Session 16: Wrap up - INSEAD · Session 16 • Wrap up Slide 3. Pricing game from Session 12 Firm B...
Transcript of Session 16: Wrap up - INSEAD · Session 16 • Wrap up Slide 3. Pricing game from Session 12 Firm B...
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Session 16: Wrap up
1.➥ Strategic commitment (from Session 15).
2. Entry as a congestion game.
3. Wrap up.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 1
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An entry deterrance game Part ofExercise 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 )
Highoutput
( 6 , 6 )
Lowoutput
Sony
Stay out
( 12 , 0 )
Highoutput
( 8 , 0 )
Lowoutput
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 2
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Suppose Sony is making plans to build a new plant
Sony
JVC
Large plant
Sony
Enter
( 4 , -2 )
Highoutput
( 3 , 6 )
Lowoutput
Sony
Stay out
( 11 , 0 )
Highoutput
( 5 , 0 )
Lowoutput
JVC
Small plant
Sony
Enter
( 5 , -2 )
Highoutput
( 6 , 6 )
Lowoutput
Sony
Stay out
( 12 , 0 )
Highoutput
( 8 , 0 )
Lowoutput
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 3
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Pricing game from Session 12
Firm BLow Med High
Low19
20
18
25
10
33
Firm A Med24
23
28
31
22
38
High30
15
40
27
34
42
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 4
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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
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 5
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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.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 6
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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?
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 7
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Preemptive investments
Your firm is first to develop the next generation memory chip. You thus willbe the first firm to install capacity. What are you thinking?
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 8
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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.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 9
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Session 16: Wrap up
1.✓ Strategic commitment (from Session 15).
2.➥ Entry as a congestion game.
3. Wrap up.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 10
![Page 11: Session 16: Wrap up - INSEAD · Session 16 • Wrap up Slide 3. 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](https://reader033.fdocuments.in/reader033/viewer/2022052721/5f0a91907e708231d42c4608/html5/thumbnails/11.jpg)
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.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 11
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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.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 12
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Example
Value of being in, excluding entry cost
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 13
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Session 16: Wrap up
1.✓ Strategic commitment (from Session 15).
2.✓ Entry as a congestion game.
3.➥ Wrap up.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 14
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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.
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 15
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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
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 16
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Imperfect competition
Perfect competition
Fixed firmsin 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 haseconomic profit ≥ 0 .
No potential entrant could makeeconomic profit > 0 by entering.
Equilibrium
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 17
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Perfect competition
Imperfect competition
Fixed firmsin market
MC = MR⇓
P, Q
Firms’decisions
Nash eqm.
Equili-brium
Entry& exit
VΠ > FC?
Firms’decisions
Each active firm haseconomic profit ≥ 0 .
No potential entrant could makeeconomic profit > 0 by entering.
Equilibrium
P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 18
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More economics by economists
• Macroeconomics in Global Economy (P3 core)
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P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 19
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More microeconomics-related courses
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P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets
Session 16 • Wrap up Slide 20