Today we will study the behavior of businesses in industries where there are only a few firms that cannot cooperate (non-collusive oligopoly). You should read the text chapter identified below in the homework section, watch the related videos for help in understanding this material, do the activities identified, in the homework section and be prepared for the Problem of the Day. This page contains all the information you need for today's class. Use the table of contents on the right to help you navigate.
Read Mankiw (Chapter 17).
Watch this video.
Problem of the Day: You will work cooperatively with your partner to construct a response to the following prompt.
A case study in the chapter describes a phone conversation between the presidents of Braniff Airways and American Airlines. Suppose each company can charge either a high price or low price for tickets. If one company charges $100, it earns low profits if the other company company charges $100 too. It earns high profits, if the other company charges $200. On the other hand, if the company charges $200, it earns very low profits if the other company charges $100 and medium profits if the other company charges $200 too. The same set of choices applies to the second company.
Draw a payoff matrix/decision box for this game.
What is the Nash equilibrium in this game? Explain.
Is there an outcome that would be better than the Nash equilibrium for both airlines? How would it be achieved? Who would lose, if it were achieved?
Lecture
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