Oligopolies and Game Theory
- Created by: Chloe Budd
- Created on: 02-06-14 10:03
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- Oligopolies
- Characteristics of an oligopoly
- A few large dominant firms
- Goods with similar characteristics and strong brand loyalty
- Imperfect knowledge about rival's price and output choices
- High barriers to entry
- Cannot price set but do secure price fixing deals
- Competition in oligopolies
- Only a few firms dominate the industry so concentration ratios are high
- If one firm lowers prices all other firms will follow
- The price war that follows lower prices leads to lost revenue outweighing the possible gains in sales
- Oligopolies tend to use non price competition
- Collusion in oligopolies
- Overt collusion is a spoken agreement between firms to cooperate
- Tacit collusion is an unspoken agreement between firms to cooperate
- This allows oligopolies to fix prices
- This reduces competition and is illegal but leads to increased profit
- Collusion is broken where game theory shows gains can be made
- Game theory
- A payoff matrix shows the different options of how a firm can act based on the actions of another firm
- The firms use game theory to act how is most beneficial to them
- If firms are at Nash equllibrium then they will not change their strategy due to fear of the actions of other firms
- If firms are using a maxmin strategy they have a price where they can be least harmed. This is due to lack of trust in other firms
- Characteristics of an oligopoly
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