Oligopoly Behavior & Game Theory Chapter 16 Pages 345 - 360

4 Market Structures “Imperfect Competition” Perfect Monopolistic Monopoly Oligopoly “Imperfect Competition” Most competitive No DWL P = MC Least competitive Biggest DWL P > MC

Two Imperfect Market Structures Oligopoly A few large sellers dominate the market (3-8 companies) Example: automobile companies, wireless service providers Fasting growing market structure in real world Monopolistic Competition Many firms in market Example: coffee shops, restaurants , hair salons Most common market structure in “real world”

Pricing decision is dependent on their competitors! Oligopoly 5-Market Characteristics Few large producers Similiar or differentiated products difficult to enter or leave market incomplete information Some price control & mutual interdependence Key with Oligopolies— Pricing decision is dependent on their competitors!

INTERDEPENDENCE MC=MR MC=MR Perfect Monopolistic Competition Monopoly Oligopoly INTERDEPENDENCE Actions of your competition affect you! Company 1 Company 2

Oligopolies are Interdependent Should I cooperate? Cooperative Behavior Non-cooperative Behavior What is in my Self Interest?

dependent on the choices Game Theory John Nash developed Game Theory Received 1994 Nobel Prize Game Theory is the Basis for Oligopoly Pricing Your Choice is dependent on the choices other players have!

Game Theory Handout Read Handout carefully

Intro: Game Theory Coke Pepsi Reading Review 80, 80 120, 45 45, 120 Advertise Don’t Advertise Advertise 80, 80 120, 45 Don’t 45, 120 100,100 Pepsi Coke to Advertise Dominant Strategy: Pepsi to Advertise Nash Equilibrium

Intro: Game Theory Wrap Up Dominant Strategy- best strategy for one player regardless of what the other player chooses Enforceable Equilibrium- is a stable “market” equilibrium. No incentive to move/cheat! Nash Equilibrium – a combination of strategies that each choose “best” choice in response to the other’s choice. Every dominant strategy is a Nash Equilibrium Every Nash equilibrium not is a dominant strategy!

Oligopoly Market Current Events. Are 3 companies enough competition? http://www.youtube.com/watch?v=N7_Oiunf1go&feature=player_embedded