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Oligopoly Behavior & Game Theory

Explore the dynamics of imperfect competition in oligopolies with few large producers and interdependent pricing strategies, using Game Theory for insightful analysis and strategic decision-making.

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Oligopoly Behavior & Game Theory

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  1. Oligopoly Behavior &Game Theory Chapter 16 Pages 345 - 360

  2. “Imperfect Competition” 4 Market Structures Perfect Competition Monopolistic Competition Monopoly Oligopoly Most competitive No DWL P = MC Least competitive Biggest DWL P > MC

  3. Two Imperfect Market Structures • Oligopoly • A few large sellers dominate the market (3-8 companies) • Example: automobile companies, wireless service providers • Fasting growing market structure in real world • Monopolistic Competition • Many firms in market • Example: coffee shops, restaurants , hair salons • Most common market structure in “real world”

  4. Oligopoly 5-Market Characteristics • Few large producers • Similiar or differentiated products • difficult to enter or leave market • incomplete information • Some price control & mutual interdependence Key with Oligopolies— Pricing decision is dependent on their competitors!

  5. Actions of your competition affect you! Company 1 Company 2 MC MC=MR MC=MR Perfect Competition Monopolistic Competition Monopoly Oligopoly INTERDEPENDENCE

  6. Oligopolies are Interdependent Should I cooperate? Cooperative Behavior Non-cooperative Behavior What is in my Self Interest?

  7. Game Theory • John Nash developed Game Theory • Received 1994 Nobel Prize • Game Theory is the Basis for Oligopoly Pricing Your Choice is dependent on the choices other players have!

  8. Game Theory Handout • Read Handout carefully

  9. Dominant Strategy: Nash Equilibrium Intro: Game Theory Reading Review Coke Advertise Don’t Advertise Pepsi Coke to Advertise Pepsi to Advertise

  10. Intro: Game Theory Wrap Up • Dominant Strategy- best strategy for one player regardless of what the other player chooses • Enforceable Equilibrium- is a stable “market” equilibrium. No incentive to move/cheat! • Nash Equilibrium – a combination of strategies that each choose “best” choice in response to the other’s choice. • Every dominant strategy is a Nash Equilibrium • Every Nash equilibrium not is a dominant strategy!

  11. Current Events. Oligopoly Market Are 3 companies enough competition? http://www.youtube.com/watch?v=N7_Oiunf1go&feature=player_embedded

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