Game Theory and Oligopoly Fall - 2627 Words

Econ 101: Principles of Microeconomics Chapter 15 - Oligopoly Fall 2010 Herriges (ISU) Ch. 15 Oligopoly Fall 2010 1 / 25 Outline 1 Understanding Oligopolies 2 Game Theory The Prisoner’s Dilemma Overcoming the Prisoner’s Dilemma 3 Antitrust Policy Herriges (ISU) Ch. 15 Oligopoly Fall 2010 2 / 25 The Oligopoly Monopolies are quiet rare, in part due to regulatory eï ¬â‚¬orts to discourage them. However, there are many markets that are dominated by a relatively few ï ¬ rms, known as oligopolies. The term oligopoly comes from two Greek words: oligoi meaning â€Å"few† and poleein meaning â€Å"to sell†. Examples of oligopolies include: 1 2 3 4 5 6 7 Airliner Manufacturing: Boeing and Airbus Food†¦show more content†¦Eï ¬â‚¬orts to model such strategic interactions has led to a whole branch of economics and math known as game theory Herriges (ISU) Ch. 15 Oligopoly Fall 2010 8 / 25 Understanding Oligopolies The Duopoly In order to understand some of the possible behaviors in the case of oligopolies, consider the simplest case - the duopoly (i.e., two ï ¬ rms). Think, for example, of the airliner industry, which is dominated by two ï ¬ rms (Boeing and Airbus). Suppose that the demand for airliners in any given month is given by Price ($mill.) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 Herriges (ISU) Quantity Demanded 0 1 2 3 4 5 6 7 8 Total Revenue TR = P Ãâ€" Q 0 3.50 6.00 7.50 8.00 7.50 6.00 3.50 0 Ch. 15 Oligopoly Marginal Revenue MR = ∆TR/∆Q 3.50 2.50 1.50 0.50 -0.50 -1.50 -2.50 -3.50 Fall 2010 9 / 25 If MC=1.75, how much would a monopoly produce? Q=2 Understanding Oligopolies The Collusion Outcome One alternative in the case of a duopoly would be for the two ï ¬ rms to form a cartel A cartel is an agreement among several producers to obey output restrictions in order to increase their joint proï ¬ t. Essentially, the cartel acts like a monopolist and simply divides the market among members of the cartel. The most famous example of this is the Organization of Petroleum Exporting Countries (OPEC) OPEC was formed in 1960’s in response to quotas instituted by PresidentShow MoreRelatedMarket Strategy Case Study: Katrinas Candies1665 Words   |  7 PagesKatrinas Candies would be successful operating in an Oligopolistic Structure. Oligopoly is a market structure characterized by a small number of relatively large firms that dominate an industry. The market can be dominated by as few as two firms or as many as twenty, and still be considered oligopoly. With fewer than two firms, the industry is monopoly. As the number of firms increase (but with no exact number) oligopol y becomes monopolistic competition. Because an oligopolistic firm is relativelyRead MoreFirms Incentives to Avoid Price Competition in Oligopoly Markets520 Words   |  3 PagesFirms Incentives to Avoid Price Competition in Oligopoly Markets In the UK a few, large firms dominate most industries. These industries are known as oligopoly markets. Oligopoly markets are an example of imperfect competition. It consists of a market structure in which there is a small number of large firms in the industry hence is relatively highly concentrated. Barriers to entry and exit are also likely to exist. In oligopoly markets there is product differentiationRead MoreMarket Structure of Oligopoly 1755 Words   |  8 PagesStructure Of The Market Structure Of Oligopoly And The Difficulty In Predicting Output And Profits Market structure of oligopoly Oligopoly is a market structure where there are a few firms producing all or most of the market supply of a particular good or service and whose decisions about the industrys output can affect competitors. Examples of oligopolistic structures are supermarket, banking industry and pharmaceutical industry. The characteristics of the oligopoly are: • Small number of large firmsRead MoreOligopoly Market Structure2237 Words   |  9 PagesOligopoly Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. †¢ Under perfect competition, monopoly, and monopolistic competition, a seller faces a well defined demand curve for its output, and should choose the quantity where MR=MC. The seller does not worry about how other sellers will react, because either the seller is negligibly small, or already a monopoly. Under oligopolyRead MoreGame Theory : The Competitive Edge Of Business, Politics, And Everyday Life By Dixit And Nalebuff Essay2016 Words   |  9 PagesGame Theory states that most anything and everything can be thought of as a game. People can use it to strategize on voting, deciding on what articles or coupons to release, or even deciding whether or not, it is in your best interest to rat out som eone else if both parties are being questioned by the police. There are many companies that use this in order to decide how they are going to operate. The book Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life by DixitRead MoreQuestions on Oligopoly19013 Words   |  77 PagesChapter 16 Oligopoly MULTIPLE CHOICE 1. Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as a. competitive markets. b. monopoly markets. c. monopolistically competitive markets. d. oligopoly markets. ANSWER: d. oligopoly markets. TYPE: M DIFFICULTY: 1 SECTION: 16.1 2. An oligopoly is a market in which a. there are only a few sellers, each offering a product similar or identicalRead MoreTopic: Profit Maximization of a Firm.1326 Words   |  6 Pagesoperating under. As mentioned earlier, firms profit maximizing output decisions take into account the market structure under which they are operating. There are four kinds of market organizations: perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect Competition Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. For a market structure to be deemed â€Å"Perfectly Competitive†Read MoreMarketing Analysis : Perfect Competition2982 Words   |  12 Pagesregulating how they function and how they must operate in future. I will provide an adequate amount of information concerning perfect competition, monopolistic competition, oligopoly, and monopoly. I will also discuss how each term is important to consumers and how it affects the market. Perfect Competition Perfect Competition is a theory of market structure based on four assumptions: there are many sellers and buyers, sellers sell a homogeneous good, buyers and sellers have all relevant information, entryRead MoreMarket Structures : Reynolds And Philip Morris1080 Words   |  5 PagesPhilip Morris Game theory allows business experts to examine decision-making in oligopolistic interdependent cases. Applying the game theory allows one to present the situation in a simple background by creating formalized models to analyze the possible results (Bhat and Rau, 2008). The outcomes may be cooperation (or collusion) and conflict (or competition), which will influence the oligopolistic company’s choice of best strategy if faced with such outcomes. Prisoner’s Dilemma game The prisoners’Read MoreMonopolistic Competition13794 Words   |  56 PagesCHAPTER 25 Monopolistic Competition and Oligopoly Topic Question numbers ___________________________________________________________________________________________________ 1. Monopolistic competition: definition; characteristics 1-17 2. Demand curve 18-24 3. Price-output behavior 25-78 4. Efficiency aspects 79-88 5. Oligopoly: definition; characteristics 89-112 6. Concentration ratio; Herfindahl Index 113-140 7. Game theory 141-156 8. Kinked-demand curve model 157-176