
YIELD CURVE: A curve plotting the yields (or returns) on securities with different maturity lengths. The standard yield is for U.S. Treasury securities with lengths ranging from 90 days to 30 years. The five maturity lengths are usually 90 day, 180 day, 2 year, 5 year, 10 year, and 30 year. The shape and slope fo the yield curve indicates the state of the economy and what's likely to come. A normal yield curve has a slight positive slope, with slightly higher yields for longer maturity securities. A steep yield curve suggests the end of a contraction and beginning of an expansion. An inverted, or negatively sloped yield curve is the sign of an upcoming contraction.
Visit the GLOSS*arama




GAME THEORY: An analysis that illustrates how the choices between two players affect the outcomes of a "game." Game theory is commonly used to explain the behavior and decision making of oligopolistic firms. It illustrates that cooperation, rather competition, between two "players" can lead to an outcome that is more beneficial to both players. Game theory is a handy way to analyze the type of interdependence often found with oligopoly. Oligopoly is a market structure containing a small number of large firms that practice competition among the few. The actions of one firm in an oligopoly is likely to prompt counter actions by other firms. One firm lowers its price, prompting a competing firm to lower its price. One firm launches a new advertising campaign, prompting a competing firm to step up its own advertising.The moves and counter moves among oligopoly firms can be analyzed with game theory, developed by John Nash, a Nobel Prize winning economist and mathematician. The standard game theory analysis is based on alternative outcomes that arise given a choice that each of two players face. The key is that the choice made by each player affects the outcome of both players. For example, suppose that Firm A introduces a new product. This act not only affects sales and profit of Firm A, but also the sales and profit of a competitor, Firm B. Competing Firm B, recognizing this fact, is likely to take a counter action, introducing a new product of its own, which affects its sales and profit, but also the sales and profit of Firm A. Much like a game of chess, each firm plans moves and counter moves based on the actions or anticipated actions of competitors. To illustrate game theory, consider how two competing firms in the hypothetical Shady Valley soft drink market engages in a game of advertising. One of the two firms, OmniCola, is considering a new advertising campaign. The question is how might a major competitor, JuiceUp, react to this decision. JuiceUp might choose to counter with an advertising campaign of its own. In particular, suppose each firm is thinking about spending $50 million on advertising. The key to this analysis is that the benefit that each firm derives from its advertising expense depends on the actions of the other firm. Soft Drink Advertising 

 The exhibit to the right presents the outcome table summarizing alternative profit received by OmniCola and JuiceUp based on the advertising choice of each firm. Each firm can choose to advertising or not. The lower right square indicates that if NEITHER OmniCola or JuiceUp decide to advertise, then each receives $250 million in profit. The top left triangular half of the square is the $250 million profit received by OmniCola and the lower right triangular half of this square is the $250 million profit received by JuiceUp. The total industry profit in this case is $500, divided evenly between the two firms.
 However, if OmniCola and JuiceUp BOTH decide to spend $50 million each on advertising, then each ends up receiving $200 million in profit. The advertising by each firm effectively cancels out that of the other firm. As such, neither gains greater sales or market share, but both end up reducing profit by $50, the amount of the advertising expense. The top left triangular half of the square is the $200 million profit received by OmniCola and the lower right triangular half of this square is the $200 million profit received by JuiceUp. The total industry profit in this case is only $400, a decline of $100, which is the total advertising expense.
 Alternatively, if OmniCola advertises but JuiceUp does not, then OmniCola receives $350 million in profit and JuiceUp receives only $100 in profit. This outcome is found in the lower left square. The top left triangular half of the square is the $350 million profit received by OmniCola and the lower right triangular half of this square is the $100 million profit received by JuiceUp. OmniCola receives a big boost in profit, and JuiceUp has a big drop because OmniCola advertising attracts customers away from JuiceUp. The total profit for this alternative is $450, which reflects the $50 advertising expense undertaken by OmniCola.
 The situation is exactly reversed if JuiceUp advertises but OmniCola does not. In this case, JuiceUp receives $350 million in profit and OmniCola receives only $100 in profit. This outcome is found in the upper right square. The top left triangular half of the square is the $100 million profit received by OmniCola and the lower right triangular half of this square is the $350 million profit received by JuiceUp. JuiceUp now receives a big boost in profit, and OmniCola has a big drop because JuiceUp advertising attracts customers away from OmniCola. The total profit for this alternative is also $450, which reflects the $50 advertising expense undertaken by JuiceUp.
Given these alternative outcomes, what is likely to happen? Is OmniCola likely to spend $50 million on advertising? What actions might JuiceUp take? Consider what would seem to be the "best" option, that is, most profitable outcome. If neither firm advertises, then total industry profit is $500the lower left square. If the two firms had a cooperative arrangement, or collusive agreement, then they would most likely select this outcome. Each avoids the $50 million advertising expense and ends up with $250 million of profit. Each maintains their individual market share and total industry profit is maximized. Both firms are best off if neither advertises. But the firms do not have a collusive arrangement. OmniCola must select an option NOT knowing what JuiceUp will do. JuiceUp must select an option NOT knowing what OmniCola will do. OmniCola must select the outcome that is best for OmniCola regardless of the decision made my JuiceUp. Likewise, JuiceUp must select the outcome that is best for JuiceUp regardless of the decision made my OmniCola. Consider the options facing OmniCola  First, suppose that JuiceUp decides TO ADVERTISE. If OmniCola also advertises, then its profit is $200 million, but it OmniCola does not advertise, then its profit is only $100 million. If JuiceUp advertises, then OmniCola is also wise to advertise, with an extra $100 million in profit.
 Second, suppose that JuiceUp decides NOT TO ADVERTISE. If OmniCola advertises, then its profit is $350 million, but if OmniCola does not advertise, then its profit is $250 million. If JuiceUp does not advertise, the OmniCola is once again better off advertising, with an extra $100 million in profit.
The best choice for OmniCola is therefore to advertise, regardless of the choice made by JuiceUp. In either case, advertising generates $100 million more for OmniCola.JuiceUp, however faces EXACTLY the same choice. Regardless of the decision made by OmniCola, JuiceUp is also wise to advertise. JuiceUp generates $100 million more, regardless of the choice made by OmniCola. The end result is that both firms decide to advertise. In so doing, they end up with less profit ($200 million each), than if they had colluded and jointly decided not to advertise ($250 million each). Game theory illustrates the key problem of interdependent decisionmaking found in oligopoly. Competition among the few can lead to inefficiency and competitive actions that waste resources without generating corresponding benefits.
Recommended Citation:GAME THEORY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 20002023. [Accessed: June 6, 2023]. Check Out These Related Terms...      Or For A Little Background...          And For Further Study...        
Search Again?
Back to the WEB*pedia



Junk bonds are so called because they have a better than 50% chance of default, carrying a Standard & Poor's rating of CC or lower.


"I've always believed that if you put in the work, the results will come. I don't do things halfheartedly. Because I know if I do, then I can expect halfhearted results. "  Michael Jordan, basketball player


OMO Open Market Operations


Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.
User Feedback

