This document provides an overview of game theory concepts and their application to competition economics. It discusses static and dynamic games, including the prisoner's dilemma, Nash equilibrium, and backward induction. Models of oligopoly including Bertrand price competition and Cournot quantity competition are presented. Applications explored include entry deterrence, predatory pricing, repeated prisoner's dilemma for collusion. Effective anti-collusion measures like leniency programs are also summarized.
Introduction to Competition Economics Lecture_2_2016_For PublicationLuke Wainscoat
The document provides an introduction to competition economics and game theory. It discusses how game theory can be used to analyze strategic interactions between firms. It presents examples of static and sequential games, including the prisoner's dilemma, coordination games, and the ultimatum game. Equilibrium concepts for games such as dominant strategies and Nash equilibria are introduced. Models of oligopoly including Bertrand price competition and Cournot quantity competition are examined. Applications of game theory to issues like entry deterrence and predatory pricing are also summarized.
This document discusses the concept of oligopoly, which is a market structure with a small number of producers. It describes key characteristics of oligopoly, including that firms recognize their interdependence and can influence market prices through their actions. The document also discusses game theory and how it can be used to analyze firm behavior in oligopolistic industries, using examples like the prisoner's dilemma. It notes that tacit collusion is possible if firms interact repeatedly through strategies like "tit for tat."
This document discusses key concepts in game theory and provides examples of how game theory can be applied to economics. It covers topics like the prisoner's dilemma, pricing games between firms, and evaluating factors like first mover advantage. Examples are given around oil markets, price wars, and advertising spending. Limitations of game theory are noted, such as its tendency to oversimplify complex business decisions.
Using Game Theory To Gain The Upper Hand During Contract Negotiations 2009Mickey Duke
An example of the creative use of "Game Theory" approach to develop a managed care strategy for a multi-hospital system in the southwest United States -- resulting in 85% increase in hospital net revenue per inpatient day over 7 years.
This document summarizes key concepts in game theory and its application to oligopolistic markets.
1. Game theory is used to analyze strategic interactions among firms in oligopolistic markets where the actions of one firm impact others. It helps explain equilibrium outcomes.
2. In an oligopoly, there are few dominant firms, high barriers to entry, product differentiation or price leadership. Firms monitor each other and their behavior is interdependent.
3. Key concepts in game theory applied to oligopolies include Nash equilibrium where no firm benefits by changing only its strategy, and Bertrand and Cournot equilibriums relating to price and quantity competition between firms.
Game theory provides a framework for analyzing strategic decision-making between interdependent players. It has become a central tool in industrial economics and managerial decision-making. Key concepts include Nash equilibrium, dominant strategies, backward induction, repeated games, and using penalties/rewards to support collusion. While game theory offers useful insights, its predictive power is limited by complex assumptions and multiple possible equilibria. Real-world applications require considering additional empirical factors not fully captured by theoretical models.
Students should be able to:
Use simple game theory to illustrate the interdependence that exists in oligopolistic markets
Understanding the prisoners’ dilemma and a simple two firm/two outcome model. Students should analyse the advantages/disadvantages of being a first mover
Students will not be expected to have an understanding of the Nash Equilibrium
This document provides an overview of topics in game theory and competitive strategy that will be discussed in Chapter 13, including gaming and strategic decisions, dominant strategies, the Nash equilibrium, repeated games, sequential games, threats and commitments, entry deterrence, bargaining strategy, and auctions. It presents examples and concepts such as noncooperative vs cooperative games, the prisoner's dilemma, mixed strategies, and analyses of specific market situations involving pricing, location choice, and oligopolistic cooperation.
Introduction to Competition Economics Lecture_2_2016_For PublicationLuke Wainscoat
The document provides an introduction to competition economics and game theory. It discusses how game theory can be used to analyze strategic interactions between firms. It presents examples of static and sequential games, including the prisoner's dilemma, coordination games, and the ultimatum game. Equilibrium concepts for games such as dominant strategies and Nash equilibria are introduced. Models of oligopoly including Bertrand price competition and Cournot quantity competition are examined. Applications of game theory to issues like entry deterrence and predatory pricing are also summarized.
This document discusses the concept of oligopoly, which is a market structure with a small number of producers. It describes key characteristics of oligopoly, including that firms recognize their interdependence and can influence market prices through their actions. The document also discusses game theory and how it can be used to analyze firm behavior in oligopolistic industries, using examples like the prisoner's dilemma. It notes that tacit collusion is possible if firms interact repeatedly through strategies like "tit for tat."
This document discusses key concepts in game theory and provides examples of how game theory can be applied to economics. It covers topics like the prisoner's dilemma, pricing games between firms, and evaluating factors like first mover advantage. Examples are given around oil markets, price wars, and advertising spending. Limitations of game theory are noted, such as its tendency to oversimplify complex business decisions.
Using Game Theory To Gain The Upper Hand During Contract Negotiations 2009Mickey Duke
An example of the creative use of "Game Theory" approach to develop a managed care strategy for a multi-hospital system in the southwest United States -- resulting in 85% increase in hospital net revenue per inpatient day over 7 years.
This document summarizes key concepts in game theory and its application to oligopolistic markets.
1. Game theory is used to analyze strategic interactions among firms in oligopolistic markets where the actions of one firm impact others. It helps explain equilibrium outcomes.
2. In an oligopoly, there are few dominant firms, high barriers to entry, product differentiation or price leadership. Firms monitor each other and their behavior is interdependent.
3. Key concepts in game theory applied to oligopolies include Nash equilibrium where no firm benefits by changing only its strategy, and Bertrand and Cournot equilibriums relating to price and quantity competition between firms.
Game theory provides a framework for analyzing strategic decision-making between interdependent players. It has become a central tool in industrial economics and managerial decision-making. Key concepts include Nash equilibrium, dominant strategies, backward induction, repeated games, and using penalties/rewards to support collusion. While game theory offers useful insights, its predictive power is limited by complex assumptions and multiple possible equilibria. Real-world applications require considering additional empirical factors not fully captured by theoretical models.
Students should be able to:
Use simple game theory to illustrate the interdependence that exists in oligopolistic markets
Understanding the prisoners’ dilemma and a simple two firm/two outcome model. Students should analyse the advantages/disadvantages of being a first mover
Students will not be expected to have an understanding of the Nash Equilibrium
This document provides an overview of topics in game theory and competitive strategy that will be discussed in Chapter 13, including gaming and strategic decisions, dominant strategies, the Nash equilibrium, repeated games, sequential games, threats and commitments, entry deterrence, bargaining strategy, and auctions. It presents examples and concepts such as noncooperative vs cooperative games, the prisoner's dilemma, mixed strategies, and analyses of specific market situations involving pricing, location choice, and oligopolistic cooperation.
Introduction to Competition Economics Lecture_1_2016_For PublicationLuke Wainscoat
This document provides an introduction to competition economics for a university law school course. It outlines how economics can provide insights into competition law and discusses key economic concepts like demand and supply, perfect competition, monopoly, and market power. The document presents models of perfect competition and monopoly to illustrate how firm behavior and market outcomes differ. It also previews topics to be covered in the next lecture, including game theory, price and quantity competition models, and other applied competition topics.
The Economics of Regulation - Mergers and Vertical Restraints (2023).pptxLuke Wainscoat
The document discusses how economics can be used to assess the competitive effects of mergers. It outlines several theories of harm for both horizontal and vertical mergers, including coordinated effects if a merger makes collusion easier, and unilateral effects if a merger allows firms to profitably raise prices by reducing competition. It discusses how market concentration, barriers to entry, diversion ratios between firms, and upward pricing pressure (UPP) tests using measures like the gross upward pricing pressure index (GUPPI) can help evaluate whether a merger would have anticompetitive effects. The document provides a hypothetical example merger calculation using GUPPI and discusses how UPP tests were applied to analyze a proposed supermarket merger in the UK between Asda and Sainsbur
Here are payoff matrices for some of the game theory scenarios:
Student helping partner:
Partner studies Partner doesn't study
Student helps Partner gets A, Student gets B Partner gets F, Student gets C
Student doesn't help Partner gets C, Student gets D Partner gets F, Student gets D
A's owner moving team:
Oakland builds stadium Oakland doesn't build stadium
Owner moves team Loss of fans and money, profit of $500m Profit of $1b
Owner stays Loss of $200m, fans stay Loss of $500m
Coke advertising:
Coke advertises Coke doesn't advertise
Pepsi advertises Profit of $1b each Profit of
Lecture at Sydney University - Mergers and Vertical RestraintsLuke Wainscoat
This document discusses how economics can help assess the competitive effects of mergers and vertical restraints. It provides an overview of how economists examine whether mergers or vertical agreements are likely to substantially lessen competition in violation of competition laws. The document outlines different theories of harm, such as coordinated effects, barriers to entry, and unilateral effects when firms set quantities or prices. It also discusses how concepts like the Herfindahl-Hirschman Index and Upward Pricing Pressure tests can be used in merger analysis. The document then discusses how similar economic techniques can be applied to analyze the potential anti-competitive effects and pro-competitive efficiencies of vertical restraints.
Perfect competition requires: firms are price takers, many sellers/buyers, free entry/exit, identical products, complete information. In short-run, individual firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Market supply is the sum of individual firm MC curves. In long-run, zero economic profits are achieved as new entry drives prices down until MC equals average costs.
The economics of regualtion: mergers and vertical restraintsLuke Wainscoat
This document discusses how economics can help assess the competitive effects of mergers. It outlines how economists examine whether a merger could substantially lessen competition in a market. Key factors discussed include market definition, theories of harm such as coordinated or unilateral effects, barriers to entry, diversion ratios between firms, and tools like the Herfindahl-Hirschman Index and upward pricing pressure tests. It provides an example analysis of a proposed supermarket merger in the UK that was blocked.
The Economics of Market Power for KWM_FinalLuke Wainscoat
This document provides an introduction to analyzing market power. It discusses key concepts such as perfect competition, monopoly, barriers to entry, and different forms of competition among existing suppliers. Specifically, it compares quantity/capacity competition with price competition and examines how mergers may impact prices under each type. The document aims to outline the relevant economic theories and evidence used to assess market power.
This document provides an overview of key concepts in game theory and oligopoly models. It discusses oligopoly market structures where a few firms account for most production. It also covers the Cournot and Bertrand models of oligopoly competition. The document explores game theory concepts such as the prisoner's dilemma, Nash equilibrium, dominant strategies, and repeated games. It examines how these concepts apply to oligopolistic pricing behaviors and the implications of threats, commitments and credibility in strategic interactions between firms.
Market Inefficiencies and Market Failures.pdfGenevira
This document discusses the concepts of efficiency, demand, supply, consumer surplus, producer surplus, and market failures in competitive markets. It provides examples of how perfect competition leads to an efficient allocation of resources where marginal social benefit equals marginal social cost. However, it also notes several situations that can cause market failures and prevent efficient outcomes, such as externalities, public goods, imperfect information, taxes/subsidies, and monopoly power.
This document discusses strategic pricing in oligopolistic markets. It explains that in these markets, firms are often afraid to change prices because they do not know how competitors will respond. If other firms follow a price change, demand becomes relatively inelastic. The document also discusses game theory concepts like the prisoner's dilemma and dominant strategies to analyze strategic decision-making between firms.
Machine learning for profit: Computational advertising landscapeSharat Chikkerur
Online advertising is a multibillion-dollar industry than spans several subfields of computer science and engineering including information retrieval, machine learning, auction theory, optimization and distributed computing. Competitiveness in the marketplace is directly dependent on accuracy, scalability and sophistication of machine learning algorithms involved. The talk will present an overview of the computational advertising landscape, outline several key challenges, and discuss how machine learning addresses them.
http://www.buffalo.edu/cdse/CDSEdayslanding1/cdse-days2017/faculty_directory/SharatChikkerur.html
1) A pure monopoly is characterized by a single seller of a unique product with no close substitutes and barriers to entry that prevent competition.
2) Monopoly power allows the firm to influence prices by controlling a large share of the market. Barriers to entry like legal restrictions, patents, and control of resources prevent other firms from entering the market.
3) For a monopoly, marginal revenue is always less than price and can be negative if demand is inelastic, meaning the firm would lose total revenue by producing more. Monopolies will only produce where marginal revenue is positive or zero.
Introduction to Competition Economics - Lecture 1Luke Wainscoat
This document provides an introduction to competition economics. It discusses how economics can provide insights into competition law and outlines some key economic concepts like demand and supply, elasticity, costs, and market power. Perfect competition and monopoly models are introduced as examples of different market structures. Perfect competition maximizes economic welfare when price equals marginal cost, while monopoly leads to higher prices, lower output, and deadweight loss compared to perfect competition. The document previews topics to be covered in the next lecture, including game theory, models of price and quantity competition, and other applied competition topics.
This document discusses various concepts related to oligopoly market structure including:
1) Oligopoly is characterized by few sellers that make interdependent decisions regarding price and output. Barriers to entry allow for potential economic profits in the long run.
2) Models of oligopoly include Cournot, Sweezy, and collusive models like cartels with price leadership.
3) Game theory can be used to analyze strategic interactions between oligopolists through concepts like the prisoner's dilemma, Nash equilibrium, and concentration measures.
Perfect competition is a market structure with many small firms, homogeneous products, perfect information and free entry and exit. In the short run, firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Abnormal profits attract new firms, lowering prices to normal profits when MC equals average cost (AC). Allocative efficiency occurs where MC equals average revenue (AR). In the long run, productive, allocative and profit maximizing efficiencies are achieved at the same output level.
The document describes the structure and assessment scheme for a microeconomics course. The course will include two unit tests worth 60 marks total, and an end-term exam worth 40 marks. The exams will include both theoretical conceptual questions and quantitative problem-solving questions. Students' scores on the assessments will be converted to letter grades based on percentiles, with cut-offs at 10 percentile increments from A+ to F.
This document discusses oligopoly and strategic behavior in markets. It begins by defining oligopoly as a market structure with a small number of firms, differentiated products, significant entry barriers, and where firms interact strategically. It then explores duopoly and shows how firms in a duopoly market may collude like a joint monopoly or compete by lowering prices. Game theory, like the prisoner's dilemma, is presented as a way to understand strategic interactions between oligopolists.
Chapter 7 a market structure game theory part askceducation
This document introduces key concepts in game theory. It explains that game theory involves strategic decision making where players' payoffs depend on the actions of other players. Game theory analyzes players, strategies, payoffs, and equilibrium strategies including dominant strategies and Nash equilibriums. It distinguishes between cooperative and non-cooperative games, one-shot and repeated games, and discusses how collusion can occur in infinitely repeated games using trigger strategies.
This document provides an overview of game theory concepts through examples from business and economics. It discusses:
1) Game theory analyzes strategic interactions where the outcomes of actions depend on the actions of others. Examples include pricing decisions between competitors and movie release dates.
2) Games involve players, strategies, and payoffs. Players consider their optimal strategies given what other players may do.
3) Equilibrium occurs when no player has an incentive to unilaterally change their strategy, given the strategies of others.
4) Games can involve simultaneous or sequential moves. In simultaneous move games, players act without knowing others' actions, while sequential games allow looking ahead to future responses.
Presentation at Sydney University on digital platform competition_11 October ...Luke Wainscoat
Presentation to students at Sydney University in the competition law course on competition between digital platforms and whether ex ante regulation of those platforms is needed.
The economics of regulation 2020 week 3 - examples of regulated industriesLuke Wainscoat
This document provides examples of economic regulation in Australia across several industries:
1. Airport regulation involves light-handed monitoring by the ACCC rather than price regulation, as airports have not been found to exercise substantial market power.
2. Railway regulation uses a floor and ceiling approach to constrain below-rail operators' market power while allowing for pricing flexibility.
3. Electricity distribution remains regulated as a natural monopoly, while generation and retail have been deregulated.
More Related Content
Similar to Introduction to Competition Economics - Lecture 2
Introduction to Competition Economics Lecture_1_2016_For PublicationLuke Wainscoat
This document provides an introduction to competition economics for a university law school course. It outlines how economics can provide insights into competition law and discusses key economic concepts like demand and supply, perfect competition, monopoly, and market power. The document presents models of perfect competition and monopoly to illustrate how firm behavior and market outcomes differ. It also previews topics to be covered in the next lecture, including game theory, price and quantity competition models, and other applied competition topics.
The Economics of Regulation - Mergers and Vertical Restraints (2023).pptxLuke Wainscoat
The document discusses how economics can be used to assess the competitive effects of mergers. It outlines several theories of harm for both horizontal and vertical mergers, including coordinated effects if a merger makes collusion easier, and unilateral effects if a merger allows firms to profitably raise prices by reducing competition. It discusses how market concentration, barriers to entry, diversion ratios between firms, and upward pricing pressure (UPP) tests using measures like the gross upward pricing pressure index (GUPPI) can help evaluate whether a merger would have anticompetitive effects. The document provides a hypothetical example merger calculation using GUPPI and discusses how UPP tests were applied to analyze a proposed supermarket merger in the UK between Asda and Sainsbur
Here are payoff matrices for some of the game theory scenarios:
Student helping partner:
Partner studies Partner doesn't study
Student helps Partner gets A, Student gets B Partner gets F, Student gets C
Student doesn't help Partner gets C, Student gets D Partner gets F, Student gets D
A's owner moving team:
Oakland builds stadium Oakland doesn't build stadium
Owner moves team Loss of fans and money, profit of $500m Profit of $1b
Owner stays Loss of $200m, fans stay Loss of $500m
Coke advertising:
Coke advertises Coke doesn't advertise
Pepsi advertises Profit of $1b each Profit of
Lecture at Sydney University - Mergers and Vertical RestraintsLuke Wainscoat
This document discusses how economics can help assess the competitive effects of mergers and vertical restraints. It provides an overview of how economists examine whether mergers or vertical agreements are likely to substantially lessen competition in violation of competition laws. The document outlines different theories of harm, such as coordinated effects, barriers to entry, and unilateral effects when firms set quantities or prices. It also discusses how concepts like the Herfindahl-Hirschman Index and Upward Pricing Pressure tests can be used in merger analysis. The document then discusses how similar economic techniques can be applied to analyze the potential anti-competitive effects and pro-competitive efficiencies of vertical restraints.
Perfect competition requires: firms are price takers, many sellers/buyers, free entry/exit, identical products, complete information. In short-run, individual firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Market supply is the sum of individual firm MC curves. In long-run, zero economic profits are achieved as new entry drives prices down until MC equals average costs.
The economics of regualtion: mergers and vertical restraintsLuke Wainscoat
This document discusses how economics can help assess the competitive effects of mergers. It outlines how economists examine whether a merger could substantially lessen competition in a market. Key factors discussed include market definition, theories of harm such as coordinated or unilateral effects, barriers to entry, diversion ratios between firms, and tools like the Herfindahl-Hirschman Index and upward pricing pressure tests. It provides an example analysis of a proposed supermarket merger in the UK that was blocked.
The Economics of Market Power for KWM_FinalLuke Wainscoat
This document provides an introduction to analyzing market power. It discusses key concepts such as perfect competition, monopoly, barriers to entry, and different forms of competition among existing suppliers. Specifically, it compares quantity/capacity competition with price competition and examines how mergers may impact prices under each type. The document aims to outline the relevant economic theories and evidence used to assess market power.
This document provides an overview of key concepts in game theory and oligopoly models. It discusses oligopoly market structures where a few firms account for most production. It also covers the Cournot and Bertrand models of oligopoly competition. The document explores game theory concepts such as the prisoner's dilemma, Nash equilibrium, dominant strategies, and repeated games. It examines how these concepts apply to oligopolistic pricing behaviors and the implications of threats, commitments and credibility in strategic interactions between firms.
Market Inefficiencies and Market Failures.pdfGenevira
This document discusses the concepts of efficiency, demand, supply, consumer surplus, producer surplus, and market failures in competitive markets. It provides examples of how perfect competition leads to an efficient allocation of resources where marginal social benefit equals marginal social cost. However, it also notes several situations that can cause market failures and prevent efficient outcomes, such as externalities, public goods, imperfect information, taxes/subsidies, and monopoly power.
This document discusses strategic pricing in oligopolistic markets. It explains that in these markets, firms are often afraid to change prices because they do not know how competitors will respond. If other firms follow a price change, demand becomes relatively inelastic. The document also discusses game theory concepts like the prisoner's dilemma and dominant strategies to analyze strategic decision-making between firms.
Machine learning for profit: Computational advertising landscapeSharat Chikkerur
Online advertising is a multibillion-dollar industry than spans several subfields of computer science and engineering including information retrieval, machine learning, auction theory, optimization and distributed computing. Competitiveness in the marketplace is directly dependent on accuracy, scalability and sophistication of machine learning algorithms involved. The talk will present an overview of the computational advertising landscape, outline several key challenges, and discuss how machine learning addresses them.
http://www.buffalo.edu/cdse/CDSEdayslanding1/cdse-days2017/faculty_directory/SharatChikkerur.html
1) A pure monopoly is characterized by a single seller of a unique product with no close substitutes and barriers to entry that prevent competition.
2) Monopoly power allows the firm to influence prices by controlling a large share of the market. Barriers to entry like legal restrictions, patents, and control of resources prevent other firms from entering the market.
3) For a monopoly, marginal revenue is always less than price and can be negative if demand is inelastic, meaning the firm would lose total revenue by producing more. Monopolies will only produce where marginal revenue is positive or zero.
Introduction to Competition Economics - Lecture 1Luke Wainscoat
This document provides an introduction to competition economics. It discusses how economics can provide insights into competition law and outlines some key economic concepts like demand and supply, elasticity, costs, and market power. Perfect competition and monopoly models are introduced as examples of different market structures. Perfect competition maximizes economic welfare when price equals marginal cost, while monopoly leads to higher prices, lower output, and deadweight loss compared to perfect competition. The document previews topics to be covered in the next lecture, including game theory, models of price and quantity competition, and other applied competition topics.
This document discusses various concepts related to oligopoly market structure including:
1) Oligopoly is characterized by few sellers that make interdependent decisions regarding price and output. Barriers to entry allow for potential economic profits in the long run.
2) Models of oligopoly include Cournot, Sweezy, and collusive models like cartels with price leadership.
3) Game theory can be used to analyze strategic interactions between oligopolists through concepts like the prisoner's dilemma, Nash equilibrium, and concentration measures.
Perfect competition is a market structure with many small firms, homogeneous products, perfect information and free entry and exit. In the short run, firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Abnormal profits attract new firms, lowering prices to normal profits when MC equals average cost (AC). Allocative efficiency occurs where MC equals average revenue (AR). In the long run, productive, allocative and profit maximizing efficiencies are achieved at the same output level.
The document describes the structure and assessment scheme for a microeconomics course. The course will include two unit tests worth 60 marks total, and an end-term exam worth 40 marks. The exams will include both theoretical conceptual questions and quantitative problem-solving questions. Students' scores on the assessments will be converted to letter grades based on percentiles, with cut-offs at 10 percentile increments from A+ to F.
This document discusses oligopoly and strategic behavior in markets. It begins by defining oligopoly as a market structure with a small number of firms, differentiated products, significant entry barriers, and where firms interact strategically. It then explores duopoly and shows how firms in a duopoly market may collude like a joint monopoly or compete by lowering prices. Game theory, like the prisoner's dilemma, is presented as a way to understand strategic interactions between oligopolists.
Chapter 7 a market structure game theory part askceducation
This document introduces key concepts in game theory. It explains that game theory involves strategic decision making where players' payoffs depend on the actions of other players. Game theory analyzes players, strategies, payoffs, and equilibrium strategies including dominant strategies and Nash equilibriums. It distinguishes between cooperative and non-cooperative games, one-shot and repeated games, and discusses how collusion can occur in infinitely repeated games using trigger strategies.
This document provides an overview of game theory concepts through examples from business and economics. It discusses:
1) Game theory analyzes strategic interactions where the outcomes of actions depend on the actions of others. Examples include pricing decisions between competitors and movie release dates.
2) Games involve players, strategies, and payoffs. Players consider their optimal strategies given what other players may do.
3) Equilibrium occurs when no player has an incentive to unilaterally change their strategy, given the strategies of others.
4) Games can involve simultaneous or sequential moves. In simultaneous move games, players act without knowing others' actions, while sequential games allow looking ahead to future responses.
Similar to Introduction to Competition Economics - Lecture 2 (20)
Presentation at Sydney University on digital platform competition_11 October ...Luke Wainscoat
Presentation to students at Sydney University in the competition law course on competition between digital platforms and whether ex ante regulation of those platforms is needed.
The economics of regulation 2020 week 3 - examples of regulated industriesLuke Wainscoat
This document provides examples of economic regulation in Australia across several industries:
1. Airport regulation involves light-handed monitoring by the ACCC rather than price regulation, as airports have not been found to exercise substantial market power.
2. Railway regulation uses a floor and ceiling approach to constrain below-rail operators' market power while allowing for pricing flexibility.
3. Electricity distribution remains regulated as a natural monopoly, while generation and retail have been deregulated.
Benefit of anti -competitive conduct - luke wainscoat - 31 august 2019Luke Wainscoat
The document discusses techniques for estimating the benefits of anti-competitive conduct in order to calculate the maximum penalty under Australian competition law. Currently, maximum penalties are typically based on a percentage of the firm's turnover rather than the estimated benefits. The document outlines two techniques - the before and after technique and difference-in-differences technique - that can be used to estimate what prices would have been in the absence of anti-competitive conduct and thereby determine the financial benefits obtained. While benefits have rarely been used to set penalties so far, the author expects they will be attempted to be calculated in upcoming cases.
This document provides examples of economic regulation in Australia, including for airports and railways. It discusses how some industries like airports and below-rail railway operations have natural monopoly characteristics that give them substantial market power. Economic regulation aims to address this by setting rules for prices, access, and investment in these industries to prevent the abuse of market power and ensure benefits for consumers. For airports, Australia moved to a lighter-touch monitoring regime where the ACCC monitors prices and quality rather than directly setting prices.
This document summarizes the key points from a presentation on concerted practices regarding motor insurers sharing price information in the UK. It discusses how information sharing can facilitate collusion or soften competition. For there to be a substantial lessening of competition, the sharing would need to make collusion more internally and externally stable. The document also analyzes how the specific information shared between motor insurers could aid collusion and whether the market is susceptible. It considers potential efficiency gains but finds the sharing in this case is more likely to harm competition. The document concludes by discussing how regulators decided to accept undertakings to reduce risks to collusion rather than prosecute the conduct.
Competition Law Conference May 2016 Triage for MFNsLuke Wainscoat
This document summarizes a presentation on efficiently assessing whether most favored nation (MFN) clauses are likely to lessen competition. It outlines a four step process: 1) applying safe harbors based on market power, coverage, and type of MFN. 2) determining if there is a coherent theory of harm consistent with facts and economic theory. 3) assessing if there are likely substantial benefits also consistent with facts and theory. 4) conducting an empirical assessment using techniques like natural experiments and hypothesis testing. Examples are provided on MFNs in the hotel booking and gas pipeline industries.
The document provides an overview of economic regulation in Australia through examples related to airport regulation, railway regulation, and electricity networks regulation. It discusses how economic regulation addresses natural monopoly problems and potential abuse of market power. Key aspects covered include the differences between ex ante regulation and ex post competition law, criteria for determining when ex ante regulation is needed, approaches to regulating monopolies in different infrastructure sectors like setting price caps for airports and electricity networks, and facilitating access to essential facilities through declaration of infrastructure under competition laws.
2. HoustonKemp.com
Previous lecture
• Demand and supply model
› Complements and substitutes
› Elasticities
› Marginal cost
› Economies and diseconomies of scale
• Perfect competition vs monopoly
› Number of firms
› Barriers to entry
› Homogeneity of product
• Economic welfare and efficiency:
› Consumer and producer surplus
› Deadweight loss
2
5. HoustonKemp.com
Market power
• Ability to profitably raise price above perfect
competitive level is called ‘market power’
• The logic of the monopoly model…
› Firms produce and sell less than in a competitive market
› There is deadweight loss / inefficiency
…holds for any firm with market power
• Market power is a form of ‘market failure’
› The privately optimal decision ≠ the socially optimal decision
› In this case: private pricing decision does not maximise
welfare
5
6. HoustonKemp.com
What do we do about market power?
• Some market power is good…
› Incentive to innovate/differentiate
› And so it is not illegal to have or use market power
• But ‘substantial’ market power can be bad
› Regulation is sometimes used when there is significant and
enduring market power (eg electricity distribution)
› If used for the purpose of deterring or preventing entry or
substantially damaging a competitor (s46)
› If it is achieved through collusion or mergers (substantial
lessening of competition, s50)
6
7. HoustonKemp.com
Outline for today
• In PC/monopoly there is no strategic interaction…
• Game theory:
› Static games
› Dynamic games
• Models of markets based on game theory:
› Bertrand (price) competition
› Cournot (quantity) competition
7
9. HoustonKemp.com
Game Theory
• Key features of interactive decision-making:
› Who are the decision-makers?
› In what order do they make decisions?
› What actions are available?
› What are their motives or preferences over outcomes?
• A game is a formal representation of this, with elements:
› Players
› Timing:
Simultaneous or sequential actions
One-shot or repeated game
› Actions (can be discrete or continuous)
› Payoffs
› Strategies (“if she does this, I do that…”)
› Equilibrium or equilibria
9
10. HoustonKemp.com
Static games
• A one-shot, simultaneous action game
• Represented by the ‘normal form’ matrix.
• Example: Prisoners’ Dilemma
10
Prisoner 1
Betray Co-operate
Prisoner 2
Betray
Co-operate
•
• What will be the outcome (equilibrium)?
2 years
2 years
3 years
No jail
No jail
3 years
1 year
1 year
11. HoustonKemp.com
Static games – equilibrium concepts
• Dominant strategy equilibrium:
› Is there a “dominant strategy” that yields a higher payoff
regardless of the other player’s action?
11
Prisoner 1
Betray Co-operate
Prisoner 2
Betray 2 years 3 years
2 years No jail
Co-operate No jail 1 year
3 years 1 year
• The dominant strategy equilibrium (betray, betray) is inferior
for both players to the alternative (co-operate, co-operate)
Dominant
strategy
Dominant
strategy
12. HoustonKemp.com
Nash equilibrium: another solution concept
• There is not always a dominant strategy equilibrium
• Define a “best response” function as the optimal
choice given your rival’s action
• Nash equilibrium:
› The intersection of best response functions
› i.e. all players are playing their best responses
› Given their rivals’ actions, in a Nash equilibrium no player has
an incentive to change their own action
› Note a DSE is automatically a Nash equilibrium as well
12
13. HoustonKemp.com
Example of Nash equilibrium
• A ‘co-ordination game’ of development of new
technology
› Assume two firms: a TV manufacturer and a broadcaster
› There are costs to both of investing in HDTV technology which
will only be recouped if the other also invests
13
TV manufacturer
Invest Don’t invest
Broadcaster
Invest 100 20
100 – 50
Don’t invest – 50 20
20 20
• Nash equilibria: (invest, invest) & (don’t invest, don’t
invest)
• What would happen if the game were sequential?
14. HoustonKemp.com
Sequential games
• Backward induction
• Represent sequential games and repeated games in
the “extensive form”
14
M
B B
Invest Don’t
invest
Invest
Don’t
invest
Don’t
invest
Invest
(100, 100) (–50, 20) (20, –50) (20, 20)(M, B) =
Invest Don’t
invest
Invest
15. HoustonKemp.com
Ultimatum game
• A one-shot sequential game
• There is a pile of chocolate to be divided amongst 2
players
• Player 1 proposes a split (e.g. 50:50, 80:20, 90:10)
• Player 2 accepts or rejects the offer
› If player 2 accepts, the chocolate is divided as proposed
› If player 2 rejects, neither player receives any chocolate
15
16. HoustonKemp.com
Ultimatum game - results
• How many rejected the offer?
• How many offered 50% to the other player?
• How many offered less than 50% to the other player?
• How many offered more than 50% to the other
player?
16
• Assume one shot game with perfectly rationale players
• Backward induction
• Player 2 should accept any amount greater than 0
• Player 1 should offer smallest amount possible
• Outcomes often different to theory because repeated
game, fairness etc
19. HoustonKemp.com
Price competition
• When firms compete on price, what is the optimal
strategy and how competitive will the market be?
• Assume imperfect substitutes
• ‘Best responses’: the higher your rival’s price, the
higher your own:
19
PA
PQ
Firm Q b.r.
Firm A b.r.
200
200 300
300
Nash equilibrium: the
intersection of best responses
21. HoustonKemp.com
Price competition (continued)
• Perfect substitutes: “Bertrand competition”
21
PT
PJ
J b.r.T b.r.
MCJ
MCT
45° line
• Best response: price just below your competitor (but not < MC)
• Nash equilibrium: P=MC, zero profit
• Are just two firms sufficient to generate a perfectly competitive market?
Nash equilibrium: the
intersection of best responses
22. HoustonKemp.com
Quantity competition: the Cournot model
• Firms set quantities and let the market determine a
price
• Can represent setting of capacities followed by
capacity-constrained price-setting
• Cournot quantity ‘best responses’:
› Firms choose quantity such that Marginal Revenue = MC
› MR can be broken down into
Additional revenue from one additional sale, which depends on
the price (and therefore quantity sold)
Loss of revenue from lower price on existing sales, which depends
upon how much the increase in the firm’s output alters the price
22
24. HoustonKemp.com
Quantity competition: the Cournot model
• The best response to 0 is the monopoly quantity (e.g. 500)
• The best response to the PC quantity (e.g. 1000) is 0
• The Nash equilibrium sees P > MC, with the price-cost margin
decreasing as the number of firms increases
• For n=1 and n=∞ Cournot produces the monopoly and PC models
24
QT
QJ
Firm J b.r.
Firm T b.r.
Nash equilibrium: the
intersection of best responses
1000
500
500 1000
27. HoustonKemp.com
Example: Monopoly with entry deterrence
28
• An example of ‘strategic commitment’
• The threat of entry can discipline a monopolist into
more competitive pricing; a ‘contestable market’
Monopolist
Entrant Entrant
Small
capacity
Large
capacity
Enter
Don’t
enter
Don’t
enter
Enter
(20, 20) (60, 0) (0, –20) (40, 0)Profits for (M, E) =
Enter
Don’t
enter
Large
capacity
28. HoustonKemp.com
Predatory pricing
• A firm ‘predator’ sets a low price for sufficient period
such that rival (or rivals) exit
• Typically involves
› Loss of profit by predator when set low prices initially; and
› Phase where predator is able to set higher prices when faces
less competition – need market power
• What is the difference between predation prices
and competitive prices?
› Risk of stifling competition
29
29. HoustonKemp.com
Predatory pricing theories
• Reputation models
› Incumbent make a loss fighting entrants in order to
discourage others
• Deep pocket theory
› Small firm’s borrowing is restricted
• Signalling
› Incumbent signals that it has very low costs
30
30. HoustonKemp.com
Repeated prisoners dilemma (RPD) and collusion
31
Firm 1
Compete Collude
Firm 2
Compete 5 1
5 14
Collude 14 10
1 10
14
10
5
1 2 3
Nash eqm in one
shot game
Firm 1 payoff from
always collude
Firm 1 payoff from
compete today
Number of
periods from now
Payoffperperiod(firm1)
31. HoustonKemp.com
According to this RPD model, firms are more likely
to collude when..
• They are patient
• Frequent interactions between firms
› Benefit of cheating is small
• Cheating is easy to detect
• Fewer firms
• Necessary conditions for collusion:
› Agree on collusive outcome
› Monitor collusion and punish cheaters
› Prevent entry (or accommodate)
32
32. HoustonKemp.com
How can we stop collusion?
• Market outcomes of collusion and competition look
the same
• No competition authority has detected collusion by
examining market outcomes alone
• Leniency programs in combination with large fines
and are very effective:
› Create a strong incentive to apply for leniency
› “unquestionably, the single greatest investigative tool
available to anti-cartel enforcers” Scott D. Hammond
U.S. Department of Justice
33