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ShareWhat makes oligopolistic markets, which are characterized by a few large firms, so different from the other market structures we study in Microeconomics?
To understand the behavior of non-collusive oligopolists (non-collusive meaning a few firms that do NOT cooperate on output and price), economists have employed a mathematical tool called Game Theory. Game theory as a mathematical tool can be applied in realms beyond oligopoly behavior in Economics. Why is oligopoly behavior more like a game of poker than the behavior of firms in more competitive markets? What does it mean that firms in oligopolistic markets are “inter-dependent” of one another? Among the videos above, which games ended in the way that your payoff matrix and understanding of human behavior and rational decision making would have predicted?
UPDATE: Golden Balls, Game Theory, the Prisoner’s Dilemma, and the cold rationality of human behavior!
In more competitive markets, firms are independent, and their choices have hardly any effects on the other firms. Firms are interdependent, because they have to be ready to make a move at any time, because when the other firm is advertising, it has to do it to, otherwise it would lose consumers.
This means that the decision that each firm makes in the payoff matrix directly influences the outcome for each firm.
Oligopolists are inter-dependent of one another as their decisions directly affect each other.
1.Why is oligopoly behavior more like a game of poker than the behavior of firms in more competitive markets? An oligopoly is defined as a small number of big firms that control most, if not all, of a particular market.
If player 1 compromises and player 2 doesn’t then we get to the square with (-1,1) in it, at the top right.
Because the game is symmetrical we get the opposite result if player 2 compromises and player 1 doesn’t. This representation of games is useful for finding equilibria and also for other further analysis.



This entry was posted in Game theory, Introduction and tagged chicken, game theory, normal form.
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Not the answer you're looking for?Browse other questions tagged game-theory nash-equilibrium or ask your own question. How can I give sufficient XP per session for 7 high-level PCs without encounters being a slog? Unlike in more competitive markets in which firms are of much smaller size and one firm’s behavior has little or no effect on its competitors, an oligopolist that decides to lower its prices, change its output, expand into a new market, offer new services, or adverstise, will have powerful and consequential effects on the profitability of its competitors. The assumption is that large firms in competition will behave similarly to individual players in a game such as poker. Regardless of what its competitor does, both companies would maximize their outcome by advertising. Of course, in the real world there are often more than two firms in competition in a particular market, and the decisions that they must make include more than simply to advertise or not. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. However, in an oligopoly, choices that one firm makes has a huge effect on the other few, and unless they respond, one firm might dominate the market and take all the profits.
Competition is reduced to these number of firms, and since each controls a relatively large share of the market, one's actions could have considerable impact on others, something known as mutual interdependence. Also, with an oligopoly, the single firm is large enough (few firms in the market) so that its actions actually influences and affects the market overall and thus the other firms. That means that player 1 is worse of, with an outcome of -1, because he chose to compromise when player 2 didn’t. Once you eliminate $R$ and $B$, it is a simple game whose way to solve it can be found in any undergraduate game theory textbook. For this reason, firms in oligopolistic markets are always considering the behavior of their competitors when making their own economic decisions.
If SF coffee were to not advertise, Starbucks will earn more profits ($20 vs $10) by advertising.


None of the videos portray a Microeconomic scenario like the one above, but in each case a payoff matrix can be created and behavior can be predicted based on an analysis of the incentives given the player’s possible behaviors. Predict the outcome of each game based on your understanding of incentives and the assumption that humans act rationally and in their own self-interest.
In addition to that, in the case of the smartphone industry every firm tries to foresee and predict what the other firm will do next. Therefore, also each firm's actions are watched by the other competitors, who may then react with their own strategies and actions. This is the situation where both sides don’t back down in a game of chicken and they are both much worse off. If SF coffee were to advertise, Starbucks will earn more profits ($12 vs $10) by advertising. Oligopoly behavior is like a game of poker because of the small number of dominant firms in the market and because each firm's decisions and actions has a considerable impact on other firms. And when $q=\frac{1}{4}$ then Player $1$ is indifferent between $T$ and $M$ and any value of $p$ is a best response. Since both firms will do best by advertising given the behavior of its competitor, both firms will advertise. Those questions might be asked by the firms because the prediction of new features of a good or just new good is very important in order to ensure profits. Clearly, the total profits earned are less when both firms advertise than if they both did NOT advertise, but such an outcome is unstable because the incentive for both firms would be to advertise.
Hence, the oligopoly behavior is like a game of poker, where there are few players trying to guess what the next move of the other players will be.



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