Monopolies and oligopolies

Question 1

what is the nash equilibrium

Answer 1

a rational equilibrium that can last in the long term

Question 2

what is a dominant strategy

Answer 2

is where one single strategy is best for a player regardless of what strategy the other player in the game decides to use

Question 3

impacts of game theory

Answer 3

1. price rigidity
   - knowing that lowering prices can trigger retaliatory price cuts for competitors, oligopolistic firms may focus on branding/ advertising and quality to attract consumers without reducing profit margins. leads to price stability within the market
2. temptation to collude
   - firms may see benefits in collusion to maintain high prices and maximise joint supernormal profits, eg starting a cartel
   - such collusive practices may limit competitive pressures
3. challenges of long run collusion
   - collusion offers short term profitability, but may not be sustainable in the long run
   - in the long run, firms may cheat to gain a competitive advantage of due to external pressures like fines
   - collusion often ends as firms start competing again, leading to price reductions
4. incentive to cheat on collusive agreements
   - individual firms have a strong incentive to cheat on a collusive agreement to gain more customers by slightly lowering prices
   - by offering lower prices, a firm can increase its market share at the expense of colluding partners, maximising short term gains
   - this undermines the stability of collusive agreements, leading to eventual breakdowns

Question 4

what is game theory

Answer 4

a theory that explores the reaction of one player to a change in strategy of another player