Strategic Interactions in Markets

Handout

Mon, 01 Jan 0001 00:00:00 +0000

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Mon, 01 Jan 0001 00:00:00 +0000

The majority of economic transactions take place through markets. Markets have a myriad of different structures. They are central in organizing production and allocating surpluses between participants. On some occasions, market participants cannot affect the outcome.

However, on other occasions, market participants can follow complicated strategies to affect production allocation in their favor.
- What kind of strategies do market participants employ?
- How do the strategies of different participants interact?
- Do their strategies affect market efficiency besides allocation?

Mon, 01 Jan 0001 00:00:00 +0000

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Mon, 01 Jan 0001 00:00:00 +0000

In most real-life situations, economic agents do not operate in isolation. Their gains and losses depend not only on their own choices but also on the choices of others.

Markets are typical examples of economic situations where social interactions matter.
- How can we study social interactions in economics?
- How do economic agents compete and coordinate with each other?
- What are the social dilemmas that arise in such situations?

Mon, 01 Jan 0001 00:00:00 +0000

Many real markets are neither perfectly competitive nor monopolies. Instead, they are oligopolies comprised of a small number of firms that have large enough market shares and can influence prices.

Nonetheless, firms' profits do not exclusively depend on their own choices. Their small numbers allow them to utilize a variety of competition strategies.
- How do firms strategically interact?
- What means do they use to compete?
- How do the welfare outcomes of oligopolies compare to those of monopolies and perfect competition?

Mon, 01 Jan 0001 00:00:00 +0000

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Mon, 01 Jan 0001 00:00:00 +0000

Strategic interactions and social dilemmas can sometimes be understood in terms of one-shot sandbox cases. In such settings, where time is neglected, promises, threats, and reputation play no role.

However, players have many additional strategies available whenever there is a future, and they can use promises and threats to achieve very different outcomes compared to the atemporal cases.
- How does time affect the outcomes of social interactions?
- Why is reputation important whenever time is involved?
- How can players incorporate time into their strategies?

Mon, 01 Jan 0001 00:00:00 +0000

Competition in real markets is not a static phenomenon. Firms can change their choices from date to date and adapt their strategies based on past events and the reactions of competitive firms.

In such fluid settings, some firms take the initiative and set the pace of competition in the market. Other firms follow.
- Do firms benefit from assuming a market leader role?
- How does the sequence of moves affect the market power?
- Why does market entry influence the behavior of incumbent firms?

Mon, 01 Jan 0001 00:00:00 +0000

Markets with intense competition tend to reduce the competing firms' market power. Firms could form cartels to control the market and extract a greater share of the economic surplus if left unregulated. For this reason, collusion and cartel formation are illegal practices in most market economies today.

However, legally binding contracts are not necessary for firms to coordinate. Firms can use dynamic strategies to collude tacitly.
- What kind of strategies can lead to tacit collusion?
- What is the role of the means of competition in tacit collusion?
- How can competition authorities measure market power?