEHAVIOR
 Price-Fixing and Collusion

Pilgrim’s Pride Corporation, a major broiler chicken producer based in Greely, Colorado pleaded guilty
to conspiracy to fix prices and rig bids for broiler chicken products.
People thought that Goldman Sachs, Glencore, and JPMorgan Chase faked having aluminum shortages to
increase demand and increase up prices.
Tuna: Christopher Lischewki was the CEO of Bumble Bee. He was sentenced to serve 40 months in jail
and to pay a $100,000 criminal fine because he had a leadership role in a three-year antitrust conspiracy
to fix prices of canned tuna. The conspiracy affected over $600 million dollars of canned tuna sales.
Bumble Bee, StarKist Co., and a couple other executives were charged in the investigation as well
British Airways and Virgin Atlantic
Apple price fixing ebooks. Amazon
YouTubers colluded on crypto currency
Archer Daniels Midland fixed price of lysine with competitors
Pharmaceutical companies price fixing generic drugs
Socony-Vacuum Oil Company, Inc. and several other midwestern oil corporations met in 1935 and
verbally agreed to partition the spot market for gasoline so that each oil company would be linked with an
independent refinery.


In 2008, three screen manufacturing companies set a price together, on goods which would be sold to
important US tech companies. The price of the screens had been plummeting, and so the companies
decided that they would slow it down by colluding. This meant that they were subject to a massive fine by
the Department of Justice, which totaled to 585 million dollars for the two companies and executives
 Hotelling’s Law
2 ice cream vendors selling identical products have to decide where to locate
along a beach.
Their goal is to maximize market share and thus profits. Potential ice cream
eaters are evenly distributed along the beach.
Customers will always choose the nearer shop as it is disadvantageous to travel to
the farther vendor.
Where should each locate their pushcart? What is the Nash Equilibrium

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Beach
Application of Hotelling’s Law

 The beach is a metaphor for product differentiation

 Less variety for the consumer
 Target & Walmart
 Lowe’s & Home Depot
 CVS & Walgreens
 McDonald’s and Burger King
 Whole Foods and Trader Joe’s
 Other examples?
Applications of Hotelling’s Law

 Voting and Politics

Suppose that the positions of 2 political candidates on all issues can be ranked on a scale of
conservative to liberal. The more conservative a candidate, the less the quantity of public
goods she will supply. That is, more conservative = smaller government. Potential voters are
evenly distributed along the spectrum.

Where should each candidate position themselves?

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Liberal Political Spectrum
Conservative
Mixed
Strategy 


Battle of the Sexes
Soccer Penalty Kick

Games .
 Game of Chicken
Mixed Strategy
Assumptions:
1. Jose & Ella can’t  A mixed strategy is a probability
communicate.
distribution over two or more
2. They way to strategies.
maximize happiness aka
Utility.  That is, the players choose
3. Utility is measured as randomly among their options in
a number in which the equilibrium.
higher the number, the
higher the happiness.
Solving the Mixed Strategy
Game
Jose prefers to go to the movies and Ella prefers to go to
the ball game, but they both like doing things together. If
they go their separate ways, both are miserable.
 Do they have a Dominant Strategy?

SOLVE for the Mixed Strategy that would Maximize

Payoffs. That is calculate the percentage of time each player
would randomly play each choice in order to maximize
expected payoffs.

 Mixed Strategy – Players use a probabilistic mix of each

of their choices.
 Jose

Jose
Ball Game p Movies 1-p

Ball Game
q

Ella

Movies
1-q
Finding the probabilities
Jose will randomize and base his randomization on his beliefs about what Ella
will do.
His best response is to randomize in such a way that he is indifferent between the
Ball Game or Movies such that UBJ = UMJ which depend on his beliefs about Ella’s
choices.
 q=Jose’s belief about the probability Ella will pick Ball Game.
 1-q= Jose’s belief about the probability Ella will pick Movies.
U
B
J
= 5q + 0(1-q)
UMJ= 1q + 10(1-q)

5q + 0(1-q) = 1q + 10(1-q)
q=5/7
1-q = ?
Do for Ella
UBE= 10p + 1(1-p)
UME= 0p + 5(1-p)
p = 2/7
1-p = ?
 Jose

Expected Values for Jose & Ella

Jose
Ball Game 2/7 Movies 5/7

Ball Game
5/7

Ella

Movies
2/7
Expected Values

Expected Utility (Jose) = 5*10/49 + 1*25/49 + 0*4/49 + 10*10/49 =

175/49 = 3.57
Expected Utility (Ella) = 10*10/49 + 1*25/49 + 0*4/49 + 5*10/49 =
175/49 = 3.57
Paper Presentations
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