Oligopoly and Game Theory

4.5
 Market Number of Type of Control Barriers Examples
Structure Sellers Product Over Price to Entry
Perfect Many Identical None None Wheat Farm
Competition (Price-takers)
Monopoly One Unique Complete Very high Mass transit
(Price-makers)
Monopolistic Many Differentiated Some Very low Restaurants,
(not as many as PC) Retail
Oligopoly Few Very similar Interdependent Very high Soda, Airlines,
Autos
 Oligopoly
• A market with a few firms acting interdependently, with high
barriers to entry
• Interdependent- dependent on others to make decisions
about pricing and quantity produced.
• Examples- Airlines, cereal, auto industry.
 Collusion and Cartels
• Oligopolies have incentive to engage in
collusion- when companies that typically
compete with each other decide to work
together to gain an unfair market advantage.
• Sometimes, companies form cartels- groups of
firms that get together and coordinate output
and price decisions.
• The idea is to lessen competition and act more
like a monopoly. (higher prices for consumers
with lower ouput)
• Collusion and cartels behavior is illegal in most
cases, but it typically doesn’t work as each firm
has incentive to cheat on the agreement.
 Game Theory
• Game Theory- the study of how people behave in strategic
situations, taking into account other people’s decisions.
• When making decisions about output or price, firms in an
oligopolistic market must be strategic.
 Butthead

Confess Not Confess

Confess 5 years, 5 years Free, 25 years

Beavis
Not
Confess 25 years, Free 2 years, 2 years

This is an example of what’s referred to as “The Prisoners Dillemma”

Dominant Strategies/Nash Equilibrium
• A dominant strategy when the payoff to a particular
action is always higher independent of the action taken
by the other player.
• Another way of saying this- no matter what the other
Player B does, Player A will not deviate from their
strategy.
• Nash Equilibrium- when no player can increase his or her
payoff by taking any other action given the other players
actions.