Week 12: Oligopoly, Prisoners’ Dilemma, Burn the boats, Oligopoly and Efficiency

Question 1

Introduction to Oligopoly

Answer 1

Market structure with small number of large firms that are interdependent in decision making
Decision of 1 firm influenced by market response of their competitors
e.g. like tennis match, actions depend on what opponent does

Question 2

Characteristics of Oligopoly

Answer 2

Few large sellers that dominate the market for good or service
Products can be same or differentiated
e.g. oil industry and steel industry
different eg. car industry

Barriers to entry: economies of scale, ownership of a key input, government imposed barriers

Question 3

Game Theory

Answer 3

Models that analyse an oligopoly firm’s behaviour as a series of strategic moves which take into account rivals actions

Question 4

Elements

Answer 4

Rules: Initial conditions governing the conduct of the players in the game
Strategies: the decision options which the player has
Playoffs: What each player stands to gain or lose when certain strategies are followed

Question 5

Prisoner’s Dilemma

Answer 5

Two player game
if both confess, only 1 month
If 1 confess and 1 doesnt, 0 and 12
If both confess, 8

Put yourself in other’s situation, what will happen if x does this
The dilemma: if both stay silent it is the best, but because of greed, it is always in each prisoner’s best interest to confess

Question 6

Dominant Strategy Equilibrium

Answer 6

Where one strategy is always the optimal strategy to pursue

Question 7

Nash Equilibrium

Answer 7

Set of strategies where each player’s strategy is their best choice given the other player’s strategy

An equilibrium where neither player can increase their profit from changing their strategy once each player’s strategy is revealed

Question 8

Escaping Prisoner’s Dilemma

Answer 8

Firm’s in an oligopoly prefer to keep a co-operative repeated game on price

As it is played many times, beneficial to keep a deal than to break it once and gain for short amount

Question 9

Oligopoly and Perfect Competition

Answer 9

Price
Differ from perfectly competitive markets through collusion, industry output is lower and price higher
if price wars occur, can potentially be lower in Perfectly competitive markets

Profit
Firms have the ability to make long-run economic profits
As Oligopolies have barriers of entry

Efficiency Loss
Price is higher than MC, indicating DWL
Collusive firms have a bigger DWL than non-cooperative solutions to games in game theory models