13. Oligopoly Characteristics of an oligopoly market
Few producers offering differentiated products
High barriers to entry
Interdependent firms
React to competitors actions

14. GAME THEORY
Game theory is the study of how firms behave in strategic situations.
When setting price and quantity, oligopolies are constantly playing a “game” with their competitors….

15. Let’s play a little game theory…

16. The Story of X vs. O

17. The Game Take out a full sheet of paper
You are going to vote on who you support, “X” or “O”
You will either write an “X” or an “O” in the direct middle of the paper.
Then, fold the paper 4 times
But…..are you asking yourself, “What happens if I write an X or if I write an O?

18. Classroom Possibilities
You will have potential to win free candy. It all depends on how the class as a group votes.

19. Everyone gets 1 piece of candy
Candy Breakdown
# of “X” votes
Reward 1
15 pieces of candy 2
7 pieces of candy 3
4 pieces of candy 4+
NO ONE GETS CANDY
Entire class votes “O”
Everyone gets 1 piece of candy

20. The Game Take out a full sheet of paper
You are going to vote on who you support, “X” or “O”
You will either write an “X” or an “O” in the direct middle of the paper.
Then, fold the paper 4 times

22. Oligopolies and Game Theory
Its best if oligopoly firms work together and don’t cheat
However, there is an incentive to cheat
A firm could benefit more than its competitor

23. Collusion
Agreement among producers to divide market, set prices, or limit production
Illegal in the United States (antitrust laws)

24. Payoff Matrix/Prisoners Dilemma

25. Payoff Matrix
Matrix that shows the possible payouts for interdependent firms

26. Pepsi and Coke’s Payoff Matrix
Decision
High Production: 40 Gal.
Low Production: 30 gal.
Coke gets $1,600 profit
Pepsi gets $1,600 profit
Coke gets $1,500 profit
Pepsi gets $2,000 profit
High
Production
40 gal.
Pepsi’s
Decision
Coke gets $2,000 profit
Pepsi gets $1,500 profit
Coke gets $1,800 profit
Pepsi gets $1,800 profit
Low
Production
30 gal.

27. Different Options Dominant Strategy Nash Equilibrium
The firm makes the same decision no matter what the other firms do
Nash Equilibrium
The equilibrium that results when all firms choose the action that maximizes their benefit given the actions of the other firms

28. Pepsi and Coke’s Payoff Matrix
Decision
High Production: 40 Gal.
Low Production: 30 gal.
Coke gets $1,600 profit
Pepsi gets $1,600 profit
Coke gets $1,500 profit
Pepsi gets $2,000 profit
High
Production
40 gal.
Pepsi’s
Decision
Coke gets $2,000 profit
Pepsi gets $1,500 profit
Coke gets $1,800 profit
Pepsi gets $1,800 profit
Low
Production
30 gal.

29. Pepsi and Coke’s Payoff Matrix
Decision
High Production: 40 Gal.
Low Production: 30 gal.
Coke gets $1,600 profit
Pepsi gets $1,600 profit
Coke gets $1,500 profit
Pepsi gets $2,000 profit
High
Production
40 gal.
Pepsi’s
Decision
Coke gets $2,000 profit
Pepsi gets $1,500 profit
Coke gets $1,800 profit
Pepsi gets $1,800 profit
Low
Production
30 gal.

30. An Arms-Race Game Arm Disarm U.S. at risk USSR at risk
Decision of the United States (U.S.)
Arm
Disarm
U.S. at risk
USSR at risk
U.S. at risk and weak
USSR safe and powerful
Arm
Decision
of the
Soviet Union
U.S. safe and powerful
USSR at risk and weak
U.S. safe
USSR safe
(USSR)
Disarm

31. How the Size of an Oligopoly Affects the Market Outcome
As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market.
The price approaches marginal cost, and the quantity produced approaches the socially efficient level.