Module 3 – Background
MARKET
STRUCTURE AND GAME THEORY
Required
Reading
To
start with, take a look at this short animated video that will introduce you to
the basics of market structure:
McGlasson,
M. (2009). Episode 25: Market structures.https://www.youtube.com/watch?v=9Hxy-TuX9fs&list=PLr6g_xbkz_0u_cINHBVW1ZuEpozKk2XGx
Now
read Chapters 9 and 10 from the following book for more detail on these
topics. In particular, pay attention to the numerical examples and the
“Self-Check Questions” at the end of each section.
Taylor,
T. (2014) Microeconomics. OpenStax College.http://cnx.org/contents/[email protected]:[email protected]/Introduction-to-a-Monopoly
Finally,
read this slightly more advanced chapter. Pay special attention to the sections
at the end on game theory and the “Policy Response to Oligopoly” section that
covers the Herfindahl index:
Beveridge, T. M. (2013).
Chapter 8: Between perfect competition and monopoly. A Primer on
Microeconomics. [New York, N.Y.] [222 East 46th Street, New York, NY
10017]: Business Expert Press.
Module 3 – Case
MARKET STRUCTURE AND
GAME THEORY
Assignment Overview
As always, make sure
to thoroughly review the required background materials before starting the
assignments. The assignment questions will require you to do some
calculations and also apply the concepts from the module. Question 3 differs
from previous assignments in that you have to use an online simulation tool;
but this activity should be a fun break from the standard numerical problems
you have been doing.
Case Assignment
1.
1.
For this problem use
the Herfindahl Index to compute market concentration:
a.
Suppose Apple has 45% of the U.S. market share for smartphones,
followed by Samsung with 30%, LG with 9%, Motorola with 8%, HTC with 6%, and
Nokia with 2%. What is the Herfindahl Index for the smartphone industry
based on these numbers? Based on the Herfindahl Index, do you think the
government would be willing to approve a merger between Apple and Samsung?
b.
Now suppose Nokia and Motorola come out with a new smartphone
that takes away a huge chunk of market share from Apple and Samsung. The new
market shares are 25% for Apple, 20% for Samsung, 20% for Motorola, 20% for
Nokia, 10% for LG, and 5% for HTC.
2.
Use what you learned
about perfect competition, monopoly, and oligopoly to answer these questions:
a.
In the table below is the quantity produced, the price, the
fixed costs, and variable costs for a perfectly competitive firm that faces a
constant price of $150 for its product regardless of the quantity it
sells. Use the information in the first four columns to calculate the
number for the last four columns. At what quantity should they produce
based on what you find with your results?
b.
How do you think your answer might change if it became a
monopolist with all of its competitors leaving the market? Or if it
became an oligopoly with only one or two competitors?
Quantity
Price
Fixed Cost
Variable Cost
Total Cost
Marginal Cost
Total Revenue
Profit/
Loss
0
150
200
–
–
1
150
200
$140
2
150
200
$240
3
150
200
$320
4
150
200
$410
5
150
200
$520
6
150
200
$650
7
150
200
$810
8
150
200
$1,010
9
150
200
$1,310
10
150
200
$1,710
3.
3.
You’ve read about the
prisoner’s dilemma in the background readings. Suppose you are a business
owner with just one main competitor. If neither you nor your competitor
cut your prices, you will both be more profitable. However, if your
competitor lowers its prices and you keep your prices high, then you will lose
all of your sales to your competitor. Every month you and your competitor
place advertisements in the local newspaper with your price – so you need to
decide each month whether or not to keep prices high, or lower them based on
what you think your competitor might do.
Go to the following webpage and test out some of your potential price
strategies:
http://www.gametheory.net/Mike/applets/PDilemma/Pdilemma.html
The strategy “defect”
indicates lowering your prices. The strategy “cooperate” means keep prices the
same. Try out different strategies, such as cooperating all the time or
defecting sometimes. There are five different rounds of this game, each
with a competitor with different personalities and different strategies.
Play all five rounds and experiment with different strategic approaches.
Report your scores for each round, and discuss which strategies seemed to work
the best for you.
Assignment Expectations
·
Answer the assignment questions directly.
·
Stay focused on the precise assignment questions. Do not go off
on tangents or devote a lot of space to summarizing general background
materials.
·
For computational problems, make sure to show your work and
explain your steps.
·
For short answer/short essay questions make sure to reference
your sources of information with both a bibliography and in-text citations. See
theStudent Guide to
Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations.
Another resource is the “Writing Style Guide,” which is found under “My
Resources” in the TLC Portal.
Module 3 – SLP
MARKET STRUCTURE AND
GAME THEORY
For this assignment,
you will be building upon your Module 2 SLP by continuing to examine other
businesses in your chosen industry. Remember that the other businesses you
wrote about in your Module 2 SLP will be your future competitors if you decide
to open your own business. So it is important to get an idea of the
competitive landscape of your chosen business. After reviewing the
required background readings and doing some more research on your chosen
industry, write a three-page paper discussing the following issues:
1.
What market structure is there for this line of business in your
home town? Is this a monopoly, oligopoly, monopolistic competition, or perfect
competition? Justify your answer using both your own research on this
type of business in your home town, and by referencing some of the required
background readings on different types of market structures.
2.
Now that you have examined market structure of your chosen
industry in your home town, do some research on IBIS World on market structure
in this industry nationwide. You can access IBIS World by going to the
main TLC Portal and clicking on “Additional Library Resources”. A link to
IBIS World will come up. Thisdirect link might also work if you are already
logged onto the Trident online library. What information could you find
regarding how concentrated or how competitive this industry is?
3.
Based on the information you found for Question 2, what market
structure do you think best describes this industry nationwide? Is this a
monopoly, oligopoly, monopolistic competition, or perfect competition? Explain
your answer using both information from IBIS World and the concepts from the
required background readings.
SLP Assignment Expectations
·
Answer the assignment questions directly.
·
Stay focused on the precise assignment questions. Do not go off
on tangents or devote a lot of space to summarizing general background
materials.
·
Make sure to use reliable and credible sources as your
references. Articles published in established newspapers or business
journals/magazines are preferred. If you find articles on the Internet, make
sure they are from a credible source.
·
Reference your sources of information with both a bibliography
and in-text citations. See theStudent Guide to
Writing a High-Quality Academic Paper, including pages 11- 14 on in-text citations.
Another resource is the “Writing Style Guide,” which is found under “My
Resources” in the TLC Portal.
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