Oligopoly
What is oligopoly?
Oligopoly refers to a situation with a few firms on the market and the central assumption that differs from the competitive model is that the firms understand that their actions affect the market price. There is an industry of different models, but most of these are in some way or another variations on the two really central models of oligopoly. These are:
1. The Cournot model, where the strategic variable is a quantity choice.
2. The Bertrand model, where the strategic variable is the price charged.
Besides being important in themselves, these models also illustrates well how the tools from game theory is used in economics. We will try to keep things as simple as possible, so we will typically only consider …show more content…
Pure because the only source of market power is lack of competition.
An example of a pure oligopoly would be the steel industry, which has only a few producers but who produce exactly the same product.
• Impure oligopoly – have a differentiated product. Impure because have both lack of competition and product differentiation as sources of market power.
An example of an impure oligopoly is the automobile industry, which has only a few producers who produce a differentiated product.
Globalization
The revolution in information technology, the liberalization in the movement of factors of production (labor and capital) and globalization (multinational companies) are bringing dramatic changes in the way modern corporations conduct their business. To an extent also these change drivers (globalization and the prevalence of multinationals) are reducing the importance of the above trade barriers. Many of the wellknown multinational companies (Coca Cola, Pepsi, Gillette, Unilever, Proctor & Gable as well as manyncompanies in the services industry) managed to achieve scale economies in production without having a large market share at home by achieving entry in many foreign markets and thus selling …show more content…
There are two points to be made here:
1. Both parties have a dominant strategy, which is to confess. Thus, the equilibrium is for both to confess. This is also the Nash equilibrium (why?).
2. A cooperative surplus exists. If both confess, they are not cooperating. Thus, the equilibrium is the non-cooperative solution.
If they both refused to confess then they would both get 2 years in prison and not 10 years. Why don’t they cooperate?
The answer is not just because they can’t trust the other party to not confess. It is because it is always better to confess that not to confess regardless of what the other party chooses. This is what a dominant strategy means.
How can you change the results in the prisoner’s dilemma? A crime organization does it by changing the payoff matrix to increase the penalty if one confesses. For example:
Individual A’s choice
Confess Don’t Confess
Death, Death Death, 15
15, Death 2, 2
Individual B’s choice- Confess Don’t Confess
In this case, as long as both parties are sure that to confess is to die then the cooperative solution will also be the Nash equilibrium. This is also a dominant
What is oligopoly?
Oligopoly refers to a situation with a few firms on the market and the central assumption that differs from the competitive model is that the firms understand that their actions affect the market price. There is an industry of different models, but most of these are in some way or another variations on the two really central models of oligopoly. These are:
1. The Cournot model, where the strategic variable is a quantity choice.
2. The Bertrand model, where the strategic variable is the price charged.
Besides being important in themselves, these models also illustrates well how the tools from game theory is used in economics. We will try to keep things as simple as possible, so we will typically only consider …show more content…
Pure because the only source of market power is lack of competition.
An example of a pure oligopoly would be the steel industry, which has only a few producers but who produce exactly the same product.
• Impure oligopoly – have a differentiated product. Impure because have both lack of competition and product differentiation as sources of market power.
An example of an impure oligopoly is the automobile industry, which has only a few producers who produce a differentiated product.
Globalization
The revolution in information technology, the liberalization in the movement of factors of production (labor and capital) and globalization (multinational companies) are bringing dramatic changes in the way modern corporations conduct their business. To an extent also these change drivers (globalization and the prevalence of multinationals) are reducing the importance of the above trade barriers. Many of the wellknown multinational companies (Coca Cola, Pepsi, Gillette, Unilever, Proctor & Gable as well as manyncompanies in the services industry) managed to achieve scale economies in production without having a large market share at home by achieving entry in many foreign markets and thus selling …show more content…
There are two points to be made here:
1. Both parties have a dominant strategy, which is to confess. Thus, the equilibrium is for both to confess. This is also the Nash equilibrium (why?).
2. A cooperative surplus exists. If both confess, they are not cooperating. Thus, the equilibrium is the non-cooperative solution.
If they both refused to confess then they would both get 2 years in prison and not 10 years. Why don’t they cooperate?
The answer is not just because they can’t trust the other party to not confess. It is because it is always better to confess that not to confess regardless of what the other party chooses. This is what a dominant strategy means.
How can you change the results in the prisoner’s dilemma? A crime organization does it by changing the payoff matrix to increase the penalty if one confesses. For example:
Individual A’s choice
Confess Don’t Confess
Death, Death Death, 15
15, Death 2, 2
Individual B’s choice- Confess Don’t Confess
In this case, as long as both parties are sure that to confess is to die then the cooperative solution will also be the Nash equilibrium. This is also a dominant