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by: May Thu

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# ECO211 Monopoly, Nash Equilibrium, Game Theory ECON 221

Marketplace > University of Miami > Economcs > ECON 221 > ECO211 Monopoly Nash Equilibrium Game Theory
May Thu
UM
GPA 3.8

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These notes cover this week's lecture about monopoly, Nash equilibrium, and game theory with specific explanations and graphs.
COURSE
Economic Principles and Problems 211
PROF.
David Spigelman
TYPE
Class Notes
PAGES
4
WORDS
CONCEPTS
Nash equilibrium, Microeconomics, monopoly, Game Thoery
KARMA
25 ?

## Popular in Economcs

This 4 page Class Notes was uploaded by May Thu on Friday March 18, 2016. The Class Notes belongs to ECON 221 at University of Miami taught by David Spigelman in Spring 2016. Since its upload, it has received 64 views. For similar materials see Economic Principles and Problems 211 in Economcs at University of Miami.

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Date Created: 03/18/16
Thursday, March 17, 2016 ECO211 Monopoly Continued and Nash Equilibrium, Game Theory - There is a a welfare loss from monopoly -There won’t be a welfare loss if the supply or demand is perfectly inelastic, but that’s impossible Monopoly is encouraged for research and development, technology and innovations *Possible Test question: What is the type of ﬁrm that is set by regulating output?* - high ﬁxed cost monopoly *Why are high ﬁxed cost natural monopolies regulated?* - to increase welfare 2 ways to optimally regulate High-Fixed Cost (HFC) Monopoly 1)Produce at the point where AC intersects the Demand curve 2)Produce at the point where Demand curve intersects the MC curve •producing at this point(2) will create a loss because it’s below the AC curve •ﬁrms must be subsidized to make up for the loss (shaded area) of proﬁt when operating at point 2 1 Thursday, March 17, 2016 - High ﬁxed cost monopoly is regulated to increase welfare - Price Discriminating Monopoly • Rules for Price Discriminating Monopoly 1. must have monopoly power 2. must be able to segment market (different demand characteristics) (ie: geographical, age) 3. must be able to prevent resales - Nash Equilibrium - results when players optimize by only looking out for themselves - Cournot Equilibrium: if players choose their level of output - Dominant Strategy: strategy that is best regardless of what the other player does 2 Thursday, March 17, 2016 Game Theory and Nash Equilibrium Example Does Clyde have a dominant strategy? 1) Look at the ﬁrst column of the table for Clyde (upper left square, lower left square) • If Clyde confesses and Bonnie confesses: (Clyde 6 years) • If Clyde doesn’t confess and Bonnie confesses: (Clyde 7 years) • If Clyde confesses he gets 6 years in prison, if he doesn’t he gets 7 years. Clyde will confess because 6 years is better than 7 years. 2) Look at the ﬁrst column of the table (upper right square, lower right square) • If Clyde confesses and Bonnie doesn’t confess: (Clyde 4 years) • If Clyde doesn’t confess and Bonnie doesn’t confess: (Clyde 5 years) • If Clyde confesses even when bonnie doesn’t, he gets 4 years in prison. If he doesn’t confess, he gets 5 years. Clyde will confess because 4 years is better than 5 years. * Clyde is better off if he confesses therefore the dominant strategy for him is to confess* Does Bonnie have a dominant strategy? 1) Look at the ﬁrst row for Bonnie (upper left square, upper right square) If Bonnie confesses and Clyde confesses: (Bonnie 10 years) • 3 Thursday, March 17, 2016 • If Bonnie doesn’t confess and Clyde confesses: (Bonnie 11 years) • If Bonnie confesses, she gets 10 years instead of 11. Bonnie will confess because 10 years is better than 11 years. 2) Look at the second row for Bonnie (lower left square, lower right square) • If Bonnie confesses and Clyde doesn’t confess: (Bonnie 6 years) • If Bonnie doesn’t confess and Clyde doesn’t confess: (Bonnie 8 years) • If Bonnie confesses, she gets 6 years instead of 8 years. Bonnie will confess because 6 years is better than 8 years. * Bonnie is better off if he confesses therefore the dominant strategy for her is to confess.* *Nash Equilibrium is at the upper left square because both will confess.* *The lower right square is the idle choice, but they can’t get there because they can’t collude.* 4

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