Oligopoly Behavior: A Game Theory OverviewThis is a featured page

Game Theory: study of how people/firms behave in strategic situations
Game Theory Model: can be used to analyse the behaviour of oligopolists
(duopoly is assumed)
Payoff Matrix: multiple-celled chart with each cell divided into halves, showing the multiple possible scenarios influenced by the decision of two firms. You only need to know how to use a 4 celled matrix for now.
Dominant Strategy: A strategy that's best for the player in a game regardless by strategy chose by another player.

Example of a Game Theory Model
(using prisoners):
Oligopoly Behavior: A Game Theory Overview - Welker's Wikinomics Page

Mutual Interdependence Revisited:
  • Oligopolistic firms can influence rival's profits by changing pricing strategies
  • Each firm's profit depends on their pricing strategy in relation to their rival's
  • Firms make decisions based on how they think other firms will react. They anticipate the next move.

Collusion Tendencies

  • Collusion: cooperation between firms to achieve benefits. It is usually ILLEGAL!!!
    • Firms can cooperate and decide on pricing strategies that will provide benefits for both
    • Without collusion, firms may end up in price wars, where their profits decrease significantly
    • When firms work together, they act as one big monopoly power, charging a monopoly price and earning a monopoly profit.
    • It may be legal when firms communicate about where they will put their stores, and not about money.
  • Obstacles to collusion
    • Demand and cost differences
    • Number of firms
    • Cheating
    • Recession
    • Potential Entry
    • Legal Obstacles: Antitrust Law
Incentive to Cheat
  • Oligopolists are strongly tempted to cheat on collusive agreements
  • If two firms agree to set a certain price, one firm may secretly change their price in an attempt to attract more consumers than the rival firm
  • Agreements are easier to make between a few firms because it is easier to track if firms begin to cheat. it is harder for a larger amounts of firms to make an agreement.
  • This incentive also works with advertisements; if two firms both agree not to increase advertising, both have an incentive to then cheat and begin making more advertisements anyway.

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Latest page update: made by MondGu , Nov 19 2007, 11:05 PM EST (about this update About This Update MondGu Edited by MondGu

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