Defining Oligopoly and Game Theory
Defining oligopoly
· Compare an oligopoly market to a perfect competition and monopolistic competition type of market
Oligopoly market and perfect competition: In oligopoly market, oligopolies are price setters. There are a few big sellers in this market so large big sellers significantly influence on setting price. On the other hand, perfect competition market sellers are price takers because there are many small sellers so each seller has little influence on the price of a good or services and output etc.
Oligopoly and monopolistic competition market: Both are in imperfect competition and they are on market structure continuum become perfect competition and monopoly. Oligopoly consists of a small amount of large firms and monopolistic competition contains many small firms.
· The similarities and differences between each type of market
Number of firms
|
Market power
|
Elasticity of demand
|
Product differentiation
|
Pricing power
| |
Infinite
|
None
|
Perfectly elastic
|
None
| ||
Monopolistic competition
|
Many
|
Low
| |||
One
|
High
|
Relatively inelastic
|
Absolute
(across industries) | ||
Oligopoly
|
Few
|
High
|
Relatively inelastic
|
Yes
|
Price setter
|
· The market type you consider the best choice. Explain why
In my opinion, monopolistic competition is the best choice. It is because that monopoly and oligopoly are influenced by a few big powers and consumer’s demand may not affect the market control. Perfect competition looks like just theory and not fit for present market.
· With your new knowledge, how do you feel as a consumer?
o Do you feel in control of your purchasing choices?
According to the market type, price and providing quantities, it is possible that consumer’s purchasing choices are controlled by firms and government. Cartels are adjusting their benefit for maximizing the reward on controlling customers like robots.
Game theory
· What are the main ideas behind game theory?
Game theory is used in oligopoly firms in order to illustrate interdependent decision-making. It means that when one firm makes a decision, it is influenced by the other firm.
· How did it develop?
Game theory refers to a branch of applied mathematics using in social sciences, economics, biology, engineering and political science etc. Game theory uses mathematics to explain that how the success of individual’s choices is connected to the choices of others. Game theory was originally developed in order to analyze competitions that a person reaches better results at another person’s expense. Game theory was first developed by economists John Neumann and Oskar Morgenstern in the 1940s. .
· Is there evidence of game theory in the current economy? Explain.
I think that telecommunication market shows the example of game theory. A few firms set the price and their prices are almost similar price range. At the early period telecommunication service just started, the prices are almost same and they moved in almost similar price range. However, a few of them tried to deduct the consumer price for increasing sales so they could obtain better profits than the others. However, except a few, others keep their prices appropriate ranges. It is true that collusive action is illegal but they seem to do collusion when prices are changed.
· How does the payoff matrix work?
Where both parties do no cheating, both can equal profits. If one of them does cheating, the party that does cheating can get more profits that the other party comparing with no cheating benefits. However, in the case that both parties do cheating, both can obtain less equal profits than the amount of no cheating. This amount is less than the amount that cheating party can achieve.
· Describe the principles behind collusive and cartel actions.
Especially in oligopoly market, a few big firms tend to be collusive for maximizing their profits. A cartel is formal agreement among competing firms so they move based on this for obtain the best reward by reducing competition.
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