1. These SIX movie studios own 90% of the movie market!
Oligopoly
These SIX movie studios own 90% of the movie market!

2. What is so unique about the firms in an oligopoly market structure?

3. Oligopoly Characteristics of an oligopoly market
Few sellers offering similar or identical products
Interdependent firms
React to competitors actions

4. GAME THEORY
Game theory is the study of how people behave in strategic situations.
Oligopolies are constantly playing a “game” with their competitors….

5. Let’s play a little game theory…

6. Game Theory: Cheating Students
I believe that you both have vandalized the school.
You have two options
You can remain silent and I can issue you a 1 hour detention
You can confess and implicate your partner, you will be granted immunity and your partner will get a 4 hour Saturday School
If both confess, that will save me the trouble of gathering evidence so you both will get a 2 hour detention

7. Game Theory: Vandalizing Students
Student B Decision
Confess
Remain Silent
Student B gets 4 hour Sat.
Student A goes free
Student B gets 2 hour
Student A gets 2 hour
Confess
Student A
Decision
Student B goes free
Student A get 4 hour Sat.
Go free
Remain Silent

8. Oligopolies and Game Theory
Each firm has an incentive to cheat to benefit at the other firm’s expense
When both firms cheat, both are worse off then they would have been if neither cheated

9. Pepsi and Coke Game Theory
What’s Coca Cola’s best decision?
What’s Pepsi’s best decision?
What is the decision that will ultimately be made? (The Nash Equilibrium)

10. 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.

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

12. Cartels
Formal organization of producers that act in unison after a collusion agreement
Illegal in the United States

13. 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

14. 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.