Oligopolies and Game Theory

View mindmap
  • Oligopolies
    • Characteristics of an oligopoly
      • A few large dominant firms
      • Goods with similar characteristics and strong brand loyalty
      • Imperfect knowledge about rival's price and output choices
      • High barriers to entry
      • Cannot price set but do secure price fixing deals
    • Competition in oligopolies
      • Only a few firms dominate the industry so concentration ratios are high
      • If one firm lowers prices all other firms will follow
      • The price war that follows lower prices leads to lost revenue outweighing the possible gains in sales
      • Oligopolies tend to use non price competition
    • Collusion in oligopolies
      • Overt collusion is a spoken agreement between firms to cooperate
      • Tacit collusion is an unspoken agreement between firms to cooperate
      • This allows oligopolies to fix prices
      • This reduces competition and is illegal but leads to increased profit
      • Collusion is broken where game theory shows gains can be made
    • Game theory
      • A payoff matrix shows the different options of how a firm can act based on the actions of another firm
      • The firms use game theory to act how is most beneficial to them
      • If firms are at Nash equllibrium then they will not change their strategy due to fear of the actions of other firms
      • If firms are using a maxmin strategy they have a price where they can be least harmed. This is due to lack of trust in other firms


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Competitive markets resources »