Crash Course Economics: Competition and Game Theory

Introduction

• Hosts: Jacob Clifford and Adriene Hill
• Focus: Competition in markets and game theory
• Analogy: Game theory is not like board or video games; losing can mean bankruptcy

Market Structures

• Perfect Competition

  • Characteristics: Many producers, easy entry, identical products
  • Example: Agricultural products (e.g., strawberries)
  • Price Control: None; market sets the price

• Monopoly

  • Characteristics: One producer, high barriers to entry
  • Price Control: Significant
  • Few substitutes available

• Monopolistic Competition

  • Characteristics: Many producers, low entry barriers, similar but differentiated products
  • Example: Fast food (e.g., McDonald's, Burger King)
  • Price Strategy: Some control due to differentiation, but competitive pressures exist

• Oligopoly

  • Characteristics: Few large companies, high barriers to entry
  • Examples: Laptops (HP, Dell, Apple), Mobile phones (Apple, Samsung, LG), Cars, Airlines
  • Price Strategy: Non-price competition (advertising, style, quality)

Non-Price Competition in Oligopolies

• Focus on differentiating products through advertising, service, and quality
• Example: Designer labels, customer service, and convenience
• Advertising as the primary form of differentiation

Game Theory

• Prisoner’s Dilemma
  • Scenario: Two parties decide independently; cooperation leads to the best mutual outcome
  • Reality: Often parties don't cooperate and choose self-interest, leading to suboptimal results
• Price Competition
  • Firms may undercut each other leading to lower profits
  • Non-price competition can stabilize a market

Collusion and Cartels

• Collusion

  • Illegal agreement to fix prices
  • Example: Cartels (e.g., OPEC)
  • Legal Issue: Price leadership might resemble collusion

• Price Leadership

  • One firm leads in setting prices; others follow
  • Example: Airline baggage fees

Payoff Matrix and Dominant Strategies

• Payoff Matrix

  • Tool to visualize possible outcomes based on strategies
  • Each firm’s decision affects the other's profits

• Dominant Strategy

  • Best response given any action of the competitor
  • Often results in a Nash equilibrium where neither firm can improve payoffs by changing strategy

Conclusion

• Game Theory's relevance in strategic decision making in oligopolies
• Competition leads to innovation, benefiting consumers
• Reminder of the outcomes for past industry leaders who failed to adapt

Additional Notes

• Support Crash Course on Patreon
• Acknowledgment of contributors to the show