Question

define, explain, and give real world examples of the strategies used by oligopoly firms: Game theory and the Nash Equilibrium, Prisoner's Dilemma, Price Leadership, Kinked Demand Curve, Collusion, and Cartel.

Answer 1

BasOligopoly Firms:

Game theory is concerned with predicting the outcomes of games of strategy in which participants have incomplete information about other's intensions. Game theory suggests that cartels are inherently

1) game theory analysis have direct relevance to the study of conduct and behaviour of firms in oligopolistic markets, for eg the decision that firms muat take over pricing and production levels and also how much money to invest in research and development spending.

2) cost research projects represent risk for any business but if one firm invest in R&D can a rival firm decide not to follow? They might loose competitive edge in the market and suffer a long term decline in market share and profitability.

3) the dominant strategy for both firms is probably to go ahead withR&Dspending. If they do not and other firm does then their profit falls and they loose market share.

The prisoner's dilemma;

* the classic example of prisoner's dilemma is a situation where two prisoners are being questioned over their guilt or innocence of crime.

* they have simple choice either to confess to crime and accept the consequences ir to deny all involvement and hope that their partner does likewise.

* the payoff inthis game is measured in terms of year in prison arising from their choices .

* no communication is permitted between two suspects , but clearly they will take into account the likely behaviour of other when under interrogation.

Nash Equilibrium;

It is important idea in the game theory . It describes any situation where all of the participants in the game are pursuing their bestpossible strategies given the strategy of all other participants. In nash equilibrium the outcome of a game occurs when player a takes the best possible action given the action of player b and viceaversa.

Cartel;

A cartel is an agreement between competiting firms to collude in order to attain higher profits . Cartel members may agree onsuch matters as price fixing, total industry output, market share , allocation of customers etc. game theory suggetsbthat cartels are unstable because behaviour of cartle members represents prisoner's dilemma. Each member of catel would be able to make higher profits atleast in short run by breaking agreements rather than it would make by abiding it.