Examples of game theory in oligopoly

With Netflix being the market leader, they have large influence over this market. One example of an oligopolistic market that exists today is the fast food industry.

Yet another example of an oligopoly is the beer industry in America. Skip to content Home » Lifehacks » Is oligopoly an example of game theory? January 22, by Admin.

Table of Contents. Should you avoid alcohol on amoxicillin? The Stackelberg model considers quantity setting firms with an identical product that make output decisions simultaneously. This module considers all three in order beginning with the Cournot model. Number of Firms. Similarity of Goods. Barriers to Entry or Exit. The model we use to analyze this is one first introduced by French economist and mathematician Antoine Augustin Cournot in Interestingly, the solution to the Cournot model is the same as the more general Nash equilibrium concept introduced by John Nash in and the one used to solve for equilibrium in non-cooperative games in Module We will start by considering the simplest situation: only two companies who make an identical product and who have the same cost function.

Later we will explore what happens when we relax those assumptions and allow more firms, differentiated products and different cost functions.

We will assume that each liter of gas produced costs the company c , or that c is the marginal cost of producing a liter of gas for both companies and that there are no fixed costs.

Now the task is to search for equilibrium of the game. To do so we have to begin with a best response function. Taking the partial derivative of this expression with respect to q F. Solving for q F yields:. It is the same best response function as the ones in Module By symmetry, National Oil has an identical best response function:.

The profit-maximizing rule tells us that to find profit maximizing output we must set the marginal revenue to the marginal cost and solve. Now that we know the best response functions solving for equilibrium in the model is relatively straightforward. We can begin by graphing the best response functions.

These graphical illustrations of the best response functions are called reaction curves. A Nash equilibrium is a correspondence of best response functions which is the same as a crossing of the reaction curves. Figure In Figure This is a system of two equations and two unknowns and therefore has a unique solution as long as the slopes are not equal.

We can solve these by substituting one equation into the other which yields a single equation with a single unknown:. So both Federal Oil and National Oil produce thousand gallons of gasoline a week. Total output is the sum of the two and is thousands gallons. To analyze this from the beginning we can set up the total revenue function for Federal Oil:. We know marginal cost is , so setting marginal revenue equal to marginal cost results in the following expression:. This is the best response function for Federal Oil.

By symmetry we know that National Oil has the same best response function:. In the previous section we studied oligopolists that make an identical good and who compete by setting quantities. The example we used in that section was wholesale gasoline where the market sets a price that equates supply and demand and the strategic decision of the refiners was how much oil to refine into gasoline.

In this section we turn our attention to a different situation in which the oligopolists compete on price. The example here are the retail gas stations that bought the wholesale gas from the refiners and are now ready to sell it to consumers. Saudi Arabia has an interest to supply a large amount of oil to the world market, because its holdings of oil are large. Potential of New Competitors At the high cartel price, it is attractive for new producers to enter the market.

In addition, buyers respond to the high price by making adjustments to their consumption. This increase in supply and decrease in demand lowers the price in the long run. In the oil market, this has indeed occurred. England, Mexico, Norway, the United States, and Russia increased their supply and drove down the price of oil. Recently we have seen technological developments in hydraulic fracking that have increased the supply of oil and brought down world oil prices and retail prices at the pump.

The pandemic is also keeping oil prices relatively low because of lower demand for gasoline and other oil products. As mentioned in the previous unit, it is difficult for a non-monopoly firm to earn excessively high profits even in the long run. This is often the case, even when firms attempt to collude and form cartels. Usually, in the long run, competitive market forces prevail and keep prices in check for consumers. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.

Section 4: Oligopoly and Game Theory Unit 8. Game Theory History Game theory has become increasingly important in microeconomics, as it has in other disciplines, such as biology, psychology, sociology, and computer science.

A Game Theory Simulation Game theory uses the same setup as regular games, including players, moves, strategies, and rewards.