Oligopoly Pricing

(CS-42207)

Group(1)
Htet Htet Oo (4SE - 924)
May Myat Mon Kyaw (4SE - 983)
Nang Mo Mo Kham (4SE - 908)
Phyo Thu Ta (4SE - 891)
Thiri Minn Thu (4SE - 1265)
Table of Contents

1.Introduction

2.Nash Equilibrium

3.Real Life Example

4.Conclusion

1.Introduction

What is Game Theory?

Game theory is a branch of mathematics that studies how

individuals, firms, or entities make decisions when their outcomes
depend on the choices of others. It provides a framework for
analyzing and understanding strategic decision-making in situations
where the outcome of one's choices is influenced by the choices of
others.

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What is Oligopoly Pricing?

● Oligopoly has been derived from two Words oligi and pollien.

● “Olligi” means a “few” and “Pollien” means “sellers”.

● Oligopoly pricing is a pricing strategy.

● Used by a small number of big companies to control a market

and work together to set prices, rather than competing fiercely.

Characteristics of Oligopoly Pricing

● Few Dominant Firms

● Non-price Competition
● Price Wars
● Price Rigidity
● Interdependence
● Barriers to Entry

Pros and Cons

Pros

● Prices tend to stay steady, so no big price changes all the time.
● Make better product to beat each other, customers get high-
quality stuff.
● Lower prices or better products.

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Cons

● Fewer companies, fewer choices.

● Secretly work together to raise prices.

Applied Organizations

(1) Automobile Industry (2)Smartphone Industry

(3)Video Gaming Industry (4) Streaming Industry

2.Nash Equilibrium
What is Nash Equilibrium?

● Nash equilibrium is a fundamental concept in game theory,

named after mathematician John Nash.
● A Nash equilibrium is a situation in a game where each player's

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 strategy is optimal given the strategies chosen by all the other
players.
● It represents a state of the game where no player has an
incentive to unilaterally change their strategy, given the
strategies of the other players.
● In other words, in a Nash equilibrium, no player can improve
their outcome by changing their strategy.

What is Dominant Strategy?

● A dominant strategy is a strategy that provides the highest

payoff for a player regardless of the choices made by the other
players.
● It is the best course of action for a player, no matter what the
other players do.
● Having a dominant strategy simplifies decision-making for a
player because they can always choose the same action,
regardless of the actions of their opponents.

Relationship between Nash Equilibrium and

Dominant Strategy

● Every game with a dominant strategy has a Nash equilibrium.

● Not every Nash equilibrium involves dominant strategies.
● The Nash equilibrium is the combination of these dominant
strategies.

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 ● However, in games where not all players have dominant
strategies, the Nash equilibrium may involve a mix of strategies
where each player's choice is optimal given the choices of the
others.

Example

Advantages

Here's how Nash equilibrium is used in oligopolistic markets:

● Strategic Decision-Making

● Stability in Pricing and Output Levels

● Avoiding Unilateral Deviation

● Avoiding Price Wars and Collusion

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3.Real Life Example

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If McD charges $7, BK should charge $5.
If McD charges $5, BK should charge $5.
So, $5 is a dominant strategy for both Burger King and McDonald’s.

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Therefore, neither firm has any incentive to deviate from their
dominant strategy, as it results in the best outcome for each firm,
regardless of the other firm’s choice. This is a stable outcome where
both firms are maximizing their profits given the dominant strategies.

4.Conclusion
In conclusion, this report has dived into the intricate world of
oligopoly pricing, shedding light on the unique characteristics and
challenges presented by markets dominated by a small number of
powerful firms. Oligopolies are pervasive in today's global economy,
and understanding their pricing strategies is essential for businesses,
policymakers, and economists alike.Moreover, we've seen how game
theory plays a pivotal role in analyzing and predicting the actions of
firms in oligopolistic markets. Game theory models help us grasp the
strategic interactions among firms and identify Nash equilibria,
providing valuable insights into pricing outcomes.

This report serves as a foundation for further research, analysis, and

decision-making in the realm of oligopoly pricing. We hope it has
provided valuable insights and a comprehensive overview of this
crucial topic.