Module 3 – Background
MARKET STRUCTURE AND GAME THEORY
Required Reading
To start with, take a look at this short animated video that
will introduce you to the basics of market structure:
McGlasson, M. (2009). Episode 25: Market structures.
https://www.youtube.com/watch?v=9Hxy-TuX9fs&list=PLr6g_xbkz_0u_cINHBVW1ZuEpozKk2XGx
Now read Chapters 9 and 10 from the following book for more
detail on these topics. In particular,
pay attention to the numerical examples and the “Self-Check Questions” at the
end of each section.
https://open.umn.edu/opentextbooks/Images/1938168240.pngTaylor,
T. (2014) Microeconomics. OpenStax College.
http://cnx.org/contents/6i8iXmBj@10.174:WXgRcPaN@10/Introduction-to-a-Monopoly
Finally, read this
slightly more advanced chapter. Pay special attention to the sections at the
end on game theory and the “Policy Response to Oligopoly” section that covers
the Herfindahl index:
Image result for A Primer on Microeconomics A Primer on
Microeconomics BeveridgeBeveridge, T.
M. (2013). Chapter 8: Between perfect competition and monopoly. A Primer on
Microeconomics. [New York, N.Y.] [222 East 46th Street, New York, NY 10017]:
Business Expert Press.
Module 3 – Case
MARKET STRUCTURE AND GAME THEORY
Assignment Overview
As always, make sure to thoroughly review the required
background materials before starting the assignments. The assignment questions will require you to
do some calculations and also apply the concepts from the module. Question 3
differs from previous assignments in that you have to use an online simulation
tool; but this activity should be a fun break from the standard numerical
problems you have been doing.
Case Assignment
1.
1. For this problem
use the Herfindahl Index to compute market concentration:
a. Suppose Apple
has 45% of the U.S. market share for smartphones, followed by Samsung with 30%,
LG with 9%, Motorola with 8%, HTC with 6%, and Nokia with 2%. What is the Herfindahl Index for the
smartphone industry based on these numbers? Based on the Herfindahl Index, do
you think the government would be willing to approve a merger between Apple and
Samsung?
b. Now suppose
Nokia and Motorola come out with a new smartphone that takes away a huge chunk
of market share from Apple and Samsung. The new market shares are 25% for
Apple, 20% for Samsung, 20% for Motorola, 20% for Nokia, 10% for LG, and 5% for
HTC.
2. Use what you
learned about perfect competition, monopoly, and oligopoly to answer these
questions:
a. In the table
below is the quantity produced, the price, the fixed costs, and variable costs
for a perfectly competitive firm that faces a constant price of $150 for its
product regardless of the quantity it sells.
Use the information in the first four columns to calculate the number
for the last four columns. At what
quantity should they produce based on what you find with your results?
b. How do you think
your answer might change if it became a monopolist with all of its competitors
leaving the market? Or if it became an
oligopoly with only one or two competitors?
Quantity
Price
Fixed Cost
Variable Cost
Total Cost
Marginal Cost
Total Revenue
Profit/
Loss
0
150
200
–
–
1
150
200
$140
2
150
200
$240
3
150
200
$320
4
150
200
$410
5
150
200
$520
6
150
200
$650
7
150
200
$810
8
150
200
$1,010
9
150
200
$1,310
10
150
200
$1,710
3.
3. You’ve read
about the prisoner’s dilemma in the background readings. Suppose you are a business owner with just
one main competitor. If neither you nor
your competitor cut your prices, you will both be more profitable. However, if your competitor lowers its prices
and you keep your prices high, then you will lose all of your sales to your
competitor. Every month you and your
competitor place advertisements in the local newspaper with your price – so you
need to decide each month whether or not to keep prices high, or lower them
based on what you think your competitor might do.
Go to the following webpage and test out some of your
potential price strategies:
http://www.gametheory.net/Mike/applets/PDilemma/Pdilemma.html
The strategy “defect” indicates lowering your prices. The
strategy “cooperate” means keep prices the same. Try out different strategies,
such as cooperating all the time or defecting sometimes. There are five different rounds of this game,
each with a competitor with different personalities and different
strategies. Play all five rounds and
experiment with different strategic approaches.
Report your scores for each round, and discuss which strategies seemed
to work the best for you.
Assignment Expectations
· Answer the
assignment questions directly.
· Stay focused
on the precise assignment questions. Do not go off on tangents or devote a lot
of space to summarizing general background materials.
· For
computational problems, make sure to show your work and explain your steps.
· For short
answer/short essay questions make sure to reference your sources of information
with both a bibliography and in-text citations. See the Student Guide to
Writing a High-Quality Academic Paper, including pages 11-14 on in-text
citations. Another resource is the “Writing Style Guide,” which is found under
“My Resources” in the TLC Portal.
