THE EQUIUBRIUM FOR AN OLIGOPOLY

At first, one might expect Jack and Jill, to teach polythene outstrip  their own,’ fer this outcome maximizes their joint profit, In the absence of a bind agreement, however, the monopoly outcome is unlikely. To see why, imagine that Jack expects Jill to produce only 30  (half of the monopoly quantity). Jack would reason as follows.

I could produce 30 gallons as well. In this case, a total, of ,60 gallons of Water .Would be sole at a price of $60 a gallon. My profit would be (allocations $60 a gallon), Alternatively, I could : produce 40 gallons. In this case, a total of 70 gallons of Water would be sold’ at a price of $58 a gallon. My profit would be $2,000 (40 gallons X $50 a gallon). Even though total refit in the market would fall, my ‘profit would be higher because I would have a larger share of the market.

The outcome in which Jack and Jill each produce 40 gallons looks like some sort of equilibrium. In fact, this outcome is called a Nash equilibrium. (It is named after economic theorist John Nash, whose life was portrayed in the book and movie A Beautiful MimI). A Nash equilibrium is a situation in which economic participants interacting with one another each choose their best strategy given the strategies the .others have chosen. In this case, given that Jill is producing 40 gallons,’ the best ‘strategy for Jack’is to produce 40 gallons. Similarly, given the Jack is producing 40 gallons, the best strategy for Jill is to produce(.40 gallons. Once they reach this Nash equilibrium, neither Jack nor Jill has an incentive to make a different decision.

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