Game Theory

Bierman,H.S.,402,417,559,560–562,586, 592,595,609,619,685 Black market,131,138 Blank,L.T.,549 Blinder,A.S.,144 Block pricing,425–431,474,476 Boulding,K.E.,144 Boyes,W.,41 Brams,S.,•• Break-even price,324,328,330,351 Brennan,M.J.,41,97,232,264,309,358 Brigham.E.F.,526,550,641,685 Brue,S.L.,194 Business cycle,14,35 Buyer’s reservation price,602

-CCapital asset pricing model,645–648,679 Capital budgeting,485–488,507,511n,538, 541–542 Capital market line,637–641,680 Capital rationing,537–538,542 CAPM (See capital asset pricing model) Carroll,T.M.,41,97,232,264,309,358 Cartel,402–403,409,411 Case,K.E.,7,41,144,358,417 Cash flow,488–517,521–526,529–532, 534–535,537,541–543 abnormal,530–532,542 diagram,488–492,494,496,498–499, 502–505,542 discounted,500,509–510,543 normal,530–532,543 operating (See also Cash flow) Categories of capital budgeting projects: capital expansion,486,541 mandated investments,486–487 miscellaneous investments,486–487 new or improved product lines,486, 487 replacement,486–487,541 Celler-Kefauver Act,383,691,694–695 Certainty-equivalent approach,643–645, 678,680 Certainty equivalent coefficient,644–645, 678,680 Certainty line,669–670 Ceteris paribus,6,35 Chamberlin,E.,360,373,377,401,417 Cheating rule finitely repeated games with a certain end,583–586

finitely repeated games with an uncertain end,582–583 infinitely repeated games,575–578,610 Chew,I.K.,511n Chiang,A.,50,97,309 Chiu,J.S.Y.,41 Clayton Act,382–383,692–695 Clemens,E.,483 Coase,R.,21,41,705,727 Coase theorem,704–707,722–723 Cobb,P.H.,232 Cobb-Douglas production function, 198–202,204–208,217,219–228 Coefficient of optimism,662–663,679 Coefficient of variation,627,678,680 Collusion,350–352,379,383,402–403,408, 411–413,569,572–580,589 explicit versus tacit,579–580 Commodity bundling,425,431–434,449, 476 Common ratio of a geometric progression, 56 Common stock,539–540,542,544 Comparing net present value and internal rate of return,523–529 Complementary goods,184,187–189 Complete ignorance,622,623,656–664, 678–681 Compounding,488–494,497–501,504,542 Concentration ratio,383–385,410–412 Conglomerate merger,694,724 Constant returns to scale,200,218–221,224, 226–227,250,252–253,259–260 Constrained optimization,84

Lagrange multiplier method,86–88,97, 297–299 substitution method,84–86,97,296–297 Consumer deadweight loss,345–346,352, 697,699–700,722–723 Consumer surplus,342–349,352,420–434, 472–473,476–479,688–689,690,696, 719–723 Consumer sovereignty,9 Consumption efficiency,15,35,36 Continuous function,62 Cooley,R.L.,511n Cooperative game (See also Collusion),558, 568–586,588,609–610

Cost average fixed,238–247,260 average total,237–247,252–255,259–261 average variable,237–247,259–260

complementarities,256,257–260 direct,260 explicit,28–29,34–35,37,236,241, 260–261 implicit,28–31,34,37,236,241,259,261 incremental,239,261 long-run average total,252–253,255, 259–261 marginal,237–247,257–261 marginal external,702–704,714 marginal private,701–709,713–715 marginal resource,287,302,304–305 marginal social,702–704,708,713–714 operating,26,30,37 opportunity,3,28–30,36–37,236,241, 259–261 sunk,239,261 total,236–246,251–253,256–258,260–261 total economic,16,28–30,34,37,236–237, 241,261,320–321,324–325,351–352 total fixed,237–243,245,247,259–261, 325–327,351,353 total variable,237–239,241,243,245–246, 260–261,326–327,353 Cost complementarities,256,257–260 Cost of capital,506,509,511–516,521, 523–529,531,534–535,537–544 Cost of debt,540,542 Cost of equity,542 Cost-plus pricing (See Markup pricing) Coupon bond,517–518,520,542 Cournot,A.,390,417,554,619 Cournot model,390–404,411–413,557 Credible threat,571,580,590–592,601,610 Crossover rate,524–528,543 CRTS (See Constant returns to scale) Cubic function,55–56,97 Cutoff rate,509,521,541–544

-DDarden,B.R.,483 Davis,O.,619,648,685 Decision making criteria,656–664

Hurwicz decision criterion,656,660–663, 679–680

Laplace criterion,656–661,679–680

Savage criterion,656,663–664,679–680

Wald (maximin) criterion,656,660–663, 679,681 Decision node,589,591–594,596–598, 600–601,610 Decreasing returns to scale,200,218–222, 224,226–227,250–253,259–260 de Fraja,G.,619 Delbono,F.,619 Demand change in demand,106,112–113,137–138 change in quantity demanded,102–106, 120,126,137,139 complements,107–110,138–139 demand curve,100–102,145–148 demand determinants,106–113,130, 137–140 demand versus quantity demanded, 106–112 inferior good,106,110 law of demand,100–102,107,113,122, 137,139 market demand curve,102–106 movement along the demand curve,105, 108,111,137,139 normal good,106–107,110 population,109–110 price expectations,109–110 shifts of the demand curve,100,106–111, 123–129,132,135,137,138–140 substitutes,107–110,138–139 tastes or preferences,107,110 Demsetz,H.,22,41,377 Dependent variable,44,93 Depletability,427 Derivative of a function,62–63 Derivatives and inflection points,80–81 Determinants of collusive agreements discriminatory pricing,580 explicit versus tacit collusion,579–580 firm size,579 number of firms,578–579 Diamond,D.W.,22,41 Direct cost,260 Discounted payback period method, 509–510 Differential pricing,419–420,473,477–478 Discount rate,500,509,511n,513,515, 520–521,524,535,541,543,633, 641–642,644–645 risk-adjusted,633–636,642–643,645,678, 680 risk-free,642,645,678 Discounted payback period,506,509–511, 541,543 Discriminatory pricing,580 Diseconomies of scale,252–256,259–260 Dividends,491,539–540,542–544

Dixit,A.,619 Domain,44 Dominant price leadership,470–472, 475–478 Douglas,P.H.,232 Dranove,D.,619 Draper,J.E.,97 Dreze,O.,685 DRTS (See Decreasing returns to scale) Duopoly,379–381,385,394,400–401, 410–413 Dumping,443,473,477 Dumping margin,443,477 Dynamic game (See Sequential-move game)

-EEastman Kodak,382 Ebling,A.O.,41 Economic efficiency,14–15,35 Economic good,2,35 Economic loss (See Below-normal profit) Economic profit,16,27–30,34–35,37,315, 317,320–321,323–325,329–330, 335–336,339–341,343–344,347,350–352 Economies of scale,251–256,259–260 Economies of scope,256–260 Eisner,M.,727 Elasticity advertising,184–185,188 arc-price,156,158,160,162–163,175–176, 187–188 coefficient of output,207,223,226–227 cross-price,184,186–188,190 determinants of price,165–168 elastic demand,156,161,163–164, 166–168,170–173,175,178–181, 187–188 income,168–169,182–189 inelastic demand,156–157,161–164,166, 168,171–173,175–176,180,185–188 inferior goods,182–183,185,187,189 luxury goods,168,182–185,187,189 marginal revenue,168–173,177–179,187, 189 midpoint formula,152–157 necessity,168,182–183,185–187,189 normal goods,182–187,189 output elasticity of labor (See output elasticity of a variable input) output elasticity of a variable input, 207–208 perfectly elastic,161–162

perfectly inelastic,162 point-price,156–160,162–164,169, 176–178,180,187,189 price,149–181,337–340 substitute goods,165–168,184,186–190 total revenue,158,168–181,187–190 unit elastic demand,157,161,163–164, 168,173,175,185,187,190 End-of-period problem,584,610 Equilibrium price,118–129,133–139, 317–331,340–341,344,347 Erhardt,M.C.,550,645,685 Excludability,427 Exclusive contract,692,724 Expansion path,274–279,302–304 Expected value (See Mean) Experience curve effect,249,260 Explicit collusion,579–580,589 Explicit cost,28–29,34–35,37,236,241, 260–261 Explicit versus tacit collusion,579–580 Exponential function,68 Externalities,15–16,687,701–715,722–724

-FFactor of production,1–2,10–16,18,27, 32–35,37,196–197,199,201,214,216, 218,225,227–228 Fair,R.C.,7,41,144,358,417 Fair gamble,628–630,632,667–670,680 Fair-odds line,667–673,676–677 Falkinger,J.,727 Fama,E.F.,22,41 Favored customer,132,138–139 Federal Trade Commission Act,691–694 Fernandez,L.,402,417,559,560–562,586, 592,595,609,619,685 Financial intermediary,3,35 Fine,H.B.,97 Finitely repeated games,580–586,609,611 First-degree price discrimination,420–424, 472,474,477–478 Fiscal policy,13,33,35–36 Focal-point equilibrium,563,586–589,610 Fold-back method (See Backward induction) Free-rider problem,427,716–717,719–720, 723–724 Friedman,L.S.,358,685,727 Friedman,M.,361,377,685 Frictional theory of profit,31 Full-cost pricing (See Markup pricing)

Fully allocated per-unit cost,444–447,475, 477 Functional relationships,44–50 Future value,488–499,504,534–535,538, 543–544 interest factor for an annuity,495 of a single payment,488–494 of an annuity due,496–497,453 of an ordinary annuity,494–497,504,543 FV (See Future value)

-GGalbraith,J.K.,377 Game theory,8,33,402,404–412,551–554, 558,568,589,602,608–610,648–655 Game tree,589–590,595–597,603,651–655 Gapenski,L.C.,526,550,641,685 Geometric progression,56–60 George,P.S.,194 Giffen good,102n Glass,J.C.,41,97,194,233,264,309,358 Gold,B.,264 Government franchise,332–334,341,346, 348,350,352 Greene,W.H.,9,41,110,144,222n,647, 685 Greenhut,M.L.,482 Grossman,S.J.,22,41 Gujarati,D.,9,41,110,144,222n

-HHaley,C.W.,550 Hart,O.D.,22,41 Hart-Scott-Rodino Act,691,694 Harris,M.,22,41 Harsanyi,J.,558 Henderson,J.M.,41,97,233,264,309,358, 377,417 Herfindahl-Hirschman Index,384–385,410, 412 HHI (See Herfindahl-Hirschman Index) Hicks,J.R.,194 Hirshleifer,J.,483,685 Holstrom,B.,22,41 Hope,S.,194,264,377,417,685,727 Horizontal merger,694,724 Horowitz,I.,619 Houston,J.F.,550 Houthakker,H.,194 Hurdle rate,509,521–522,541–544 Hyman,D.N.,727 -IImplicit collusion,579–580 Implicit cost,28–31,34,37,236,241,259,261 Implicit differentiation,71–72 Incentive contract,24,35 Income effect,101–102 Increasing returns to scale,200,218, 221–222,224,226–227,250–253,259–260 Incremental cost,239,261 Independent projects,521,525,531,533,537, 541,543 Independent variable,44,97 Inferior goods,182–183,185,187,189 Infinitely repeated game,568–583,588, 609–611 Inflection point,80–81 Innovation theory of profit,32 Insurance,632,664–677,680 Insurance premium,632,666,671–674 Integration,88–91 area under a curve,90–92 constant of integration,89 indefinite integrals,88–90 Intercept of a linear function,47 Interlocking directorate,692,724 Interlocking stockholding,724 Internal rate of return,506,510,517–537, 541,543 Internal rate of return method,517–523 International Harvester,382 Interstate Commerce Commission,382 Inverse function,50–52 Inverse function rule,69–71 Investor equilibrium,636–643 Investor indifference curve,633,636,680 Invisible hand,14 IRR (See Internal rate of return) IRTS (See Increasing returns to scale) Isocost curve (See Isocost line) Isocost equation,267,269,303–304 Isocost line,266–273,275,277–278,302–303, 309 Isoquants,212–218,227–228 Iterated strictly dominant strategy,561–562

-JJensen,M.C.,22,41

-KKeat,P.G.,483 Key money,132

Khan,D.N.,727 Kilgour,M.,619 King,G.A.,194 “Kinked”demand curve model (See Sweezy model) Klingman,J.S.,97 Knight,F.H.,685 Knutson,R.D.,483 Kunreuther,H.,685

-LLagrange multiplier,87,97 Lanzillotti,R.F.,483 Last-mover’s advantage,604–605,608–609 Law of demand,100–101 Law of diminishing marginal product,7, 199–200,201,205–207,210,215,225,227 Law of diminishing returns (See Law of diminishing marginal product) Law of supply,113–114 Layard,P.R.G.,309,727 Learning curve effect,247–250 Lehn,K.,22,41 Lerner index,338–340,352 Linear function,46–50,97 Linear homogeneity (See Returns to scale) Littlechild,S.C.,483 Logarithmic function,68 Long-run average total cost,252–253,255, 259–261 Long-run monopolistic equilibrium,336–337 Long-run monopolistically competitive equilibrium,364–371 Long-run perfectly competitive equilibrium, 321,324,328,330,341,351 Long-run total product curve,250–251 LRATC (See Long-run average total cost) Luce,D.R.,406,417,619 Luxury good,168,182–185,187,189

-MMacDonald,G.M.,22,41 Macroeconomic policy,13–14,36 Macroeconomics,3–4,33,36 Malinvaud,E.,727 Manager-worker/principal-agent problem, 22,25–26,36 Managerial economics,4–5,8–9,33–35,36 Mansfield,E.,194 Marginal cost,237–247,257–261 Marginal efficiency theory of profit,32 Marginal external cost,702–704,714 Marginal private cost,701–709,713–715 Marginal product,202–207,207–211,214, 225–226,228 Marginal rate of technical substitution, 212–218,225–226,228 Marginal resource cost,287,302,304–305 Marginal revenue,61,168–175,189 Marginal social cost,702–704,708,713–714 Marginal utility of money,627–629,678 Market demand curve,102–106 Market demand equation,110–112 Market demand versus firm demand, 112–113 Market economy,2–3,9–11,13,15,31, 33–34,36 Market equilibrium (See also Equilibrium price),118–129 Market failure,687,701,722,724 Market intervention,131,135 Market power,99–100,139,316,350–352, 687–691,695–696,700,722–723 Markup pricing,443–447,475,477–478 Marris,R.,22,41 Marshall,A.,49,97,144 Maximin strategy,563–568,611 Maxwell,W.D.,233,264 MC (See Marginal cost) McCloskey,D.N.,194,264 McConnell,C.R.,194 McGuire,J.W.,41 Mean,623–625,627–678,680–681 MEC (See Marginal external cost) Meckling,W.H.,22,41 Melvin,M.,41 Merger regulation,695 Methods for evaluating capital investment projects: certainty-equivalent approach,643–645, 678,680 comparing net present value and internal rate of return,523–529 discounted payback period,509–510 internal rate of return,517–523 net present value,510–517 payback period,507–508 Microeconomic policy,14–16,36 Microeconomics,3–4,33–36 Microsoft,431 Midpoint formula,152–157 Miller,R.L.,194 Mills,D.,264

MIRR (See Modified internal rate of return) Mixed economies,11 Modified internal rate of return,510, 533–537,541,543 Monetary policy,13,33,36 Monopolistic competition,315,350,361–375 Monopoly,32,280,288–295,314–315, 331–342,344–352 Monotonic function,51–52 Morgenstern,O.,417,554,620 Moral hazard,674–677,679–680 MP (See Marginal product) MPC (See Marginal private cost) MR (See Marginal revenue) MRC (See Marginal resource cost) MRTS (See Marginal rate of technical substitution) MSC (See Marginal social cost) Multiple internal rates of return,529–533, 534,537,541–543 Multiproduct pricing,449–460,477 Multistage game,405,553–554,589–601,603, 609–611 Mutual interdependence,401–402,411–412 Mutually exclusive projects,507,510, 512–514,516,521,525–526,533–534, 541,543

-NNalebuff,B.,619 Nasar,S.,417,619 Nash equilibrium,407–412,557–558, 560–564,566–569,572–577,581,584, 586,590–592,594–597,605–606,609, 611 Nash,J.,407,417,558,619 Natural monopoly,348–352 Negative externalities,16,36,701–707,722 Necessary good,168,182–183,185–187,189 Net present value,506,510–517,519–520, 523–529,531–532,534,537–538,541, 543 Net present value method,510–517 Nicholson,W.,169,184,194,264,309,667n, 727 Noncooperative game,554–568,576, 583–586,595,609–611 Nondepletability,715,723–724 Nonexcludability,715,723–724 Nonlinear function,53–56,97 Nonmarginal pricing,443–448,475,477–478 Non-strictly dominant strategy,562–563,611 Nordhaus,W.D.,102,144 Normal-form game,406,412,557,595–596, 609,611 Normal good,167,182–187,189 Normal profit,30–32,34,36 Norman,G.,483 NPV (See Net present value)

-OOckham’s razor,6,36 Oi,W.Y.,483 Oil drilling game,558–563 Oligopoly,314–315,350,379–381,385–386, 410,412–413 One-shot game,554–568,569–577,581, 583–586,609–611 One-to-one correspondence,50 Operating cost,26,30,37 Operating profit,30–31,35,37 Optimization analysis,60–61 Organization of Petroleum Exporting

Countries,402 Out-of-pocket expense (See Explicit cost) Owner-manager/principal-agent problem, 22,23–24,36

-PPalm,T.,194,550 Parabola,54 Pareto efficiency,15 Parkin,M.,727 Partial derivatives: first-order and second-order conditions, 81–84 Partial ignorance,622,656,677 Par value of a bond,517–518,539,543 Patent,315,332–334,346,348,352 Pauly,M.,685 Payback period,506–511,541,543–544 Payback period method,507–508 Payoff,404–413 Payoff matrix,406–410,416,556,559–562, 564–565,568–569,573,575–577,582, 595–596 Peak-load pricing,460–462,475,478 Penetration pricing,470,473,476,478 Perfect competition,12,280,283–288,291, 315–331,340–346,350–352 Per se rule,383 Political rent seeking,706,719–724