Name: GERRALYN P.

EDELEON Year & Course: BSBA MM2-1

1. What is Nash Equilibrium & Game Theory? How it relates to firm’s decision-making purposes.
Please discuss.

Imagine you're playing a game, but it's not just any game—it's a strategic game where your
decisions depend on what you think your opponent will do. That's where game theory comes in.
It's like a toolkit for understanding these kinds of situations. Now, one key concept in game
theory is Nash Equilibrium, named after mathematician John Nash.

Nash Equilibrium is a situation where each player in a game is making the best decision they can,
given the decisions of the other players. Think of it as a sort of balance point where nobody
wants to change their strategy because any change would make them worse off. It's like a stable
state of play where everyone's choices are optimal given what the others are doing.

Now, how does this relate to firms? Well, businesses often face situations where their success
depends not only on their own actions but also on what their competitors do. For example, think
about pricing decisions. A firm wants to set a price for its product that maximizes its profits, but
it also has to consider what prices its competitors are setting. If it sets a price too high, it might
lose customers to competitors. If it sets it too low, it might not make enough profit.

In this scenario, Nash Equilibrium helps the firm understand where it stands relative to its
competitors. It helps them anticipate how other firms will react to their decisions and adjust
their strategies accordingly. By understanding the dynamics of the market in this way, firms can
make more informed decisions about things like pricing, production, marketing, and so on. So, in
essence, Nash Equilibrium and game theory provide a framework for firms to navigate complex
decision-making situations where the actions of others matter.

2. Please define and discuss the following terms:

a. Market power: Market power refers to the ability of a firm or a group of firms to influence
the price, quantity, or quality of goods or services in a market. It's basically the degree to
which a company can control its market environment, often leading to higher prices or lower
output than would exist in a competitive market.
b. Product differentiation: Product differentiation is when a company makes its products or
services different from those of its competitors in ways that are meaningful to customers.
This can be through branding, features, quality, or other factors. The aim is to make
customers perceive the product as unique, giving the company an edge in the market.
c. Price discrimination: Price discrimination is when a seller charges different prices to different
customers for the same product or service, based on factors like willingness to pay, location,
or purchasing power. This strategy allows companies to capture more consumer surplus and
maximize profits.
d. Durable goods and experience goods: Durable goods are products that are expected to last
for a relatively long period, such as cars or appliances. Experience goods are products whose
quality or utility is difficult for the consumer to evaluate before purchase, such as restaurant
meals or movies. Both types of goods pose unique challenges for sellers in terms of pricing
and marketing.
e. Secondary markets and their relationship with primary markets: Secondary markets are
where already issued securities, such as stocks or bonds, are traded among investors. They
provide liquidity and allow investors to buy or sell assets after the initial issuance in primary
markets, where new securities are created and sold by issuers.
f. Collusion: Collusion occurs when competing firms cooperate rather than compete with each
other, often to fix prices, divide markets, or restrict competition. It's typically illegal because
it harms consumers by reducing choices and increasing prices.
g. Signaling: Signaling is when one party in a transaction provides credible information to
another party to influence their beliefs or actions. For example, a company might signal its
quality by investing in advertising or using high-quality materials in its products.
h. Mergers and acquisitions: Mergers happen when two companies combine to form a new
entity, while acquisitions occur when one company buys another. Both strategies are used by
firms to expand their operations, gain market share, or achieve synergies.
i. Antitrust and competition: Antitrust refers to laws and regulations aimed at promoting
competition and preventing monopolistic practices, such as price-fixing, market allocation,
or mergers that reduce competition. The goal is to ensure fair and efficient markets that
benefit consumers.
j. Industrial policy: Industrial policy involves government interventions aimed at influencing
the structure, performance, or behavior of specific industries to promote economic
development or address market failures. This can include subsidies, tax incentives, or
regulations.
k. Industrial Organization and Policy: Industrial organization is a field of economics that studies
the behavior of firms and industries, including topics like market structure, competition,
pricing strategies, and government policies. Industrial policy refers to government actions
that shape or influence industrial activities to achieve specific economic or social objectives.