6. Game Theory

define oligopoly

a market with a small number of firms whose decisions are mutually independent.

Features of an oligopoly include product differentiation or homogeneity, barriers to entry, and strategic behaviour. 

explain stategic interdependence in oligopoly decisions

Strategic interdependence means when a firm's payoff depends on its own action and rival actions. Firms choose price and output ( strategies) by forecasting rivals’ responses. This creates the feedback loop of non-cooperative games.

what is a normal form game

specifies players, strategy sets, and payoff function. Each player simultaneously chooses a strategy, yielding a payoff profile. In oligopoly, player are firms, strategies include quantities and price, and the payoffs are profits. 

nash equilibrium

strategy profile where no player can deviate unilaterally. self-enforcing; each player’s strategy is the best response to the others. Departures reduce the deviator’s payoff given rivals’ choices. 

best responses in a cournot dupoly with a linear demand