Week 5: Rivalry, Game Theory and Market Failure

Week 5: Rivalry, Game Theory and Market Failure

“Introduction … Monopoly once again”
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Summaries

  • Week 5: Rivalry, Game Theory and Market Failure > Overview > Introduction
  • Week 5: Rivalry, Game Theory and Market Failure > Oligopoly II > Monopoly Once Again

Week 5: Rivalry, Game Theory and Market Failure > Overview > Introduction

  • Last week, we saw how a firm chooses price and quantity.
  • We assumed there that the firm had some degree of monopoly power.
  • Of course, the firm has to deal with competitive pressures, but we assumed that this effect would be evident in the elasticity of demand that the firm faces.
  • We will start by looking at very strong price competition followed by quantity competition.

Week 5: Rivalry, Game Theory and Market Failure > Oligopoly II > Monopoly Once Again

  • Look at a simple restaurant, a restaurant doesn’t just sell one product – even the chai guy doesn’t just sell tea, right? I mean typically tea and biscuits or something else.
  • How do we look at the decision of a person or a business which is selling multiple products at the same time?
  • We talked about economies of scope whereby, if you produce different goods, you can lower costs of each of the goods that you produced.
  • Sometimes it may not. Sometimes it might happen that because you are producing these different goods, you are actually increasing your cost.
  • I have two products A and B, how do I calculate the marginal revenue from A? Marginal revenue is what happens if I sell one more unit.
  • Here, MRA would be equal to just the change in total revenue by a change in A. How do I sell one more unit of A? By reducing the price of A. And when I reduce the price of A, that affects the revenue I get from B. What if there is no relationship between A & B and what if there is a relationship?
  • The marginal revenue when the two goods are interrelated and the two goods are substitutes will be less than the marginal revenue if the two goods weren’t related.
  • Review of examples where goods are interrelated and when they are not.
  • Any time you have complementary goods, say in restaurant, you might be selling drinks along with food and you want to make sure if you get people more people to eat, or eat more, then they will drink more.
  • If you take this idea to its extreme, what will you get? With complementary products what you are saying is that it will be the reverse of substitutes, people will tend to buy more, keep the prices low and try to sell more.

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