Week 7

• the Cournot model fits into the normal form non cooperative game model, where firms make decisions simultaneously
• to define a game, you need to define the players, choices, and payoffs
• in oligopoly game theory models, firms are players
• in oligopoly game theory models, choosing quantities are strategies
• in oligopoly game theory models, the profits are the payoffs
• a firm can work out the quantity that will maximise their profit (their best choice) if they know the strategy (quantity) of the other firms in the simultaneous decision making model
• firms calculate best response functions based on the strategy decisions of the other firms in the Cournot model
• the best response function of firm 1 in a duopoly Cournot model is BR1 = (a - bq2- c)/2b
• in symmetric outcomes, both firms do the same thing and have the same setup
• in oligopoly simultaneous game theory, symmetry is assumed, so the quantity produced by each firm is assumed to be the same, which makes finding the best response much easier
• oligopolies involve only a few firms operating
• a duopoly involves just 2 firms
• in an oligopoly, the quantity and price will change depending on the actions of individuals
• in an duopoly, price depends on the quantity choices of both firms, P = a-b(q1+q2)
• the total cost to each firm is calculated by the cost of one unit* quantity produced by that firm
• the profit to one firm is a function of the quantity produced by all firms in the market, not just the quantity that firm produces
• perfect competition involves individuals that are small, and take prices as given
• perfect competition means individuals have no way of influencing price
• sequentially played oligopoly models involve one firm (the leader) announcing their output choice first, and the other firms can then use this knowledge to make their best response
• the Stackelberg model is used to model sequentially played oligopoly models
• in the Stackelberg model, the firms have a continuous choice and can choose any quantity of goods to produce
• in extensive form games, backward induction is used by the leading firm to work out what the other firms will do depending on their announcement
• in the Stackelberg model, firms do not choose simultaneously, so they produce different quantities and have different outcomes
• the first mover advantage is found in the Stackelberg model and shows that the profit of the leader firm is higher in the Stackelberg model compared to the Cournot model