oligopoly- game theory

• Game Theory can provide more nuanced and detailed conclusions than the kinked demand curve because it maps interdependence
• Applying the prisoners' dilemma game to oligopoly results in a situation where firms make pricing decisions based on their competitors' actions.
• In a payoff matrix, what does the left-hand number represent?

  Profit for the left firm
• In the payoff matrix, the right-hand number represents the profit for the firm at the top
• Steps to solve a game using Game Theory

  1️⃣ Identify the possible strategies for each firm

  2️⃣ Create a payoff matrix

  3️⃣ Determine the best response for each firm based on the other's strategies

  4️⃣ Find the Nash equilibrium
• The Nash equilibrium in a payoff matrix is a stable outcome where no player can gain by unilaterally changing their strategy.
• What is a dominant strategy in Game Theory?

  Best strategy regardless of others
• Price rigidity occurs in the Nash equilibrium because there is no incentive to change the price
• In the given example, charging 90p is a dominant strategy for both firms.
• Match the pricing strategy with its outcome in the Nash equilibrium:

  Both firms charge 90p ↔️ Nash equilibrium

  Both firms charge £1 ↔️ Unstable outcome
• Collusion in an oligopoly aims to fix prices
• What non-price factors can firms compete on in an oligopoly?

  Branding, advertising, quality
• The Nash equilibrium in the prisoners' dilemma game is the best outcome for both firms combined.

  False
• What is the primary incentive for firms to collude in an oligopoly?

  Increase profits
• A collusive agreement may fail due to the temptation to undercut
• Firms in a collusive agreement always have an incentive to cheat.
• Competition authorities may intervene if firms are suspected of collusion.
• What are the three key conclusions of the prisoners' dilemma game applied to oligopoly?

  Nash equilibrium, collusion incentive, cheating