Del 1 (In english)
WHAT IS STRATEGIC BEHAVIOUR?
In the basic competitive behaviour model and in a monopoly, individuals and firms do not
need to behave strategically. The reason for this is that the basic competitive model creates
the condition of perfect competition, where each firm and individual is a price taker that
cannot influence the market price, and with a monopoly, there simply is no competition.
When markets are, however, structured in such a way that there exists imperfect competition,
strategic behaviour becomes important. With imperfect competition several firms are each
aware that their sales depend on the price they charge and possibly other actions they take,
such as advertising. There are two special cases where the imperfect competition market
structure is relevant to us: oligopoly (when there are sufficiently few firms that each must be
concerned with how its rivals will respond to any action it undertakes) and monopolistic
competition (when there are sufficiently many firms that each believe that its rivals will not
change the price they charge should it lower its own price, and that profits may be driven
down to zero).
Strategic behaviour is basically decisions that take into account the possible reactions of
others. For understanding strategic behaviour we use game theory. Economists have found
that many examples of strategic behaviour can be understood by relying on the core concepts
of incentives and information.
Behaving strategically means that each player must try to determine what the other player is
likely to do. Rollback is crucial for strategic behaviour- thinking strategically means looking
into the future to predict how others will behave and then using that information to make
decisions.
Game theory provides a framework for studying strategic behaviour. The objective is to
predict what strategy each player will choose, and to predict the outcome of the game- its
equilibrium. John Nash developed the most fundamental idea for predicting the actions of
players in a strategic game. This theory is called the Nash equilibrium, and in it each player in
a game is following a strategy that is best, given the strategies followed by the other players.
A game may have a unique Nash equilibrium or it may have several equilibrium. That
depends on the strategy.
A strategy is a plan of action and to predict the outcome of a game one needs to ascertain
whether the strategy is a dominant strategy or not. A dominant strategy is one that works best,
no matter what the other player does. It is easy to predict the outcome of a game, the Nash
equilibrium, if both players have a dominant strategy. A game that illustrates this ease when a
situation exists where each player has a dominant strategy is the ‘Prisoner’s Dilemma’.
Although we have heard it all before, it is worth recapping:
Two Prisoner’s 1 and 2, are alleged by police to be conspirators in a crime. After being taken
into custody, they are separated. A police officer tells each that if the prisoner confesses and
his co-conspirator does not, then the prisoner will not get any jail time. If both co-conspirators
confess then they will both get five years imprisonment. If they both do not confess they will
both get one year in jail. But if the prisoner does not confess and his co-conspirator does
confess, then he will receive 15 years in jail. It is easiest to understand using a game table
(Figure 1 below)
Figure 1 A Game Table
Based on self-interest, each individual prisoner believes that confession is best, whether his
partner confesses or not. By following their self-interest and confessing, they both end up
worse off than if neither had confessed. They are both following their dominant strategy and it
is a strategy that works best no matter what the other prisoner should decide to do
It is also possible, however to have games with either only one player with a dominant
strategy or neither player having a dominant strategy at all. To explain these circumstances
economists have devised a game called the Bertrand price-cutting game. Two firms, Company
A and Company B, produce identical products that compete with one another. Company A
has a dominant strategy- reduce prices. It makes more money with this strategy, regardless of
what Company B does because it has an incentive to reduce its price below that of Company
B as long as the price is above marginal cost. If each is charging the same price, then they
split the market. If the price is above marginal cost, they both make a profit. But what if
one charges a (slightly) lower price? Its profit per unit falls (a little, since the price cut
was small), but because it gets the whole market its profits go up. (For a small enough
price reduction, profit should almost double.) Therefore it has a clear incentive to reduce
price. Even though Company B does not have a dominant strategy, we can predict what it will
do. Company B will have to reduce its prices because company A has that as its dominant
strategy. The optimal strategy for each firm, then, is to reduce price below the other, unless
price equals marginal cost. Since each firm is trying to undercut the other, we end up with
price equal to marginal cost. In game theory terms, this is a Nash equilibrium.
Company A
Company B
Reduce Do not reduce
2.5
1
Reduce
5
6
3
3.5
Do not reduce
1
2
Figure 2: A Game Table of Bertrand’s Price-Cutting Game
Some circumstances have 2 players both without dominant strategies. They give rise to
outcomes with more than one Nash equilibrium. The study game outlined in SAW illustrates
this point. Two friends decide to study together. They are both enrolled in the same class for
economics and public administration and both agree that their performances on upcoming
exams will improve if they study together. However Student A would prefer to spend time
studying economics, whilst Student B would prefer to study public administration. The game
table in figure 3 expresses payoffs in the average grade for the two courses. Neither student
has a dominant strategy, one that is best regardless of what the other does. But there are 2
Nash equilibria in this game- to either both study economics or public administration. So
whilst the concept of a Nash equilibrium may not lead us to predict a unique equilibrium in a
game, it can help us to eliminate some outcomes.
Student A
Student B
Study public admin
Study public admin Study economics
B
A
C
C
Study economics
A
C
C
B
Figure 3: A Game Table of the Study Game
In the three games described above, each party makes only one decision. The games are
played only once. But it sometimes occurs that the games played are played many times over.
They are called repeated games and the strategies employed become more complex. To
illustrate this point SAW comes up with the example of two firms in a duopoly. Each
duopolist announces that it will refrain from cutting prices as long as its rival does. But if the
rival cheats on the collusive agreement, then the first duopolist might respond by increasing
production and lowering prices. With repeated games it is even more important to look to the
end result and work backward to identify the best current choice. Making decisions this way
is called backward induction or rollback. Back to the example of the duoplolists. Collusion in
a repeated game setting can function because in strategic game’s that do not have a finite end
there are a number of strategies that may allow players to cooperate to achieve the best
outcome. These strategies include: developing a good reputation with customers and other
firms, the existence of a strategy called ‘tit for tat’ where the threat of increased production
will achieve cooperation in competition, as well as institutions such as The World Trade
Organisation that serves to enforce agreements between nations.
In the prisoner’s dilemma, each player had to make a decision without knowing what the
other player was going to decide. Many instances lead to a sequential decision making
process, one player decides first and the second player responds to the choice made by that
player. In this type of game, the sequential game, the player who moves first must consider
how the next player will respond. We use a tree diagram to simplify the complex scenario of
sequential games. (see presentation).
Threats and time consistencies are two occurrences that are common components of strategic
behaviour. Threats we have already delved into, and time inconsistencies simply is the case
when the strategic choices have been made but carrying out the initial strategy might no
longer be the best option, The example found in SAW of the college student whose parents
want her to find a summer job illustrates this strategy well.
Del 2:
Fangens dilemma
Oppgave 2a:
(Fra Stiglitz & Walsh side 399)
Marlboro og Benson & Hedges
Denne oppgaven handler om mulige konsekvenser av å reklamere eller ikke å bruke penger på
reklame for to konkurrerende firmaer med produkter som retter seg mot det samme markedet.
Marlboro og Benson & Hedges er blant verdens største produsenter av tobakksvarer. Hvis
bare det ene firmaet investerer i markedsføring, vil det ene firmaet i teorien få en større del av
markedet. Hvis begge bruker penger på dette, vil markedsandelene i teorien holde seg på
samme nivå. Dette vil antakelig også hende hvis ingen bruker noe på reklame.
Tobakksreklame er i de fleste land forbudt eller er forbundet med strenge restriksjoner og hvis
man går ut fra at dette er en markedssituasjon hvor reklame for tobakk er lov, men underlagt
et strengt regelverk. For å få et bilde av situasjonen er fangens dilemma en anvendbar måte
for å redusere abstraheringen av en markedssituasjon med få, jevnstore aktører (for eksempel
oligopol). Egentlig dreier oppgaven seg om strategisk adferd, hvor to konkurrerende firmaer
må forutse de andres planer for å kunne møte konkurrenten med samme tiltak for å beholde
sin posisjon i et marked.
Marlboro
Benson &
Ikke reklame
Hedges
Reklame
Ikke reklame
B&H
Marlboro
100
100 mill
mill
profitt
profitt
B&H
Marlboro
150
50 mill
mill
profitt
profitt
Reklame
B&H
Marlboro
50 mill 150 mill
profitt profitt
B&H
Marlboro
70 mill 70 mill
profitt profitt
Hvis begge firmaene bruker penger på reklame, vil profitten synke litt, men begge beholder
samme markedsandeler i prosent.
Oppgaven tar også opp hvorfor tobakksprodusentene klager på statlige restriksjoner på
kampanjer for produktet tobakk. På en måte vil jo faktisk begge tjene mest på at ingen
reklamerer. En uheldig konsekvens fra en del sitt synspunkt, kan være at det å ha restriksjoner
på produkter som er lovlige, faktisk i prinsippet er å begrense ytringsfriheten. Det kan også
være at det kan virke som en stat som vil ha restriksjoner på enkelte produkter. Det kan også
virke som om ideologer hos myndighetene har et ønske om å kontrollere private bedrifter eller
påvirke eventuelt begrense ett individs rett til å utrykke seg og å foreta selvstendige valg.
Oppgave 2b
Ta for deg to rivaler, produsenter av film til kamera. Forbrukerne ønsker en film som
reproduserer fargekvaliteten og som ikke er “kornete”.
Både Kodak og Fuji har filmer som er sammenlignbare i kvalitet. Men om en av produsentene
gjør forskning og forbedrer sitt produkt, vil denne produsenten stjele kunder fra produsent nr.
2. Om dem begge gjennomfører forskning, og forbedrer kvaliteten på sitt produkt, vil de
fortsette å “dele” markedet som tidligere.
Spørsmål 1:
Hvorfor vil begge tjene på å gjennomføre forskning av sitt produkt, selvom deres profitt blir
lavere?
Begge produsenter må tenke; “for hvert valg jeg eventuelt vil foreta, hva er det beste valget
rivalen min vil foreta?”
Om vi tar utgangspunkt i Kodak. Hvis Kodak velger å forske på sitt produkt, hva er den beste
strategien til Fuji? Og hvis Kodak velger å ikke forske på sitt produkt, hva er da den beste
strategien til Fuji?
I begge situasjoner ser vi at det beste for Fuji er å forske på sitt produkt. Hvis det beste for
Fuji er å forske, hva er da den beste strategien for Kodak?
Vi foretar den samme metoden som over: Hvis Fuji velger å forske på sitt produkt, hva er den
beste strategien til Kodak? Og hvis Fuji velger å ikke drive forskning på sitt produkt, hva er
da den beste strategien til Kodak?
Vi ser at både Fuji og Kodak vil tjene på å forske på sin film, uansett hva rivalen velger å
gjøre.
Spørsmål 2:
Vil samfunnet tjene på at både Kodak og Fuji driver forskning på sitt produkt, selv om
profitten er lavere?
Når begge velger å drive forskning, og videreutvikle sammenliknbare produkter, vil begge
produsenter fortsette å “dele” markedet. Det vil da oppstå ny konkurranse og konsumentene
vil kunne kjøpe et enda bedre produkt.
Del 3.
Angi likevekten i et marked med monopolistisk konkurranse.
A: optimal profitt får en bedrift ved å produsere den mengden der grenseinntekt er lik
grensekostnad og selge til den prisen konsumentene er villig til å gi. Prisen ligger over
kostnad og de får profitt.
Profitt lokker til seg flere konkurrenter.
B: med flere konkurrenter som deler på etterspørselen blir etterspørselen til bedriften i A
mindre. Der prisen til etterspurt mengde er lik kostnadene går de verken med overskudd eller
underskudd.
Som vi ser, ligger kostnadene ellers over prisnivået. Likevekten vil derfor være der
grenseinntekt er lik grensekostnad.