In: Economics
Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.
False
Game theory is important to understanding firm behavior in oligopolies. Game theory helps us understand oligopoly and other situations where "players" interact and behave strategically. A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the other players."Players" can be people, countries, or other entities. Game" is a situation in which players interact."Strategy" is a decision or decision-plan chosen by a player, which takes into account the behavior and likely reactions of other players.
When firms in an oligopoly individually choose production to maximize profit, they product a quantity of output greater than the level produced by monopoly and less than the level produced by perfect competition.The oligopoly price is less than the monopoly price, but greater than the competitive price (which equals marginal cost).The Prisoner's Dilemma and the Welfare of Society also relates to Oligopoly. When oligopolists fails to cooperate, the quantity they produce is closer to this optimal level of maximizing total surplus. The invisible hand guides markets to allocate resources efficiently only when markets are competitive, and markets are competitive only when firms in the market fail to cooperate with one another. All firms try to maximize profits, however game theory tracks economic strategies to monitor collusion between companies. Oligopolies have so few firms that they could work together, but this game theory would pick up on that action.The Nash equilibrium is an important concept in game theory. It is the set of strategies such that no player can do better by unilaterally changing his or her strategy. If a player knew the strategies of the other players (and those strategies could not change), and could not benefit by changing his or her strategy, then that set of strategies represents a Nash equilibrium. If any player would benefit by changing his or her strategy, then that set of strategies is not a Nash equilibrium.
Game theory is generally not needed to understand competitive or monopolized markets. In competitive markets, firms have such a small individual effect on the market, that taking other firms into account is simply not necessary. A monopolized market has only one firm, and thus strategic interactions do not occur.