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Competition vs Collusion

game theory - where firms make strategic decisions  

  • firms try to get the best possible outcome/payoff
  • strategy - plan for going through the game
    • optimal strategy - gives the best payoff
  • noncooperative game - negotiation between firms not possible
    • no binding contracts
  • cooperative game - firms negotiate, work together
    • have binding contract to dictate how they should behave
    • pursued in joint interest to help both sides

cooperative collusion - firms don't react to one another  

  • find the quantity/price at equilibrium where MR=MC
    • no need to find reaction curves
  • results in less output and higher profits than Cournot equilibrium
    • firms not in competition in this case
  • competitive equilibrium >> P = MC >> zero profit
  • Cournot equilibrium >> reaction curves set equal
  • collusion >> MC = MR >> best outcome

 

  • reaction curves
  • Q = q1+q2
Subject: 
Economics
Subject X2: 
Economics

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