oligopoly and game theory microeconomics

Oligopoly charecteristics

Small number of firms dominating the market, high barriers to entry, similar but differentiated products, significant interdependence between firms, mostly price makers, non-price competition

Examples of oligopolies

phone carriers, domestic airline, media production, big tech

Strategic dependence

If oligopolists compete hard, they act similarly to perfect competitors , driving down costs and leading to zero profits for all. They can also collude with each other, they act like a monopoly and push up prices while earning consistently high levels of profit (illegal.)

Cooperation types

Collusion and cartel

Collusion

when firms act together to reduce output and keep prices high

Cartel

a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price

are drug cartels the same as real cartels

no

example of a real cartel

OPEC (organization of the petroleum exporting countries)

Merger types

vertical and horizontal

Vertical merger

the joining of a firm with another to which it sells an output or from which it buys an input (a company selling a ingredient merges with one selling a final product)

Horizontal merger

The joining of firms that are producing or selling a similar product (frito + lay)

vertical merger example

Ebay and PayPal merge in 2002

horizontal merger example

Sprint and T mobile merge in 2020

Prisoners dilemma

A scenario in which the gains from cooperation are larger than the rewards from pursuing self interest. Does not work because people pursue self interest before cooperation, you would confess and betray prisoner B since in both scenarios betrayal is your best interest

Nash equilibrium

A state in which no player can benefit by changing their strategy, even if they know what other players are doing

Dominant strategy

the act of prisoners confessing every time since it is their best choice even if the other person does not confess

Game theory

Firm A can cooperate and they can both make $1000, or both companies can not cooperate and make $400 each. If one company cooperates they get $1500 while the other gets less (dominant strategy). This leads to a nash equilibrium at each making $400

One shot game

Like golden balls, people have no reason to cooperate. They are playing a stranger they will never meet again, and the stranger will never get back at them, so they will almost always choose to steal.

Infinite games

In a game that happens infinitely, like two companies competing for customers, they have a good reason to cooperate. The other company can get back at them in the future. Most companies cooperate for the “tit for tat” rule (companies work with each other until one goes against them)