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Chapter 17: Oligopoly and Business Strategy (Game theory: the approach…
Chapter 17: Oligopoly and Business Strategy
Oligopoly: a market structure in which a small number of
interdependent
firms compete
Duopoly: a market with two firms
Nash equilibrium
: a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all others actors have chosen
Game theory: the approach used to analyse competition among oligopolists
Strategies
Payoffs (= profit)
Rules
The prisoner's dilemma
Equilibrium
Cooperative equilibrium: players cooperate to increase their mutual profits
Non- cooperative equilibrium: players do not cooperate but pursue their own self- interest
Payoff matrix
Dominant strategy
: best strategy for a player in a game regardless of the strategies chosen by other players
Retaliation strategies
: send a signal to a public but not directly to competitors
Collusion
: an agreement among firms in a market about quantities to produce or prices to charge. However, it is often impossible because competition laws prohibit that
Cartel:
a group of firms acting in unison
Market outcome for oligopoly
The output effect:
because price is above marginal cost, selling one more litre of water at the going price will raise profit
The price effect:
raising production will increase the total amount sold, which will lower the price of water and lower the profit
If output effect > price effect => increase production
If price effect > output effect => decrease production