BHUM209L

GAME THEORY
 GAME THEORY
• A branch of mathematics (decision theory),
which formalizes games and defines
solutions to them
• Game theory was introduced by John von
Neumann’s and Morgenstern’s
• What is a Game?
• It is a decision problem, where decision-
maker’s payoff (profit) may depend not
only on his own decision, but also on the
decisions made by other decision makers.
W H O D E T E R M I N E P R I C E S O F T O M AT O A N D N E T W O R K R E C H A R G E P R I C E ?

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 Course Course Title L T P C
Code
BHUM209L Game Theory 3 0 0 3
Pre- NIL Syllabus
Module:1 Games with Perfect Information
requisite version 5 hours
Strategic Games and Examples. Nash Equilibrium, Strict and1.0
Nonstrict Nash
Equilibria, Best Response Functions, Dominated Actions - Strict and Weak
Domination, Symmetric Games.

Module:2 Nash Equilibrium 6 hours

Cournot’s Model of Oligopoly - Bertrand’s Model of Oligopoly, Electoral
Competition, Median Voter Theorem and Auctions.
Module:3 Mixed Strategy Equilibrium 5 hours
Randomization and Expected Payoffs, Mixed Strategy Nash Equilibrium and
Properties, Dominated Actions – Strict and Weak Domination.
Module:4 Extensive Games with Perfect Information 7 hours
Strategies and Outcomes, Nash Equilibrium, Subgame Perfect Equilibrium, Backward
Induction, The Ultimatum game, The Holdup game and Stackelberg’s Model of duopoly,
Properties of Subgame perfect equilibrium.
Module:5 Extensive Games with Imperfect Information 6 hours
Strategies and Nash Equilibrium, Beliefs and Sequential equilibrium,
Sequential Rationality, Signaling Games, Separating and Pooling Equilibrium.
Module:6 Repeated Games 7 hours
Finitely and Infinitely Repeated Prisoner’s dilemma, Grim Trigger and Tit-for-tat
Strategies, Nash Equilibria of General Infinitely Repeated Games, Finitely
Repeated Games.

Module:7 Bargaining 7 hours

Bargaining as an Extensive Game, Nash’s axiomatic Model, Bargaining Solution, Pareto
Efficiency and Symmetry, Nash Bargaining Solution.
Module:8 Contemporary Issues 2 hours
 GAME
• What is a Game?
• It is a decision problem, where decision-
maker’s payoff (profit) may depend not
only on his own decision, but also on the
decisions made by other decision makers.
 D E F I N I N G G A M E ELEMENTS

• Formally, a game is a set of 4 elements:

• A set of players (can even be infinite)
• A set of rules (allowable actions and sequencing of
actions by each player)
• A payoff function (which assigns payoffs for each
player as a function of strategies chosen)
• Informational structure (what players know at each
point in the game)
 HISTORY OF GAME THEORY

• Cournot (1838) - quantity-setting duopoly

model
• Bertrand (1883) – price-setting duopoly model
• Zermelo (1913) – the game of chess
• John von Neumann & Morgenstern (1944) –
defined games, min-max solution for 0-sum
games
• Nash (1950) – defined the equilibrium and the
solution to a cooperative bargaining problem
‘NOBEL’ PRIZE WINNERS FOR
GAME THEORY (ECONOMICS)

• 1994 – John Nash, John Harsanyi, Reinhard

Selten
• 1996 – James aMirrlees, William Vickrey
• 2005 – Robert Aumann, Thomas Shelling
 GENERAL ASSUMPTIONS

• Standard GT assumes that players are:

• Selfish: maximize their own payoffs and do not care
about the opponent’s payoffs
• Rational: they understand the game and can
determine the optimal strategy
• Expected-utility maximizers: in uncertain situations
players they base their choices on expected utility
• Share common knowledge about all aspects of the
game
• In addition, it is often assumed that players do not
communicate, cooperate or negotiate, unless the
game allows it explicitly
 GAME THEORY

• A branch of mathematics (decision theory), which

formalizes games and defines solutions to them
• Game theory was introduced by John von Neumann’s
and Morgenstern’s
• What is Game Theory?
• Game Theory studies the interaction between a group
of rational agents who behave strategically
• Let’s analyze each underlined element of this
definition.
• 1. Group of individuals.
• Game theory studies interaction between a group of
agents.
• Scenarios with one individual or firm are analyzed
with other individual decision making
 I I . R AT I O N A L I T Y

• Every agent seeks to maximize her objective

function.
• Common knowledge of rationality. In a two-player
game
• Player 1 seeks to maximize her payoff,
• Player 2 seeks to maximize her payoff,
• Player 1 knows that player 2 seeks to maximize her
payoff,
• Player 2 knows that player 1 seeks to maximize her
payoff,
• Player 1 knows that player 2 knows that player 1
seeks to maximize her payoff,…
• And so on, ad infinitum.
• Intuitively, everyone can put herself in the shoes of
 III. STRATEGIC BEHAVIOR

• Every agent seeks to maximize a well-defined

objective function.
• The objective function can be a utility function of
an individual, a profit function of a firm, or a social
welfare function of an entire country.
• This allows for the agent to be selfish (if his
objective function only includes his own payoffs) or
altruistic (if it contains payoffs from other
individuals).
 MAIN ELEMENTS IN A GAME
• 1. Players
• Set of agents, such as individuals, firms, or countries, interacting in a
game.
• For instance, if two firms compete in an industry, we say that the number
of players is N=2.

players is 𝑁 ≥ 2.
• And if a generic number firms interact, we write that the number of

• 2. Strategy
• Strategy is a course of action or a policy which a player adopt during
play of game
• (or)
• Complete contingent plan, describing which actions a player chooses in
each possible situation (each contingency) that she faces along the
game.

as 𝑠𝐴, where 𝑠𝐴 ∈ 𝑆𝐴, meaning that firm A selects a specific strategy 𝑠𝐴

• In a two-player game with firms A and B, we denote firm A’s strategy

(such as a price of Rs.12) from a set of available strategies 𝑆𝐴, known as

the “strategy set”.
 MAIN ELEMENTS IN A GAME

• Optimal Strategy: The particular strategy that

optimizes a player’s gains or losses, without knowing the
competitor’s strategies, is called Optimal strategy.
• Value of the Game: The expected outcome, when
players use their optimal strategy is called value of the
game.
• Fair game: The game whose value v = 0 is known as
zero sum game or fair game.
 S T RAT E GY ( C O N T ’ D ) .

• Strategies can be understood as an instruction

manual: a player opens the manual, looks for the page
describing the actions other players chose, and the

she chooses a specific action 𝑠𝐴.

manual indicates how to respond, recommending that

• Discrete strategies. 𝑆𝐴 = {6,10} if binary, 𝑆𝐴 = {1,2,

…}
• Examples are output levels, or other strategies that
require being natural numbers.
• Continuous strategies. 𝑆𝐴 = 0,10, the agent can
choose non-integer amounts from 0 to 10 (e.g., 𝑠𝐴 =
5.7) , or 𝑆𝐴 = [0, +∞)
• Examples can be prices in an auction, where rupees
can be split into paisa
 S Y M M E T R I C A N D A S Y M M E T R I C S T R AT E G Y

• Symmetric strategy sets. If 𝑆𝑖 = 𝑆𝑗 = 𝑆 for every

player 𝑗 ≠ 𝑖.
• Example: firms competing in the same industry
have access to the same technology, so every

strategy set 𝑆 = (0,10) .

firm chooses an output level from the same

• Asymmetric strategy sets. If 𝑆𝑖 ≠ 𝑆𝑗 for at least

one player 𝑗 ≠ 𝑖.

have access to different technologies, so 𝑆𝑖 =

• Example: firms competing in the same industry

(0,10) but 𝑆𝑗 = (0,75)

 S TRATE GY PROFILE

• A list describing the strategies that each player selects, 𝑠 =

(𝑠1, 𝑠2, … , 𝑠𝑁 )
• Examples: 𝑆 = (12,8) , meaning that firm A chooses 𝑠𝐴 = 12
and firm B selects 𝑠𝐵 = 8 units of output.
• In a setting with N players, a strategy profile is 𝑠 ≡ (𝑠1, 𝑠2, … ,
𝑠𝑖−1, 𝑠𝑖, 𝑠𝑖+1, …, 𝑠𝑁 )
• For compactness, we write 𝑠 = 𝑠𝑖, 𝑠−𝑖 where 𝑠−𝑖 ≡ (𝑠1, 𝑠2, … ,
𝑠𝑖−1, 𝑠𝑖+1, … , 𝑠𝑁) denotes the strategy profile chosen by
player i’s rivals.
• Example:
• In a setting with four firms, 𝑠 = (12,8,10,13) , so 𝑠 = (12, 𝑠−1)
where 𝑠−1 = (8,10,13) denotes the output of firm 1’s rivals.
S T R AT E G I E S A N D E X A M P L E S
 BASI C CONCEPTS

• Pay-off matrix: A pay - off matrix is a

table, which shows how payments should
be made at end of a play or the game.
• The choices of one player are
represented in the rows of the matrix,
and
• Choices of the other player are
represented in the columns.
• Each cell in the matrix represents the
payoffs for each player with the payoffs
for the player represented by rows being
displayed first.
 S T R AT E G I E S A N D E X A M P L E S

• 1. Pure strategy and mixed strategy.

• 2. Dominant and Dominated Strategies
• 3. Maximin Strategy
• 4. Minimax Strategy
 1. PURE STRATEGY AND MIXED
STRATEGY

• Pure strategy is a decision rule always to select the same

course of action.
• A pure strategy is the one that provides maximum profit or
the best outcome to players.
• Therefore, it is regarded as the best strategy for every player
of the game.
• Example
• Assume that firm A & firm B are increasing prices of their
products and it is the best strategy for both of them. If both of
them increase the prices of their products, they would earn
maximum profits.
• However, if only one of the organization increases the prices
of its products, then it would incur losses. In such a case, an
increase in prices is regarded as a pure strategy for
organizations A and B.
 MIXED STRATEGY

• In a mixed strategy, players adopt different strategies to get

the possible probability outcome.
• For example, in cricket a bowler cannot throw the same type of
ball every time because it makes the batsman aware about the
type of ball. In such a case, the batsman may make more runs.
• However, if the bowler throws the ball differently every time,
then it may make the batsman puzzled about the type of ball,
he would be getting the next time.

Baller
Throws spin Throws
ball fastball
Batsman Anticipate spin 30% 10%
ball
Anticipate 10% 30%
fastball
 2 . D O M I N A N T A N D D O M I N AT E D S T R AT E G I E S

• A dominant strategy is the one that is best for an

organization (player) and is not influenced by the
strategies of other organizations (players).
• Let us understand the dominant strategy given in
Table. Suppose Firms A or B adopt a dominant
strategy. Firm A

Payoff No price change Price increase

matrix (crores) (crores)

Firm B No price 100,100 900, -200

change
(crores)
Price increase -300, 500 1100, 500
(crores)
 C O N T. ,

• As shown in Table, when Firm B is not making any change in

prices, then Firm A has also not changed its prices. This would
results as the best strategy of A.
• However, when B has increased its prices, then A would earn
profit of Rs. 300 crores by keeping its prices constant. When
A increases its prices, it would earn Rs. 500 crores.
• Therefore, it is better for A to make its price constant so that it
can earn more.
• The dominant strategy- for A is to keep the prices of its
products constant.
• On the other hand, the dominant strategy- of B would also be
to keep the price constant. This is because A would incur
losses if it increases the prices of its products.
 3. M AXIM IN S T RAT EGY

• Main aim of every organization is to earn maximum profit.

• However, in the highly competitive market, such as oligopoly,
organizations strive to reduce the risk factor. This is done by adopting
the strategy that increases the probability of minimum outcome. Such
a strategy is termed as maximin strategy.
• In other words, maximin strategy is the one in which a player or
organization maximizes the probability of minimum profit so that the
degree of risk can be reduced.
• Let us understand the maximin strategy with the help of an example.
Suppose two organizations,
Payoff matrix A and B, want to launch a new product in a
for Maximin strategy
duopoly market.
Organization B
No new New product Organization A
product minimum
Organizati No new product 7,7 6,9 6
on A
New product 9,6 4,4 4

Organization B 6 4
minimum
 4. MINIMAX STRATEGY

• Minimax strategy is the one in which the main objective

of a player is to minimize the loss and maximize the
profit.
• It is a type of mixed strategy. Therefore, a player can
adopt multiple strategies. It can be applied to complex
as well as simple decision-making process.
• Let us understand the minimax strategy with the help
of an example.
• Suppose Mr. Ram wants to manufacture cream biscuits.
For this, he selected three flavors, namely strawberry,
chocolate, and pineapple, which he denoted with A, B,
and C respectively. He wants to select one of the
flavors to produce cream biscuits and introduce them in
the market on the basis of their demand.
• He needs to predict the future events that can occur from
the options he has selected. These future events are termed
as the states of nature in decision analysis.
• The states of nature selected by Ram with respect to
demand are high demand, medium demand, and low
demand.
Payoff matrix for biscuits
State of nature
Alternative High demand Moderate Low demand
strategies demand
A 4,00,000 3,00,000 1,00,000
B 5,50,000 2,70,000 3,00,000
C 3,00,000 1,80,000 2,50,000

• Here, we are assuming that Mr. Ram adopts minimax

strategy. Now, if he selects strategy A in a high demand
market, then he would incur a loss of Rs. 150000. This is
because he has not selected the strategy B that would yield
• In such a case, he would determine the maximum loss for each
alternative and then select the alternative that would give
minimum loss. Among each state of nature, the highest payoff is
selected and subtracted from all other values in the state of nature.

Regret value (actual value-optimal value)

State of nature
Alternative High demand Moderate Low demand
strategies demand
A 1,50,000 0 2,00,000
B 0 30,000 0
C 2,50,000 1,20,000 50,000

• In Table, the maximum regret in each state of nature is highlighted

with blue color. Among the highlighted regret values, strategy C
has the least regret value of Rs. 250000. Therefore, Ram would not
select the strategy- C or pineapple flavor to produce biscuits.
 COOPERATIVE VS. NONCOOPERATIVE

• Cooperative games
• A game in which participants can negotiate binding
contracts that allow them to plan joint strategies.

• Noncooperative games
• i) every player seeks its best response based on the
available information and in order to maximize its own
payoff,
• ii) there are no binding agreements on optimal joint
actions,
• iii) pre-play communication is possibly allowed
 NASH EQUILIBRIUM

• Nash equilibrium is commonly used in non-

cooperative games
• Meaning
• Nash equilibrium is a situation where no player
could gain by changing their own strategy (holding
all other players' strategies fixed).
• In a Nash equilibrium “unilateral deviations” do not
benefit any of the players. Unilateral deviations
mean that only one player changes its own decision
while the others stick to their current choices.
• The concept of Nash equilibrium was an old
concept, which used in Oligopoly Firms by Cournot
in 1838.
 HISTORY

• Nash equilibrium is named after American mathematician John

Forbes Nash Jr.
• The same idea was used in a particular application in 1838 by
Cournot in his theory of oligopoly.
• In Cournot's theory, each of several firms choose how much
output to produce to maximize its profit. The best output for
one firm depends on the outputs of the others.
• A Cournot equilibrium occurs when each firm's output
maximizes its profits given the output of the other firms, which
is a pure-strategy of Nash equilibrium.
• Cournot did not use the idea in any other applications,
however, or define it generally.
• The modern concept of Nash equilibrium is instead
defined in terms of mixed strategies, where players
choose a probability distribution over possible pure
strategies
 HISTORY

• The contribution of Nash in his 1951 article

"Non-Cooperative Games" was to define a
mixed-strategy Nash equilibrium for any game
with a finite set of actions and prove that at
least one (mixed-strategy) Nash equilibrium
must exist in such a game.
 DEFINITIONS

• Nash equilibrium
• A strategy profile is a set of strategies, one for each player.
• A strategy profile is a Nash equilibrium if no player can do
better by unilaterally changing their strategy.
• To see what this means, imagine that each player is told
the strategies of the others. Suppose then that each player
asks themselves: "Knowing the strategies of the other
players, and treating the strategies of the other players as
set in stone, can I benefit by changing my strategy?“.
• For instances, if a player prefers "Yes", then that set of
strategies is not a Nash equilibrium. But if every player
prefers not to switch (or is indifferent between switching
and not) then the strategy profile is a Nash equilibrium.
Thus, each strategy in a Nash equilibrium is a best
response to the other players' strategies in that
equilibrium.
 WHAT DOES NASH EQUILIBRIUM

• A Nash equilibrium is a law that no one would want to

break even in the absence of an effective police force
• Pretend the police do not exist
• The government passes a law
• The law is Nash Equilibrium if everyone want to follow it
• Example : following Traffic rules
 TRAFFIC RULES

• In some situations, following stoplights is a Nash Equilibrium

• Suppose two cars are driving at each other from
perpendicular directions,
• The stoplight is red for one of the them and green for the
other
• If the police was not present, would they want to break the
law?
 TRAFFIC RULES

Player A

Go Stop
Player B

Go -10, -10 1,0

Stop 0,1 -1,-1

 APPLICATIONS

• Game theorists use Nash equilibrium to analyze the

outcome of the strategic interaction of several decision
makers.
• In a strategic interaction, the outcome for each decision-
maker depends on the decisions of the others as well as
their own.
• In simple, Nash equilibrium is that one cannot predict the
choices of multiple decision makers if one analyzes those
decisions in isolation. Instead, one must ask what each
player would do taking into account what the player
expects the others to do.
• Nash equilibrium requires that one's choices be consistent
 CONT,D

• Nash equilibrium has been used

• To analyze hostile situations such as wars and arms races (Eg:
prisoner's dilemma)
• How conflict may be mitigated by repeated interaction
• To study to what extent people with different preferences can
cooperate, and whether they will take risks to achieve a
cooperative outcome.
• Traffic flow
• How to organize auctions (see auction theory)
• The outcome of efforts exerted by multiple parties in the
education process
• Regulatory legislation such as environmental regulations (see
tragedy of the commons)
• Natural resource management
• Analysing strategies in marketing, etc
 STRICT/NON-STRICT EQUILIBRIUM

• Strict Nash equilibrium

• An equilibrium is strict if each player’s
equilibrium strategy is better than all her other
strategies, given the other players’ strategies.
Precisely, a strategy profile a∗ is a strict Nash
equilibrium if for every player i we have ui (a∗)
> ui (ai, a∗ −i ) for every action
Player A ai= a∗i of player i.

Go Stop
Player B

Go -10, -10 1,0

Stop 0,1 -1,-1

 NON-STRICT EQUILIBRIUM
• Consider the game in Table.1. This game has a unique Nash
equilibrium, namely (T, L).
• For every other pair of actions, one of the players is better
off changing her action.
• When player 2 chooses L, as she does in this equilibrium,
player 1 is equally happy choosing T or B (her payoff is 1 in
each case); if she deviates to B then she is no worse off than
she is in the equilibrium.
• We say that the Nash equilibrium (T, L) is not a strict
equilibrium. Player 2

L M R
Player 1

T 1,1 1,0 0,1

B 1,0 0,1 1,0

 WHAT ARE THE LIMITATIONS OF NASH
EQUILIBRIUM?

• It requires an individual to know their opponent’s strategy.

• A Nash equilibrium can only occur if a player chooses to
remain with their current strategy if they know their
opponent’s strategy.
• In most cases, such as in war—whether that be a military
war or a bidding war—an individual rarely knows the
opponent’s strategy or what they want the outcome to be.
• Unlike dominant strategy, the Nash equilibrium doesn’t
always lead to the most optimal outcome. It just means
that an individual chooses the best strategy based on the
information they have.
 BEST RESPONSE FUNCTIONS

• We can find the Nash equilibria of a game in which

each player has only a few strategies by examining
each strategy profile in turn to see if it satisfies the
conditions for equilibrium.
• In more complicated games, it is often better to work
with the players’ “best response functions”.
 B E S T R E S P O N S E F U N C T I O N S

• Consider a player, say player i. For any given strategies of the

players other than i, player i’s strategies yield her various payoffs.
• We are interested in the best strategies— those that yield her the
highest payoff
• In the traffic rules following game, “Stop” is the best action for
Player B, if Player A chooses “Go” strategy.
• By contrast, in second game, both T and B are best actions for
player 1 if player 2 chooses L: they both yield the payoff of 1, and
player 1 has no strategy that yields a higher payoff

Traffic following game: Player 2

Player A
Go Stop L M R
Player 1
Player B

Go -10, -10 1,0 T 1,1 1,0 0,1

Stop 0,1 -1,-1 B 1,0 0,1 1,0

 C O N T. ,

• We denotes set of player i’s best actions when

the list of the other players’ actions is a−i by Bi
(a−i ).
• Precisely, we define the function Bi by
• Bi (a−i ) = {ai in Ai : ui (ai , a−i ) ≥ ui (a’i , a−i ) for
all a’i in Ai}
• any action in Bi (a−i ) is at least as good for
player i as every other action of player i when
the other players’ actions are given by a−i . We
call Bi the best response function of player i.
USING BEST RESPONSE FUNCTIONS TO FIND NASH EQUILIBRIA

• Consider the game in Table.1.

• First find the best response of player 1 to each action of
player 2.
• If player 2 chooses L, then player 1’s best response is M (2
is the highest payoff for player 1 in this column); indicate
the best response by attaching a star to player 1’s payoff
to (M, L).
• If player 2 chooses C, then player 1’s best response is T,
indicated by the star attached to player 1’s payoff to (T, C).
• And if player 2 chooses R, then both T and2 B are best
Player
responses for player 1; both are indicated by stars.
L C R
Player 1

T 1, 2* 2*,1 1*,0
M 2*,1* 0,1* 0,0
B 0,1 0,0 1*,2*
 B E S T RE S P O N S E F U N C T I O N S

• Second, find the best response of player 2 to

each action of player 1 (for each row, find highest
payoff of player 2); these best responses are
indicated by attaching stars to player 2’s payoffs.
Player 2

L C R
Player 1

T 1, 2* 2*,1 1*,0
M 2*,1* 0,1* 0,0

B 0,1 0,0 1*,2*

 BEST RESPONSE FUNCTIONS

• Finally, find the boxes in which both players’ payoffs

are starred.
• Each such box is a Nash equilibrium: the star on
player 1’s payoff means that player 1’s strategy is a
best response to player 2’s strategy, and the star on
player 2’s payoff means that player 2’s strategy is a
best response to player 1’s strategy.
• Thus, we conclude that
Playerthe
2 game has two Nash
equilibrium: (M, L) and (B, R)
L C R
T 1, 2* 2*,1 1*,0
Player 1

M 2*,1* 0,1* 0,0

B 0,1 0,0 1*,2*
DOMINATED STRATEGIES – STRICT AND
WEAK DOMINATIONS

• Strict dominations
• In any game, a player’s action “strictly dominates”
another action if it is superior, no matter what the
other players.
• (Strict domination) In a strategic game with ordinal
preferences, player i’s action ai’’ strictly dominates
her action ai’ if
• ui (ai’’, a−i ) > ui (a’i , a−i ) for every list a--i of the other
players action
• where ui is a payoff function that represents player i’s
preferences. We say that the action ai’ is strictly
dominated
• The fact that the action ai’’ strictly dominates the
action ai’ of course does not imply that ai’’strictly
dominates all actions.
• For example, M strictly dominates T, but B is
better than M if player 2 chooses R. (I give only
the payoffs of playerPlayer
1 in the
2 Table, because those
of player 2 are not relevant.)
L R
Player 1

T 1 0
M 2 1
B 1 3
 WEAK DOMINATION

• In any game, a player’s action “weakly dominates” another

action if the first action is at least as good as the second
action, no matter what the other players do, and is better than
the second action for some actions of the other players
• (Weak domination) In a strategic game with ordinal
preferences, player i’s action ai’’ weakly dominates her action
ai’ if
• ui (ai’’, a−i ) ≥ ui (a’i , a−i ) for every list a--i of the other players
action
• where ui is a payoff function that represents player i’s
preferences. We say that the action a i’ is strictly dominated
• For example, in the game in Table.1 (in which, once again, only
player 1’s payoffs are given), M weakly dominates T, and B
weakly dominates M; B strictly dominates T.
 Player 2

L R
Player 1

T 1 0

M 2 0

B 2 1
 S Y M M E T R I C A N D A S Y M M E T R I C S T R AT E G Y

• Symmetric strategy sets. If 𝑆𝑖 = 𝑆𝑗 = 𝑆 for every

player 𝑗 ≠ 𝑖.
• Example: firms competing in the same industry
have access to the same technology, so every

strategy set 𝑆 = (0,10) .

firm chooses an output level from the same

• Asymmetric strategy sets. If 𝑆𝑖 ≠ 𝑆𝑗 for at least

one player 𝑗 ≠ 𝑖.

have access to different technologies, so 𝑆𝑖 =

• Example: firms competing in the same industry

(0,10) but 𝑆𝑗 = (0,75)

 MARKETS

• A market facilitates the interaction of a buyer

and a seller as they complete a transaction
• Buyers, as a group, determine the demand
• Sellers, as a group, determine the supply
 COMPETITIVE MARKETS

• Identical goods or services

• Enough buyers and sellers so that no
participant can influence the market
price – everyone is a price taker
 IMPERFECT COMPETITION

• Goods or services that are not identical

• Restaurants, gas stations and hotels
• Markets dominated by single or small
number of producers
• Computer operating systems, automobiles,
diamonds,
 MARKET STRUCTURES

Are products differentiated?

No Yes

One Monopoly N/A

How
many
produc Few Oligopoly
ers are
there? Perfect Monopolistic
Many
Competition Competition
 MARKET STRUCTURES

Product
# of Influence Advertisi Barriers to
Differentiati
Firms on Price ng Entry
on
Perfect
Competitio Many None No No None
n
Monopolisti
c
Many Limited Some Yes Limited
Competitio
n
Oligopoly Few Some Some Yes Significant

Pure
One Extensive No Yes Complete
Monopoly
 OLIGOPOLY

• Oligopoly (Several Sellers)

Characteristics of an oligopoly industry

include:
1. A Few firms (2, 3, 4, ...) control the
majority of the sales
2. More difficult to start up (barriers to
enter)
3. Firms are interdependent
4. Firms mostly advertise on a national
scale
 OLIGOPOLY

• Oligopoly
•
Examples of oligopoly industries include:
• Automobile
• Beer
• Breakfast Cereal
• Soft Drinks
• Oil (Wholesalers)
• Steel
• Airlines
• Aircraft Manufacturers
• Internet Search
 OLIGOPOLY

• Oligopoly and Game Theory

B sets high price B sets low price

A sets high price A’s profit = Rs 40 A’s profit = Rs 10

B’s profit = Rs 40 B’s profit = Rs 60

A sets low price A’s profit = Rs 60 A’s profit = Rs 15

B’s profit = Rs 10 B’s profit = Rs 15
THANK YOU