Ch.16+Oligopoly

=Oligopoly=

*[|prisoners' dilemma]

Oligopoly is based on the prisoner's dilemma. Let's look at a specific case. Prisoner A and B, terrorists from the Al Quaeda, were just caught. A and B promised they would not spill any information to each other. BUT in the prison, things were different. The Supreme Court has promised them several choices. Whether they confess or not confess, things would change. If both of them did not confess, both of them would only need to stay for a year each. However, if only one of them confessed and the other did not, the person who confessed would be set free while the other stays in jail for 20 years. The last case is that both of them confessing, making both of them stay in jail 5 years.

What does this situation have to do with economy? Well, look at this. These two prisoners would most likely want to leave prison as early as possible. What choice would they want to choose then? Of course, the one with **0 years**, which is confessing. But what happens when both of them confess? Both of them stay for 5 years. Consequently, when both of the prisoners strive for the best choice possible, not cooperating with each other, they would eventually make a decision that is not the best choice.

THIS is the equilibrium. And also, the equilibrium for Oligopoly.



There are two competitors in the oil industry: Jack and Jill. Normally, if there is more production, there is more profit. But if there is too much production, it is not efficient. If Jack and Jill cooperate and produce 30 gallons each, they earn the most profit because they are able to charge the consumers a little higher by choosing the same price. However, as they start trying to produce more, they have this dilemma considering what the other competitor would choose. If they did not decide to make a collusion, they would choose the safest decision. Thus, they would eventually choose the first decision of making 40 gallons and getting $1600 each.

media type="youtube" key="Yqn6MXyJ37c" width="425" height="350" [|*Prisoner's Dilemma]


 * __Key Concepts__**
 * Nash** **Equilibrium**: a situation in economy where people interact with each other choosing their best strategies
 * Collusion**: an agreement groups of firms make to charge an overall price like a monopoly
 * Cartel**: a group acting in unison
 * Prisoner'****s** **Dilemma**: a kind of a "game" where two captured prisoners that have been working together are apart in a prison and having a dilemma
 * Game Theory**: study of how people behave in strategic situations

Questions 1. What is the study of how people behave in strategic situations? 2. What is the group acting in unison called?

Answers 1. game theory 2. cartel