Notes

Games theory is the systematic study of how rational agents behave in strategic situations, or in game, where each agent must first know the decision of the other before knowing which decision is best for her. The solution concepts include Nash equilibrium and strategic decision making. The Bertrand models of duopoly capture strategic decision making on the part of the two firms. Each firm understands well its optical action depends on the action taken by other firm. The idea of Pareto efficiency is pervasive in economics and it is often used as one means to evaluate the performance of an economic system. The basic idea is that if an economic system is to be considered as functioning well, and then given the distribution resources it determines, it should not be possible to redistribute them in a way that results in a Pareto improvement. Which, if any, of the three types of market competition- perfect competition, monopoly or oligopoly- function well in the sense that they yield Pareto-efficient outcome?
Note that difference between the three forms of competition is simply the prices and quantities they determine. For example, were a perfectly competitive industry taken over by a monopolist, the price would rise from the perfectly competitive equilibrium price to the monopolist’s profit-maximizing price ant the quantity of the good produced and consumed would fall. Our conclusion is that the only price-quantity pair yielding a Pareto-efficient outcome it’s the perfectly competitive one. In particular, neither the monopoly outcome nor the oligopoly outcome is Pareto efficient.
The games theory can provide explanations of the existing phenomena in real economy. By applying this theory as a reference in representing economic agents’ behaviors, a broad investigation field has been revealed. Economic agents should no more be concerned with studying of perfectly competitive markets functionality, but instead with analyzing the modalities in which they can coordinate decisions in static or dynamic configurations, within a competitive environment influenced by risk and uncertainty.