Summary Managerial Economics (D0H52A) 17/20

Managerial Economics
Lec 1: Game theory and competition
Game theory: fundamentals
Agents:
- Rational preferences

Complete/perfect Information Asymmetric information
Static Strategic games Bayesian games
Dynam Extensive games, repeated Sequential (Bayesian) games
ic games
- Payoff maximizing




Main categories of games:
- Strategic
o Static
 One shot
 Simultaneous choice
o Complete information
 All players know capabilities (available strategies) other
players
 All players know consequences (payoffs) of every combination
strategies
 !! does not mean certainty (probability distributions)
o Fully described by
 Set of players
 Set of actions (action profiles gebruiken als je een nash ofz
weergeeft)
 Payoff functions (2 players: payoff matrix = normal form)
o Strategies:
 X strictly dominated by Y
 X heeft in alle gevallen een lagere payoff dan Y
 X nooit spelen, dus verwijderen uit game
 X is a strictly dominant strategy
 X altijd beste optie
 Altijd X spelen
o Equilibrium
 In dominant strategies
 Als beide een dominante strategie volgen
 Alleen rationaliteit hier
 Is ook een NE
 Nash

1

, 
Ze kunnen niet positief deviaten, elk speelt zijn beste
response op wat de andere doet
 Niet per se een optimum, eerder een resting point
 Niet altijd een te vinden
 Soms meer dan een (players might disagree on which
is best)
 Niet altijd een te vinden in pure strategies, wel altijd in mixed
strategies (matching pennies)
- Extensive /repeated games
o Dynamic
o Complete information
- Bayesian
o Static
o Asymmetric information
- Sequential
o Dynamic
o Asymmetric information

Demand, monopoly and competition
Market demand
- Price elasticity:
Δq
q dq ( p ) p
o ε ( p)= = ×
Δp dp q ( p)
p
o |ε|=1
 Als de prijs dealt met x% zal de hoeveelheid
toenemen/afnemen met x%
o |ε|>1
 Elastic
 Increasing price reduces revenue
o |ε|<1
 Inelastic
 Increasing price increases revenue
Perfect competition
- Does not exist, archetype
- Consumers willing to buy any quantity, but only at price p (or lower) 
price infinitely elastic
- Price taking firm
o Single-agent problem
 Each firm too small to affect demand (no strategic
interactions)
 Can produce q with cost C(q)
 Choose quantity to maximize profit
 Profit = p*q – C(q) afleiden naar q
 P = C’(q) = marginale kost van q-de eenheid
 IF price taking + free entry = zero profits

2

, Monopolist
- Single agent problem
o Observes downward demand slope q(p) and can set the price
o Choose quantity or price to maximize profit
 Profit = p*q(p) – C(q(p))
 Pm = (A+bc)/2b
 In elastische deel van de vraag
Imperfect competition: Bertrand duopoly
- Assumptions: firm 1 en 2
o Homogeneous products
o Same cost function
o Each firm chooses own price simultaneously
o Consumers only buy from cheapest
o Prices equal  split equally
o Only produce if units are sold (incur costs)
- Predictions: Bertrand Paradox
o 2 firms = enough to achieve competitive outcomes
 Price at marginal cost
 Same output produced as perfect competition
 Zero profits
o Market concentration alone does not lead to market power

Beyond the paradox
- Many firms do make profits
o Increasing marginal costs (short term profits)
o Capacity constraints
 Scaling up takes time and investments
 Niet direct van 0 naar volledige market demand
o Search/information frictions
 Consumers weten niet altijd waar het goedkoopst is
 Takes time to shop around
o Product differentiation
 Horizontal (like different products)
 Vertical (different quality)
 Advertisement



Diff erentiated products
Consumers don’t always switch to competing brands if price increases: brand
loyalty, differences quality/taste, switching costs, limited information
 consumers treating products as if they are not homogeneous
 market power restored

Demand differentiated products:
- Q = Ai + xp + ypi …….
- Cross price elasticity


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