Question

Using game theory, explain how actions by firms in their own self-interest can lead oligopolist firms to suboptimal (from the firms point of view) results.

Answer 1

Game theory is the examination of how individuals carry on in key circumstances. By 'key' it mean a circumstance in which every individual, when choosing what moves to make, must consider how others may react to that activity

Oligopoly is a market structure in which there are certain firms delivering an item. When there are barely any organizations in the market, they may connive to set a cost or yield level for the market so as to expand industry benefits. Thus, cost will be higher than the market-clearing cost, and yield is probably going to be lower. At the extraordinary, the conspiring firms may go about as an imposing business model, decreasing their individual yield with the goal that their aggregate yield would rise to that of a monopolist, permitting them to gain higher benefits.

In an oligopoly, firms are influenced by their own production choices, however by the production choices of different firms in the market too. Game hypothesis models circumstances in which every on-screen character, when choosing a game-plan, should likewise consider how others may react to that activity.

The prisoner’s dilemma is a kind of game that outlines why participation is hard to keep up for oligopolists in any event, when it is commonly helpful. In this game, the predominant technique of every entertainer is to surrender. Be that as it may, acting in personal circumstances prompts an imperfect aggregate result.

The Nash equilibrium is a significant idea in-game hypothesis. It is the arrangement of procedures with the end goal that no player can improve by singularly changing their methodology.

Game theory is commonly not expected to comprehend serious or consumed markets.