- The majority of economic transactions take place through markets. Markets have a myriad of different structures. They are central in organizing production and allocating surpluses between participants. On some occasions, market participants cannot affect the outcome.
- However, on other occasions, market participants can follow complicated strategies to affect production allocation in their favor.
- What kind of strategies do market participants employ?
- How do the strategies of different participants interact?
- Do their strategies affect market efficiency besides allocation?
- In most real-life situations, economic agents do not operate in isolation. Their gains and losses depend not only on their own choices but also on the choices of others.
- Markets are typical examples of economic situations where social interactions matter.
- How can we study social interactions in economics?
- How do economic agents compete and coordinate with each other?
- What are the social dilemmas that arise in such situations?
- Many real markets are neither perfectly competitive nor monopolies. Instead, they are oligopolies comprised of a small number of firms that have large enough market shares and can influence prices.
- Nonetheless, firms' profits do not exclusively depend on their own choices. Their small numbers allow them to utilize a variety of competition strategies.
- How do firms strategically interact?
- What means do they use to compete?
- How do the welfare outcomes of oligopolies compare to those of monopolies and perfect competition?
- Strategic interactions and social dilemmas can sometimes be understood in terms of one-shot sandbox cases. In such settings, where time is neglected, promises, threats, and reputation play no role.
- However, players have many additional strategies available whenever there is a future, and they can use promises and threats to achieve very different outcomes compared to the atemporal cases.
- How does time affect the outcomes of social interactions?
- Why is reputation important whenever time is involved?
- How can players incorporate time into their strategies?
- Competition in real markets is not a static phenomenon. Firms can change their choices from date to date and adapt their strategies based on past events and the reactions of competitive firms.
- In such fluid settings, some firms take the initiative and set the pace of competition in the market. Other firms follow.
- Do firms benefit from assuming a market leader role?
- How does the sequence of moves affect the market power?
- Why does market entry influence the behavior of incumbent firms?
- Markets with intense competition tend to reduce the competing firms' market power. Firms could form cartels to control the market and extract a greater share of the economic surplus if left unregulated. For this reason, collusion and cartel formation are illegal practices in most market economies today.
- However, legally binding contracts are not necessary for firms to coordinate. Firms can use dynamic strategies to collude tacitly.
- What kind of strategies can lead to tacit collusion?
- What is the role of the means of competition in tacit collusion?
- How can competition authorities measure market power?