Ogliopoly

• Natural or legal barriers prevent the entry of new firms
• A small number of firms compete
• Dualpoly - a market with two firms (e.g. AMD and Intel)
• Cartel - a group of firms in collusive agreement
  • Temptation to form one
  • Mostly illegal
• Interdependence of profits

Game Theory

• A tool for studying strategic behaviour
  • Behaviour that takes into account the expected behaviour of others and the mutual recognition of interdependence

Rules

• Describe the setting of the game, the action the players may take, and the consequences of those actions

Strategies

• All the possible actions of each player

Payoffs

• Profits and losses of player
• A payoff matrix shows payoffs for every possible action by each player

Outcome

• Determined by players' choices

Nash equilirium

• A takes the best possible action given B's action
• B takes best possible action given A's action

Collusion

• A collusive agreement is an agreement between two (or more) firms to restrict output, raise the price, and increase profits
  • Mostly illegal
• Firms in a collusive agreement operate a cartel

Strategies

• Comply (e.g. increase output)
• Cheat

One comply, one cheat

• The complier incurs economic loss, the cheat increases economic profit

Both cheat

• Produces a competitive outcome

Tit-for-tat strategy - taking the same action the other player took last period (lightest punishment)

Trigger strategy - cooperating until the other player cheats, then cheating forever (most severe punishment)

• In a contestable market there are few firms but free entry and exit, so existing firms face competition from potential entrants

Payoff Matrix