Economic Applications of Game Theory

8/4/2019 Economic Applications of Game Theory

1/19

Presented By:

Karthik Gompa

Saurabh Singh

Puneet Singh

Dataram Prajapati

Samar Pandey

Adarsh Pandey


2/19

17-04-2012GAME THEORY AND CARTELIZATION

2

Study of rational behavior in situationsinvolving interdependence. (McMillan,

economist)

A formal way to analyze interactions among agroup of rational agents who behavestrategically (Dutta, economist)

In war the will is directed at an animate objectthat reacts (Karl von Clausewitz, general)


3/19


3

COOPERATIVE

When players can negotiate a bindingcontract to play joint strategies

NON COOPERATIVE

When the game is not cooperative it issaid to be non cooperative


4/19


4

Prisoner B

stays silent(cooperates)

Prisoner B

confesses(defects)

Prisoner Astays silent

(cooperates)

Each serves 1month

Prisoner A: 1yearPrisoner B:

goes free

Prisoner Aconfesses(defects)

Prisoner A:goes freePrisoner B: 1year

Each serves 3months

A classic approach in solving a game


5/19


5

Nash equilibriumFor every game, there exists at least one set of

strategies, one for each player, such that each

players strategy is best for her given that all other

players are playing their equilibrium strategies

key conditionNo incentive to unilaterally change my strategyThe strategies employed can be mixed strategies

A byproduct theorem by Nash in his proof usingTopology

For every human head, there exists at least one

swirl.


6/19


6

A powerful tool, BUToutcomes are very sensitive to the protocolsthere may be many equilibriawhen using it to model real life cases there may be manydifferent options - a model may be devised to fitalmost any fact Saloner 1991analysis works backwards - instead of theory tohypotheses to empirical data - empirical data to theorysometimes players commonsense tells them what to do

despite multiple equilibriathe requirement that firms do as expected (in rollback,for instance)where do the protocols come from, how do they change?GE and Westinghouse found new protocols which helpedthem to collude - why then and not before?


7/19


7

An overall judgment?Some very useful insights

Nash equilibrium conceptcollusion; the price matching resultentry deterrence; the importance of credibilityCournot and Bertrand provide determinate solutions foroligopoly

The degree of complexity involved may limit its usefulness as

a predictive tool

The degree of rationality which has to be assumed on the partof players is uncomfortable


8/19

The study of oligopolies (industriescontaining only a few firms)

The study of cartels, e.g., OPEC

The study of externalities, e.g., using acommon resource such as a fishery

The study of military strategies

The study of international negotiations

Bargaining

17-04-2012

8

GAME THEORY AND CARTELIZATION


9/19

17-04-2012

9


Cartelization is a formal agreement among firmsin an industry.

Cartel members may agree on such matters as

prices, total industry output, market shares,allocation of customers, allocation of territories,bid-rigging establishment of common salesagencies, and the division of profits or combinationof these.

People of same trade seldom meet together evenfor merriment and diversion, but the conversationend in a conspiracy against public, or in somecontrivance to raise prices.


10/19

Producers in a cartel explicitly agree tocooperate in setting prices and output

Typically only a subset of producers arepart of the cartel and others benefitfrom the choices of the cartel

If demand is sufficiently inelastic and

cartel is enforceable, prices may bewell above competitive levels

Most fail to maintain high prices


10

17-04-2012


11/19

Examples ofsuccessful

cartelsOPEC

InternationalBauxite

Association

MercurioEuropeo

Examples ofunsuccessful

cartelsCopper

Tin

Coffee

Tea

Cocoa


11

17-04-2012


12/19

To be successful:

Total demand must be fairlyinelastic

Either the cartel must controlnearly all of the worlds supply or

the supply of non-cartelproducers must also be inelastic


12

17-04-2012


13/19

Can control the price.

Limiting production

Creating barriers for new entrants

Promotion of technical, scientific

and economic development

Existence of dominance

17-04-2012

13



14/19

1. Stable cartel organization must beformed price and quantity settled on

and adhered to

Members have different costs,assessments of demand and objectives

Tempting to cheat by lowering price to

capture larger market share


14

17-04-2012


15/19

2. Potential for monopoly power

Even if cartel can succeed, there mightbe little room to raise prices if it faceshighly elastic demand

If potential gains from cooperation arelarge, cartel members will have more

incentive to make the cartel work

Low potential = low incentive to workout organizational problems


15

17-04-2012


16/19

UNPRECEDENTED RISE of food prices across Asian countries

There were thoughts of creating a cartel of Organisation of RiceExporting Country (OREC) same on the line of Organisation of

Petroleum Exporting Countries (OPEC).

The frustration of Asian countries is justified as despiteaccounting for more than 60% to 70 % of world rice production

Formation of cartel of rice exporting countries will help themember countries to earn more foreign exchange, as cartel willbe able to keep the prices at high level. Good foreign exchangeearnings from rice export will improve the economic status ofthese countries, as capital formation in agriculture will increasein these countries.

17-04-2012

16



17/19

Thailand and Vietnam itself produce half of the rice of world.

America has seldom bothered of oil price inflation of world, as itis able to produce more than 40 per cent of its domestic oilrequirement. But the oil reserves data of world shows that by2012 US oil reserve field of United States of America(USA) maydry and hence the activities of ethanol production by divertingcorn and soybean has picked up in USA.

As one can stop driving his car for months if price of oil crosses

US dollar 200.00 ,but it will be very difficult to survive few dayswithout having staple food like rice or wheat. Even all junk foodsare having a mix of these rice or wheat in one form or the other.

cartelisation in rice will benefit only few and will trouble entireworld

17-04-2012

17



18/19

Cartels are considered the most pernicious ofanti-competitive practices. In manyjurisdictions cartelisation or collusion is

treated as a criminal activity under the law.While companies have paid heavy fines,senior executives have even undergone jailsentences. Besides, cartels do not onlyrelate to price fixing but also division ofbusiness, territory, restriction on output,etc. They can create barriers to new

entrants and non members to the cartelagreement.

17-04-2012

18



19/19

17-04-2012

19


Economic Applications of Game Theory

Documents

Transcript of Economic Applications of Game Theory