Oligopoly and Game Theory

Question 1

Oligopoly Markets

Answer 1

• A small number of large firms (high concentration).
• Products may be identical (homogeneous) or vary between firms (differentiated).
• A firm can raise the price of its product without losing all of its customers (price maker). However, firms are in competition with one and other for customers.
• High barriers to entry tend to limit the number of firms competing in an oligopoly market.

Question 2

Strategic Environment

Answer 2

In an oligopoly firms must anticipate the actions of their rivals before they can determine their best response. This requires a new, more powerful, method of analysis.

Question 3

Game Theory

Answer 3

The study of strategic interaction; decision making where the welfare of each decision maker depends on the actions of all decision makers.

Question 4

Payoff

Answer 4

A numerical representation of the benefit created for a player by a particular outcome (similar to utility). A player’s ONLY goal is to maximise their payoff.
For firms payoffs usually represent profits.

Question 5

Nash Equilibrium

Answer 5

A state of a game in which each player takes their respective best response to their rival’s action (mutual best response).

Question 6

Collusion

Answer 6

An (illegal) agreement between firms to coordinate actions, reducing competition.