GENERAL INFORMATION
- New material will be uploaded by 12PM on Wednesdays
LECTURES
Lecture 00 : Introduction SLIDES-L0, HANDOUT-L0
Lecture 01 : Monopoly and price discrimination SLIDES-L1, HANDOUT-L1
Lecture 02 : Oligopoly SLIDES-L2 HANDOUT-L2
Lecture 03 : Product Differentiation SLIDES-L3 HANDOUT-L3
Lecture 04 : Collusion SLIDES-L4 HANDOUT-L4
Lecture 05 : Entry Barriers SLIDES-L5 HANDOUT-L5
Lecture 06 : Network Effects SLIDES-L6 HANDOUT-L6
Game Theory I: Nash Equilibrium HANDOUT-GTI
Game Theory II: Dynamic Games HANDOUT-GTII
PROBLEM SETS
EXAM
Duration: 3 hours
Bring only a pen with you
- 10 short questions
- 2 problems
- 1 open question
TAs
Si Hao Li (si.li@ip-paris.fr)
Haitam Chakori (haitam.chakori@ip-paris.fr)
TEXTBOOKS
D Fudenberg, J Tirole; 1991, Game Theory, MIT Press
J Tirole, 1988, The Theory of Industrial Organization, MITPress
DIARY
Day 1
Introduction to economics and industrial organization
Positive and normative analysis in IO
Market failures and notion of market power
Definition of monopoly and sources of monopoly power
Demand and inverse demand functions
Profit maximization of a single-product monopolist
Marginal revenue and marginal cost
Price elasticity of demand – definition and properties
Elasticity as a logarithmic derivative
The Lerner index and the inverse elasticity rule
Elastic and inelastic regions of demand
Isoelastic demand functions
Two-product monopolist
Cross-price elasticity and substitutes/complements
Generalized inverse elasticity rule
Day 2
Welfare diagram and deadweight loss from monopoly pricing
Economies of scale and decreasing average costs
Relationship between marginal cost and average cost
Cost elasticity and the marginal-cost/average-cost ratio
Economies of scope
Submodular and supermodular cost functions
Price discrimination
First-degree price discrimination
Two-part tariffs as a form of first-degree price discrimination
Consumer choice under a two-part tariff
Optimal fixed and variable components of a two-part tariff
First encounter with game theory concepts
Prisoner’s Dilemma
Normal-form games and payoff matrices
Best responses and dominant strategies
Nash equilibrium as mutual best response
Pareto optimality and efficiency versus Nash equilibrium
Bertrand “pick a number” game
Nash equilibrium with continuous actions
Undercutting incentives
Day 3
Nash Equilibrium (NE)
Best response
Interpretation of NE
Submodular, Modular, Supermodular Games
Relationship between cross derivatives and reaction function slope
Strategic substitutes, independent actions, and strategic complements
Oligopoly definition and examples
Cournot competition: definition, best responses, equilibria
Examples with Cournot competition: Linear inverse demand, constant marginal costs
Bertrand competition: definition, best responses, equilibria
Discussion of the Bertrand paradox and its solutions
Examples of Bertrand with imperfect substitution: Linear demand function, constant marginal costs
Mergers
Discussion on timing horizon and frim choices
Capacity constrained Bertrand competition
Subgame Perfect Nash Equilibrium (SPNE)
Residual demand
NE of the pricing stage
Connection with Cournot profit function at capacity choice stage
Day 4
Product differentiation as a source of market power and solution to the Bertrand paradox
Horizontal and vertical differentiation: definitions and examples
Hotelling model with quadratic transportation costs
Consumer preferences, covered markets, and demand functions
Price competition, best responses, and Nash equilibrium
Horizontal differentiation, market power, and markups
Welfare analysis and transportation costs
Endogenous product locations in the Hotelling model
Two-stage games and Subgame Perfect Nash Equilibrium (SPNE)
Direct and strategic effects of location choices
Maximum versus minimum differentiation and socially optimal locations
Salop circular-city model and local price competition
Fixed costs, free-entry equilibrium, and excessive product proliferation
Vertical differentiation, quality ranking, and consumer heterogeneity
Single-crossing property and market segmentation
Price competition between high- and low-quality products
Endogenous quality choices and strategic differentiation
Day 5
Review of Prisoner’s Dilemma and Bertrand competition
Best responses, Nash equilibrium, Pareto optimality, and coordination games
Repeated games: stage games, histories, and history-dependent strategies
Discount factors, continuation values, and normalized payoffs
Subgame Perfect Nash Equilibrium (SPNE) in repeated games
Repeated-game strategies: grim trigger and tit-for-tat
One-shot deviation principle
Nash Folk Theorem and cooperation through repeated interaction
Feasible payoffs, convex hulls, minimax payoffs, and individual rationality
General Folk Theorem and sustainable equilibrium payoffs
Collusion and cartels: economic interpretation and historical examples
Historical cartels: diamonds, lysine, cathode ray tubes, and OPEC
Infinitely repeated Bertrand competition and grim-trigger strategies
Finite versus infinite horizons and backward induction
Incentive constraints and critical discount factors for collusion
Number of firms, market concentration, and sustainability of collusion
Entry threats, market growth, and collusive stability
Introduction to strategic entry, deterrence, and first- versus second-mover advantages
Day 6
Entry barriers: definitions and classification
Structural barriers: fixed costs, economies of scale, and market concentration
Legal barriers: medical professions, taxi licenses, and Italian beach concessions
Competition in the market versus competition for the market
Strategic barriers: blockaded, deterred, and accommodated entry
Industrial policy: Chinese electric vehicles, overcapacity, and US/EU tariffs
Charging infrastructure and strategic investment incentives
Sequential games, commitment, and credibility
Entry game: extensive and normal forms
Nash equilibrium versus Subgame Perfect Nash Equilibrium (SPNE)
Non-credible threats, backward induction, and sequential rationality
Contingent strategies and the one-shot deviation principle
Stackelberg model: sequential Cournot competition
Leader and follower best responses, equilibrium quantities, and profits
Simultaneous versus sequential Cournot equilibria
Direct and strategic effects of first-mover decisions
Strategic substitutes, complements, and timing advantages
Sequential differentiated Bertrand competition
Sunk costs, irreversibility, and credible commitments
Entry deterrence through capacity commitments and fixed entry costs
Fudenberg–Tirole taxonomy: top dog, puppy dog, fat cat, and lean and hungry
