405 Oligopoly & Game Theory

game theory

Finally! We have come to the last and final installment of the Market Structures chapter! This one is going to be a fun topic so let’s end this chapter with a BANG!

The last market structure is the Oligopoly structure and we have left the best for the last! Throughout the years, this subject has not been taught very thoroughly in some lectures so we are going to clear the concepts TODAY!

One key assumption we are going to make is that in this Oligopoly there are only 2 firms (We can call them players too! That’s in regards to game theory). As you can see, it is very close to the Monopoly structure! These Oligopolists have got strong monopolistic power as well but of course not as strong as a monopoly.

So why is it that we cannot analyze the oligopoly like we do in monopolistic competition? Just like comparing a 100m race and a boxing match, there are many differences!

In a 100m race, I do not have to care how fast the other sprinters are. All I need to do is to put in my 10000% and run as fast as I can! My long hours of training and coaching will determine the results for me!

However, in a boxing match, am I supposed to tell myself to just punch as hard as I can? So the person with the biggest punch will win? No way! By throwing my hardest punch, I might miss and be totally vulnerable!

So what can we conclude from this example? In a game where we have 2 players, it is literally A GAME! As a boxer, I have to anticipate my opponent’s strategy and plan my own! Now, that’s what so interesting about game theory!

Here’s the linkage between game theory and the oligopoly, both firms have to anticipate the other party’s move (how much to produce) and determine a DOMINANT STRATEGY. This is done simultaneously and in the video tutorial, we will see how this mystery unfolds!

Let’s relate some real life examples to what we are going to study:

  • USA VS North Korea: Nuclear talks. To build or not to build?
  • Boeing VS Airbus: Building the A380. To research and develop or not?
  • Northwest VS Continental Airlines: Price war. How much are prices going to be reduced?

As you can see, after determining the dominant strategies for both players, which we will eventually call a Nash Equilibrium, we can then determine their behavior and that will bring us back to our favorite Demand, Marginal Revenue and cost curves!

At the end of this video, you should be able to:

  • Be clear of the game scenario in the Prisoners’ Dilemma.
  • Identify Dominate Strategies and the Nash Equilibrium.
  • Draw the Cournot model.
  • Understand why each firm in a 2 firm Oligopoly will monopolize on 1/3 of the market share each using the Cournot model and mathematically calculations.
  • Draw the best response curves.

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Author: admin

7 Comments

  1. I really liked the way you presented this information. It nice to read good information like this rather than to waste your time doing nothing. Great Job! Thnkas for posting it!

  2. Kim says:

    Come to the end of Chapter 4 and I UNDERSTAND! WOOOOOOOOW wooooooooooooo! Love this website and the video tutorials MAXIMISE my brains utility! LOL Thank you Gerald and team.

  3. kaliopasi foki says:

    thank for letting us know about oligopoly

  4. 'ilisapesi tonga says:

    oligopoly help me alot with my project. thank you and love you UMMAAAGH!!!

  5. Irene says:

    are you doing any video on managerial economics? I really like this blog since last year I studied from here for my intro econ

    • Quickienomics says:

      Hi Irene,

      I’m sorry but we won’t be doing any videos for Managerial Econs. I’m really glad you like the website! I hope it helped!