Oligopolies Game Theory

Revision notes on oligopolies and Game Theory for AQA A-Level Economics Paper 5.

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James
OLIGOPOLIES, GAME THEORY
& CONTESTABLE MARKETS
OLIGOPOLIES
Oligopoly: 3+ big firms in an industry, dominating production. E.g. Tesco, ASDA, Sainsbury's,
Morrisons ("The Big Four").
Duopoly: 2 big firms in an industry, dominating production. E.g. Pepsi and Coca Cola.
GAME THEORY
Game theory looks at how one firm changes their approach
as another firm alters their strategy in the industry.
Oligopolistic markets are like a game in that there are
players in the market, who are trying to win against each
other.
There are a range of different possible outcomes in
response to market changes (PRICE) or changes in the
behaviour of firms. Nash equilibrium is where neither player
is able to improve their position given the choice of the other player (neither player has an
incentive to change their strategy).
THE THREE STRATEGIES
STRATEGY EXPLANATION EVIDENCE
Firms will always operate in the free Market Structure & Prices in US
Price market whilst competing on price ­ it is a Airline Markets.
Competition case of survival of the fittest.
Adam Smith In a market with 5+ airlines,
there is lots of competition to
keep prices down.
The more competitive a
market, the lower the price.
Where firms get together and collude on Many private schools were
prices. This allows firms to raise their accused of operating in a
Price prices to a set amount (profit fee-fixing cartel (2001 ­ 02 and
Collusion John maximisation); thus consumers are 2003 ­ 04); including Eton and
Nash
forced to purchase at the higher price Charterhouse.
(there are no/few substitutes available).
Leading cosmetic companies
were suspected of fixing
perfume prices between 1996
and 1999.
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James
Even if oligopolies were in competition The skin/hair/deodorant
with each other, prices in such markets company, Dove, started a
Non-Price would be stable. Firms would not want to controversial advertising
Competition
raise or lower their prices. program in 2004 (i.e. altering
Paul Sweezy their brand image; not price).
RAISING PRICES Consumers will switch Instead of using models for it's
to other substitutes. advertising, it used members of
the ordinary public.…read more

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