Invented in 1937 by John von Newmann and continues to be a major research topic in economics, the Game theory is a method that economists use evaluate behavior which acknowledges shared interdependence and with consideration of the expected behavior of others, also referred to as strategic behavior. It assists in the understanding many types of economic, political, biological, and social rivalries, including oligopoly.
Typically, a game consists of three features: rules, strategies, and playoffs.
An example to apply the game theory to is the “Prisoners’ dilemma.” The game is between two prisoners who are arrested for a crime but are suspected for a smaller crime without evidence.
There are four different strategies in this dilemma. One being that they both confess and each will receive 3 years of imprisonment, if they both deny then each will receive two years of imprisonment. If prisoner 1 confesses and prisoner 2 denies, then Prisoner 1 will receive 1 year of imprisonment and Prisoner two will receive ten years of imprisonment, and vice versa if the strategy is switched. The trick of the game is that neither of the prisoners will know what the other one will do.
Sunday, April 25, 2010
Sunday, April 18, 2010
Signaling Quality through Advertisement in a Monopolisitc Competition
Signaling occurs when an informed person of a firm takes some sort of action to send out a message to those who are less informed.
A firm that sells a consistently high quality product can run a costly campaign to advertise their product because it is likely that the consumers will continue to purchase that product since it is of high quality.
In contrast, it does not make sense for a firm that sells a low quality product to run a costly campaign to attempt to advertise their product because the amount of money spent by that company to advertise their product will exceed the revenue that is brought in by selling that product because it likely that most consumers will attempt to try that product once, and will not purchase it again if it is low quality.
It is more likely that consumers will believe an advertisement that is much more expensive and flashy looking because they feel that a firm will not go through all the trouble spending a great amount of money if their product is not good. The expensive flashy advertisement for the high quality product will send out a signal to the audience and consumers that the particular product is very good without having to say much about the product itself.
A firm that sells a consistently high quality product can run a costly campaign to advertise their product because it is likely that the consumers will continue to purchase that product since it is of high quality.
In contrast, it does not make sense for a firm that sells a low quality product to run a costly campaign to attempt to advertise their product because the amount of money spent by that company to advertise their product will exceed the revenue that is brought in by selling that product because it likely that most consumers will attempt to try that product once, and will not purchase it again if it is low quality.
It is more likely that consumers will believe an advertisement that is much more expensive and flashy looking because they feel that a firm will not go through all the trouble spending a great amount of money if their product is not good. The expensive flashy advertisement for the high quality product will send out a signal to the audience and consumers that the particular product is very good without having to say much about the product itself.
Sunday, April 11, 2010
Barriers to Entry in a Monopoly
A barrier to entry is a restraint that shields a firm from the entry of a new competitor. There are three barriers to entry that exist in a monopoly: Natural, ownership, and legal.
A natural barrier to entry in a monopoly occrs when one firm can assemble the full market demand at a lower expense than two or more other firms are able to assemble. For instance a cable provider can provide its customer's cable for a price lower than other companies.
Ownership barrier to entry occurs when one firm holds control of all production and supply. For instance, DeBeers is a company that control the entire production of raw diamonds in the world.
Legal barrier to entry occurs when the governemnt restricts entry in to the market through issuing patents, licenses, public franchises and copyright to a firm. An example of this would be the United States Postal Service. They have the exclusive right to deliver first-class mail, they are a public franchise. A patent is an exclusive right issued to the inventor of a service or good. A license isseud by the government to a firm manages the entry into certain professions, occupations, industries. A copyright is an exclusive right that is issued to author or creator of a literary, musical, artistic, or dramatic piece.
A natural barrier to entry in a monopoly occrs when one firm can assemble the full market demand at a lower expense than two or more other firms are able to assemble. For instance a cable provider can provide its customer's cable for a price lower than other companies.
Ownership barrier to entry occurs when one firm holds control of all production and supply. For instance, DeBeers is a company that control the entire production of raw diamonds in the world.
Legal barrier to entry occurs when the governemnt restricts entry in to the market through issuing patents, licenses, public franchises and copyright to a firm. An example of this would be the United States Postal Service. They have the exclusive right to deliver first-class mail, they are a public franchise. A patent is an exclusive right issued to the inventor of a service or good. A license isseud by the government to a firm manages the entry into certain professions, occupations, industries. A copyright is an exclusive right that is issued to author or creator of a literary, musical, artistic, or dramatic piece.
Sunday, April 4, 2010
Change in Demand in a Perfectly Competitive Market
In a competitive market the firms are are not making any economic profit and the entreprenuer makes normal profit. It is part of a long-run equilibrium. With that said, the demand increases which causes prices to rise and firms will have to increase proudction in order to be able to maintain the marginal cost equal to the price, and the firm will make economic profit. In this process, the market becomes part of short-run equilibrium.
The economic profit is what interests a firm to participate in a market. As the number of firms enter into a market, the market supply increases and the prices will start to decrease. With lower prices, firms' output decreases in order to maintain the marginal cost equal to the price.
There are two different types of equilibriums associated with this: Initial long-run competition and new long-run equilibrium. The difference between the two is the permanant increase in demand in the number of firms. Every firm produces the same amount of output in the new long-run equilibrium as at first and does not make any economic profit.
A decrease in demand causes a lower price, ecnomic loss, and exit from the market. The exit from the market will decrease the market supply, cause an increase in prices, and will eradicate economic loss.
The economic profit is what interests a firm to participate in a market. As the number of firms enter into a market, the market supply increases and the prices will start to decrease. With lower prices, firms' output decreases in order to maintain the marginal cost equal to the price.
There are two different types of equilibriums associated with this: Initial long-run competition and new long-run equilibrium. The difference between the two is the permanant increase in demand in the number of firms. Every firm produces the same amount of output in the new long-run equilibrium as at first and does not make any economic profit.
A decrease in demand causes a lower price, ecnomic loss, and exit from the market. The exit from the market will decrease the market supply, cause an increase in prices, and will eradicate economic loss.
Sunday, March 28, 2010
Monopoly Price-Setting Strategies
Monopolies face tradeoffs between price and the quantity that is traded or sold. There are two price setting potentials that generate different tradeoffs, which are single price and price discrimination.
Single price monopoly is a firm that has to sell each unit of its output for the same price to all of its customers. Price discriminating monopoly is when a firm that vends different units for different prices that are not related to cost differences. Airlines, for instance have different prices for the same flights. If a firm price discriminates it makes the impression that it is doing so in the favor of their customer(s) when in fact it is charging each group of customers the greatest price they can get them to pay in order to increase their profit.
Single price monopoly is a firm that has to sell each unit of its output for the same price to all of its customers. Price discriminating monopoly is when a firm that vends different units for different prices that are not related to cost differences. Airlines, for instance have different prices for the same flights. If a firm price discriminates it makes the impression that it is doing so in the favor of their customer(s) when in fact it is charging each group of customers the greatest price they can get them to pay in order to increase their profit.
Market Types
There are four market types: Perfect competition, monopoly, monopolistic competition, and oligopoly.
Perfect competition exists when: many firms sell the same product to a number of buyers, there are no barriers to entry or exit from the market, established firms do not have any advantage over new firms, and sellers and buyers are informed of the prices. These circumstances occur at the time that the market demand for the particular product is large relative to the productivity of a single producer.
Monopoly is a market for a good or service which has no close replacements and in which there is one provider that is protected from competition by an obstacle preventing the entry of new firms. The phone, gas, electricity and water supplies are considered as local monopolies in some places.
Monopolistic competition is a market in which a great number of firms compete against each other by creating similar but faintly different products. For instance, different companies such as Nike, Asics and other brands that sell running shoes all compete with each other but they have a monopoly on their particular show brand.
Oligopoly is markets in which there are a small number of firms which are interdependent that compete with each other. Oligopolies may produce nearly identical products such as batteries or differentiated products such as soda products.
Perfect competition exists when: many firms sell the same product to a number of buyers, there are no barriers to entry or exit from the market, established firms do not have any advantage over new firms, and sellers and buyers are informed of the prices. These circumstances occur at the time that the market demand for the particular product is large relative to the productivity of a single producer.
Monopoly is a market for a good or service which has no close replacements and in which there is one provider that is protected from competition by an obstacle preventing the entry of new firms. The phone, gas, electricity and water supplies are considered as local monopolies in some places.
Monopolistic competition is a market in which a great number of firms compete against each other by creating similar but faintly different products. For instance, different companies such as Nike, Asics and other brands that sell running shoes all compete with each other but they have a monopoly on their particular show brand.
Oligopoly is markets in which there are a small number of firms which are interdependent that compete with each other. Oligopolies may produce nearly identical products such as batteries or differentiated products such as soda products.
Thursday, February 25, 2010
Maximizing Total Utility
The consumer’s objective is to allocate the available budget in a manner that will maximize total utility. In order to achieve this goal, the consumer must choose the most reasonably priced combination of goods at which the total of the utilities acquired from all goods consumed is as big as feasible. In order to be able to find the best budget allocation for the consumer, we can use the utility maximizing rule, which consists of two things; allocating the full amount of the accessible budget and making the marginal utility per dollar equivalent for all of the goods.
To allocate the full amount of the available budget you have to come up with combinations that reach the entire available budget. You want to maximize total utility because you want to get the most for your dollar when you are facing scarcity. You do not have to literally use your entire amount of money on purchases, allocating a budget can involve saving money as well. You can decide the amount of money you want to save, and spend the rest on goods. Equalizing the marginal utility per dollar can be achieved by creating a combination that formulates the marginal utility per dollar equivalent for both of the goods. Marginal utility per dollar is the marginal utility from a good matched to the cost of the good. You are able to calculate the marginal utility per dollar by dividing the marginal utility of a good by the price of that good. In order to be able to find the utility maximizing choice, you calculate the marginal utility per dollar for only the most reasonable priced combinations that deplete your entire budget.
To allocate the full amount of the available budget you have to come up with combinations that reach the entire available budget. You want to maximize total utility because you want to get the most for your dollar when you are facing scarcity. You do not have to literally use your entire amount of money on purchases, allocating a budget can involve saving money as well. You can decide the amount of money you want to save, and spend the rest on goods. Equalizing the marginal utility per dollar can be achieved by creating a combination that formulates the marginal utility per dollar equivalent for both of the goods. Marginal utility per dollar is the marginal utility from a good matched to the cost of the good. You are able to calculate the marginal utility per dollar by dividing the marginal utility of a good by the price of that good. In order to be able to find the utility maximizing choice, you calculate the marginal utility per dollar for only the most reasonable priced combinations that deplete your entire budget.
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