Question

5. Why do you think that game theory has become the preferred method of analyzing oligopolistic markets? What advantages does it have over simply assuming, say, Cournot behavior? Carefully Explain.

Answer 1

Game Theory & Oligopoly
Game theory analyzes the formulation of strategic behavior how a person or firm chooses over the reaction and strategies over other. The theory suggests framing objectives and behaviors predicting the probable fluctuation in the behavior of other. Game theory brings up suitable example of a player who adopts strategies according to strategies or actions of other helping him for better pay off.
Game theory is important in the market structure of oligopoly. Since the market contains only few sellers, everyone should behave according to the plan and strategies of others. The demand for the commodities in oligopoly market of a firm is depended on how the others in the market act according to the decisions. The firm which is not able to predict the probable action or reaction of other firms could face a reduction in the demand for the commodity they produce. So, it is necessary to adopt game theory in oligopoly market to avoid the demand fluctuations and revenue earned by firms.
Cournot behavior in the oligopoly market refers to the independency of firms which are producing identical goods. They cannot form cartel market but they make decisions accordingly how the rivals take. They have to be aware about the output decisions of the firm. This is suggested as mere a perfect competition where firms adopt the output level of rivals. The decisions are taken independently but according to the behavior of rivals as suggested by the game theory.