Oligopoly
These SIX movie studios own 90% of the movie market!
What is so unique about the firms in
an oligopoly market structure?
Oligopoly
• Characteristics of
an oligopoly market
– Few sellers offering
similar or identical
products
– Interdependent
firms
• React to competitors
actions
GAME THEORY
• Game theory is the study of how people
behave in strategic situations.
• Oligopolies are constantly playing a “game”
with their competitors….
Let’s play a little game theory…
Game Theory: Cheating Students
• I believe that you both have vandalized the
school.
• You have two options
– You can remain silent and I can issue you a 1 hour
detention
– You can confess and implicate your partner, you
will be granted immunity and your partner will get
a 4 hour Saturday School
– If both confess, that will save me the trouble of
gathering evidence so you both will get a 2 hour
detention
Game Theory: Vandalizing Students
Student B Decision
Confess
Student B gets 2 hour
Remain Silent
Student B gets 4 hour Sat.
Confess
Student A gets 2 hour
Student A
Decision
Student A goes free
Student B goes free
Go free
Remain Silent
Go free
Student A get 4 hour Sat.
Oligopolies and Game Theory
• Each firm has an incentive to cheat to benefit
at the other firm’s expense
• When both firms cheat, both are worse off
then they would have been if neither cheated
Pepsi and Coke Game Theory
• What’s Coca Cola’s best decision?
• What’s Pepsi’s best decision?
• What is the decision that will ultimately be
made? (The Nash Equilibrium)
Pepsi and Coke’s Payoff Matrix
Coke’s Decision
High Production: 40 Gal.
Coke gets $1,600 profit
Low Production: 30 gal.
Coke gets $1,500 profit
High
Production
40 gal.
Pepsi gets $1,600 profit
Pepsi’s
Decision
Coke gets $2,000 profit
Pepsi gets $2,000 profit
Coke gets $1,800 profit
Low
Production
30 gal.
Pepsi gets $1,500 profit
Pepsi gets $1,800 profit
Collusion
Agreement among producers to divide
market, set prices, or limit production
Illegal in the United States (antitrust
laws)
Cartels
○ Formal organization of producers that act
in unison after a collusion agreement
○ Illegal in the United States
An Arms-Race Game
Decision of the United States (U.S.)
Arm
Disarm
U.S. at risk
U.S. at risk and weak
Arm
Decision
of the
Soviet Union
(USSR)
USSR at risk
USSR safe and powerful
U.S. safe and powerful
U.S. safe
Disarm
USSR at risk and weak
USSR safe
How the Size of an Oligopoly Affects
the Market Outcome
• As the number of sellers in an oligopoly grows
larger, an oligopolistic market looks more and
more like a competitive market.
• The price approaches marginal cost, and the
quantity produced approaches the socially
efficient level.