Defining Oligopoly and Game Theory

- The characteristics listed below demonstrate the resemblance and contrast between each type of market.

perfect competition:

• numerous buyers and sellers
• many perfect substitutes are available so no preference is shown
• easy entry and exit for buyers and sellers
• sellers have no control over price
• market knowledge is available to everyone
• perfectly elastic demand

monopolistic competition:

• large number of small firms
• easy entry
• sellers have some control over price
• similar substitutes are available but product is differentiated
• highly elastic demand

oligopoly:

• controlled by a few dominate firms
• entry is difficult since economies of scale is usually present
• non price competition is practised especially when product differentiation exists
• sellers have significant control over price
• mutual interdependence subsists between sellers
• elasticity of demand will vary

- As a consumer, my preferred market type is a perfect competition since the price is not determined by the seller. If I were to own a business I would prefer to be part of a monopolistic competition, offering brand name, differentiated products. Although firms operating in an oligopoly have the most control over price and profit, they are constrained by the actions of other relative businesses.

- As a consumer of each market type I feel in control of all purchasing choices, except those which come from an oligopoly. As shown by the oil example in our text, if supply is limited by the cooperation of firms it will drive the prices up. This is not fair for the buyers.

- Game theory is the mathematical theory of conflict and cooperation. It is a study of how a person will strategically position themselves to recieve maximum gains while taking others actions into consideration.

- In 1944, Game Theory was established after the publication of, "Theory of Games and Economic Behavior, by John Von Neumann and Oskar Morgenstern. The idea originated from watching the social interaction and matematical outcomes of parlour games.

- In the current economy, Game Theory exists within the majority of oligopoly market structures, even when collusive and cartel actions are present. When mutual interdependence prevails, a business will always be looking out for it's best interests. This includes anticipating moves and reactions of other firms. It seems there should be cooperation between firms to recieve maximum profits but it is safer for a firm to cheat. If one firm cheats and the other doesn't, the loyal firm is rewarded by a large loss of profit but if both fims cheat the loss is much smaller for both.

- A payoff matrix is a tool used to display all possible outcomes of the decisions made by two mutually interdependant parties. The four combinations include:

• both player a and player b cheating
• both player a and player b not cheating
• player a cheating and player b not cheating
• player b cheating and player a not cheating

- Collusion is cooperation between rival firms, usually in the form of agreement over price setting and division of the market. Between countries collusion is acceptable but is illegal among firms. A cartel is a formal organization that acts in collusion in order to increase individual members' profits by reducing competition.



Resources:

Sayre, J.E. & Morris, A.J.  (2009).  Principles of Microeconomics (6th ed.).  Toronto, ON: McGraw-Hill Ryerson.

http://plato.stanford.edu/entries/game-theory/

http://dictionary.reference.com/browse/game+theory