SLIDE 1 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Page 1
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Session 16: Wrap up
1. ➥ Strategic commitment (from Session 15).
- 2. Entry as a congestion game.
- 3. Wrap up.
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An entry deterrance game
Part of Exercise 15.1
The figure below illustrates the following strategic situation involving Sony, which currently has a monopoly in the Discman, and JVC, which may enter the market. JVC Sony Enter ( 5 , -2 )
High
( 6 , 6 )
Low
Sony Stay out ( 12 , 0 )
High
( 8 , 0 )
Low
SLIDE 2 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Page 2
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Suppose Sony is making plans to build a new plant
Sony JVC Large plant Sony Enter ( 4 , -2 )
High
( 3 , 6 )
Low
Sony Stay out ( 11 , 0 )
High
( 5 , 0 )
Low
JVC Small plant Sony Enter ( 5 , -2 )
High
( 6 , 6 )
Low
Sony Stay out ( 12 , 0 )
High
( 8 , 0 )
Low
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Pricing game from Session 12
Firm B Low Med High Low 19 20 18 25 10 33 Firm A Med 24 23 28 31 22 38 High 30 15 40 27 34 42
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P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Page 3
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Suppose that Firm B can commit to its price first
Firm B Firm A
( 24 , 23 )
Low ( 19 , 20 ) Low ( 24 , 23 ) Med
( 30 , 15 )
High
( 28 , 31 ) Firm A
Med ( 18 , 25 ) Low
( 28 , 31 )
Med ( 40 , 27 ) High
( 34 , 42 ) Firm A
High
( 10 , 33 )
Low ( 22 , 38 ) Med ( 34 , 42 ) High
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Summary: What are Stackelberg games?
From these ingredients: two players: 1 and 2 player 1 chooses action A1 and player 2 chooses action A2 We can have three different strategic situations, depending on the timing: Simultaneous moves Sequential game in which player 1 moves first Sequential game in which player 2 moves first Such sequential games are called Stackelberg games. Player who moves first is the leader; other player is the follower.
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P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Page 4
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Summary: What about Stackelberg games?
They let us see how timing and strategic commmitment matter. Who is behaving differently in Stackelberg vs. Nash? Follower? Leader?
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Preemptive investments
Your firm is first to develop the next generation memory chip. You thus will be the first firm to install capacity. What are you thinking?
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Wrap up on strategic commitment
When you have the chance to commit, think about:
- 1. In what way you want to influence the other players’ actions.
- 2. How you can achieve this.
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Session 16: Wrap up
1. ✓ Strategic commitment (from Session 15). 2. ➥ Entry as a congestion game.
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Congestion games
What do these situations have in common?
- 1. Entering a market.
- 2. Going to study at the INSEAD library.
- 3. Entering a random draw for free tickets to a concert.
- 4. Deciding whether to focus on the finance job market.
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Congestion games — simple version
Simplification: “How many” not “who”. Each player cares about how many other players are in, but not on their identities.
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Example
Value of being in, excluding entry cost
Session 16: Wrap up
1. ✓ Strategic commitment (from Session 15). 2. ✓ Entry as a congestion game. 3. ➥ Wrap up.
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What is this course about?
Consumers
Firms Markets
Prices Quantities
Our focus is on Firms. And the topics differ according to how we treat firms.
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Main structure
(Sessions 1–6)
(Firms’ decisions & equilibrium)
Firms are price-takers (Perfect competition) Firms have market power (Imperfect competition)
(Sessions 7–11)
Firms’ decisions
(Sessions 12–15)
Equilibrium
In each case: fixed firms in the market, then entry/exit
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Imperfect competition
Perfect competition
Fixed firms in market
MC = MR = P ⇓ s i (P) Firms’ decisions s(P) = d(P) Equili- brium
Entry & exit
VΠ > FC? P > AC u ? Firms’ decisions
Each active firm has economic profit ≥ 0 . No potential entrant could make economic profit > 0 by entering.
Equilibrium
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Perfect competition
Imperfect competition
Fixed firms in market
MC = MR ⇓ P, Q Firms’ decisions Nash eqm. Equili- brium
Entry & exit
VΠ > FC? Firms’ decisions
Each active firm has economic profit ≥ 0 . No potential entrant could make economic profit > 0 by entering.
Equilibrium
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More economics by economists
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(P3 core)
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(P4)
Applied, but for those who find rigorous modeling useful.
- Economics and Management of Developing Countries
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Title says it all.
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More microeconomics-related courses
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More pricing!
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Much more applied but similar frameworks as in P&M.
Incomplete information, behavioral biases, commitment problems
