1. Oligopoly Behavior & Game Theory
Chapter 16 Pages

2. 4 Market Structures “Imperfect Competition” Perfect Monopolistic
Monopoly
Oligopoly
“Imperfect Competition”
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. Pricing decision is dependent on their competitors!
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. INTERDEPENDENCE MC=MR MC=MR Perfect Monopolistic Competition Monopoly
Oligopoly
INTERDEPENDENCE
Actions of your
competition
affect you!
Company 1
Company 2

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

7. dependent on the choices
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. Intro: Game Theory Coke Pepsi Reading Review 80, 80 120, 45 45, 120
Advertise
Don’t Advertise
Advertise
80, 80
120, 45
Don’t
45, 120
100,100
Pepsi
Coke to Advertise
Dominant Strategy:
Pepsi to Advertise
Nash Equilibrium

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. Oligopoly Market Current Events. Are 3 companies enough competition?