Game Theory

·         What are the main ideas behind game theory?

Game theory is an umbrella term that was first developed economically to describe the actions of firms and corporations. Later is was used in biology, mathematics, and the animal kingdom. Game theory is used to describe how the actions of one group are based on what the reactions of another would be. There is evidence of game theory in our current economy. WIth an oligopoly, game theory will come into play in certain extents, because each company wants to maximize it's own profit. This can be seen with soft drink, appliance, and movie production companies.

The pay off matrix assumes two different outcomes for two different firms and can be set up in a grid. It can be applied to any situation, not just an economic one. Here is an example of a jail time matrix, and the consequences for each. Each decision is based on the liklihood of what the other will do.

Collusion is the illegal practice of two firms agreeing to set the price of their product or the quantities that each will produce in order to acheive maximum profts. In reality, both firms will cheat on the assumption that the other is cheating, thus driving down the profits they make.
A Cartel is a legalized association of sellers acting in unison. Together they form a mass firm that sets prices and quantities.

7.1 Monopolistic Competition

Monopolistic Competitive Companies

Size:	Small Company	Medium Company	Large Company
Features:	Wedding Invite Shop	Hair Salon Chain	LuLu Lemon Athletica
Differentiated products	Different looks by the designer	Different hair care retail products, different stylists	Designer yoga and workout gear
Control over price	Some. Can vary price depending on education and materials used.	Little. Can vary depending on stylists experience	Lots. Can charge more as consumers are willing to pay. Little substiture.
Mass advertising	Word of mouth and classified ads	TV commercials for the big chains	Word of mouth
Brand name goods	No	May have own products	Yes

Starbucks Gossip

Is Starbucks the ideal definition of a perfectly competitive market? It could certainly be said so! Unless you've been living under a rock all your life, you know that Starbucks is the most famous coffee peddler in all the world. Although they dominate the market, there are still numerous other coffee shops on this planet, all selling coffe. It is easy for prospective coffee shop owners to enter and exit the market.  Everything appears to line up with the definition of perfect competition, except for that whole "seller having NO control over the price" thing. A long standing gripe with Starbucks are their expensive prices for their designer brews. It would appear that Starbucks is very much in control of what it charges per cup! Despite this, the company is still ruled by the competitive market, and that means it must bow and accomodate booms and busts with the rest of them. They've shut down numerous shops that are built to close to older ones. The world has been in recession after all, and that's one thing Starbucks can't avoid! In production terms, they have hit diminishing returns, and it's best to scale back operations and output of their "plants" in order to maintain that tidy profit they've come to expect! Criticized for turning the quaint coffee shop experience into nothing more than a stark visit in a roboticly mass produced and sterile "store", Starbucks is working hard to bring back the charm that the original Seattle store so richly possessed. But is it too late?
Is coffee too expensive at Starbucks? That all depends. Are designer jeans that flatter the body too expensive? What about a Prada hand bag that last a lifetime? When compared to the cheaper alternatives, of course these "luxury items" are expensive. Consider Starbucks the Cadillac of the coffee industry. For some people, the extra money is worth it. For them, the coffee tastes better, the atmosphere is cosier than a mud ridden floored Tim Hortons' and they like being served their cup of Joe by friendly barristas who enjoy what they do. It all depends on the experience you are seeking
. Starbucks is no exception to any large corporation that, no matter how successful they have become, cannot escape the inevitable booms and busts of the economy.