Oligopoly Behavior & Game Theory

Chapter 16 Pages 345 - 360

PerfectCompetition

MonopolisticCompetition Oligopoly Monopoly

Most competitiveNo DWLP = MC

Least competitiveBiggest DWLP > MC

4 Market Structures

“Imperfect Competition”

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”

Oligopoly

• Few large producers• Similiar or differentiated products• difficult to enter or leave market• incomplete information• Some price control & mutual interdependence

5-Market Characteristics

Key with Oligopolies—Pricing decision is dependent on their competitors!

PerfectCompetition

MonopolisticCompetition Oligopoly Monopoly

Company 1Company 2

Actions of your competition affect you!

QuantityQ QQ0

Costs andRevenue

DemandDemand

Average total costAverage total cost

Marginal revenueMarginal revenue

Marginalcost

Marginalcost

Marginalcost

Price

Qty

P = AR = MRP1

Q1

Individual Firm

MC=MR

MC=MR

MC

INTERDEPENDENCE

Non-cooperative BehaviorCooperative Behavior

Should I cooperate?

Oligopolies are Interdependent

What is in my Self Interest?

Game Theory

• John Nash developed Game Theory– Received 1994 Nobel Prize

– Game Theory is the Basis for Oligopoly Pricing

Your Choice isdependent on the choices

other players have!

Game Theory Handout

• Read Handout carefully

Intro: Game Theory

Reading Review

Coke

Pepsi Advertise 80, 80 120, 45

Don’t

Advertise45, 120 100,100

Advertise

Don’t Advertise

Dominant Strategy:

Nash Equilibrium

Pepsi to Advertise Coke to Advertise

Intro: Game Theory Wrap UpDominant 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!

Oligopoly MarketCurrent Events.

Are 3 companies enough competition?

http://www.youtube.com/watch?v=N7_Oiunf1go&feature=player_embedded