Exercise 8-1: Defining Oligopoly and Game Theory

Oligopoly
Oligopoly in Industry means that there are few large firms providing similar or differentiated services to the consumers. In Monopoly competition there is only one firm providing all the services and it has much more control over the prices it charges from the consumers. In contract to Oligopoly and Monopoly competition perfect market exists when there are numbers of small firms providing similar services to number of consumers, such that no firm or consumer have any influence over the market and no one controls the price in the market. Though perfect markets don’t really exist in today’s global economy but i consider them the best market as no firms can influence the market and the price for goods is determined by the market itself based on supply and demand. This kind of market might not be best for all kind of goods like agricultural and arms etc. but for other non-essential goods this is the best market.

After all getting a knowledge about all this I can  make a much better buying decisions in the future. I am now able to understand why one brand of cereal is cheaper that other why one firm offers buy one get one free and why government is interfering in almost all kinds of market.

Game Theory

The main idea behind the game theory is that in competitive environment all firms are always analyzing other firm’s behavior that highlights mutual interdependence among firms. Game theory was first developed to understand strategic behavior.
I feel Game Theory is consistently in use in today’s market place. With most of the market working as Oligopoly competition, all the firms are consistently trying to analyze other firm’s moves and decisions to get competitive advantage and product differentiation over each other. Collusion and Cartels are very common form of agreement in-game theory among oligopoly market. Collusion’s exist when there is an agreement among suppliers to set the prices of a product or quantities each supplier will produce. If all firms honor their collusion agreement they will all make greatest amount of profit possible. As either all of them are selling at the same price or producing limited amount of product not leaving too much choice for consumers but to buy the product at the given price.

Moreover,as firms get greedy to increase its profits over the other payoff matrix comes into play where when one firm starts charging less to increase its sales and profit. As a result other firm is only left with 2 options; watch its market share stolen by the first firm or to lower its prices to compete with the firm as well. In the end resulting in lower prices for the consumers.