CHAPTER+16+.+OLIGOPOLY+;)

=Oligopoly = 

Basic Terms
 Oligopoly: a market structure in which only a few sellers offer similar or identical products Monopolistic Competition: a market structure in which many firms sell products that are similar but not identical Nash Equilibrium: a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen Game Theory: the study of how people behave in strategic situations Prisoners' Dilemma: a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial Dominant Strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Key points
 1. Few sellers 2. Interdependence 3. Price maker 4. High barrier 5. Price > Marginal revenue 6. Price > Marginal Cost (at profit-maximizing point) 7. Inefficient 8. Collusion 9. Dominant Strategy is used when trying to compete. (makes it more like a competitive market.)
 * If works well -> more like monopoly
 * If not works well -> more like competitive market

 Oligopoly is similar to monopoly in many ways. But there are few sellers, instead of one. Because there are few sellers, the firms are inter-dependent to each other. If one firm lowers its price, then the other firms will have to lower their price together, to sell their products. They are therefore still the price makers. For the same reason in the monopoly market, firms in an oligopoly market has a price greater than their marginal revenue. And because price is greater than the marginal revenue, at the profit maximizing quantity point (where MR meets MC), the marginal revenue is also less than the price. This, therefore, also under-allocates the resources and is inefficient. When oligopoly firms works well together and makes some kind of promise, then the firms will be similar to monopolistic firms. OPEC is a great example of this case. If the firms in an oligopoly market does not work well together, they will start to compete with each other, and will move toward the competitive market.



Dominant Strategy
 Firms in an oligopoly market faces a similar dilemma like the prisoner's dilemma. If the firms think carefully about this dilemma and choose the dominant strategy, then they would be more like a competitive market. Then what is a dominant strategy? In order to figure out the dominant strategy, one needs to first set up the moves that the other side makes. Lets take a look at the case of the prisoner's dilemma.



In both cases of Prisoner A and Prisoner B, it is always better for them to confess. In prisoner A's point of view, if B confesses, it is better for A to confess too. If B remains silent, it is still better for A to confess. This is the same for prisoner B. Therefore, confessing is the dominant strategy for both prisoners.