Game theory in setting quantity oligopoly essay

His rivals may follow his change, or they may not, but they will, in all likelihood, notice it. For this reason it is difficult to predict the total demand for the product of an oligopolistic industry.

The marginal revenues of the duopolists are: We end with the game theoretic treatment of oligopoly which shows decision-making under conflict. It is not true to say that, in oligopoly, profit is always maximised. And so there is opportunity for both conflict and cooperation.

The second order sufficient condition of each duopolist requires that The slope of the marginal revenue curve of each duopolist must be less than that of the marginal cost curve. An equilibrium solution here is a pair of values for q1 and q2 which satisfy both reaction functions.

Two main features of the model are: So the profits of the duopolists are The corresponding reaction functions are: In such a situation, competition among buyers will force all the sellers to charge a uniform price for a product.

Essay on Oligopoly: Top 8 Essays on Oligopoly | Markets | Microeconomics

In oligopoly no firm can take decision on price independently. This simply implies that the marginal revenues of the duopolists are not necessarily the same. When taking its production decision, each duopolist takes into consideration its competitor.

But each firm is a dominant part of the market. An oligopoly is not necessarily made up of large firms. The solution of 7 is. In order to sell QM plus Qc, the price must fall to P1.

Competition is of two types- perfect competition and monopolistic competition. Scope of Study of Oligopoly: As in monopolistic competition there is not only price competition but non-price competition as well in oligopoly and, to some extent, in duopoly.

Since the demand curve is downward sloping the duopolist with the greater output will have the smaller marginal revenue because a duopolist has to reduce price to sell more. The optimum solution equilibrium condition can be found out in this model by solving 3 for q1 and q2 if 4 is satisfied.

Two extreme market forms are monopoly characterised by the existence of a single seller and perfect competition characterised by a large number of sellers.

The Cournot model presented in is based on the analysis of a market in which two firms produce a homogeneous product. The optimum quantity and maximum profit of a duopolist or oligopolist depend upon the actions of the firms belonging to the industry.

In short, it is not possible to define general price- quantity relations for an individual firm, since reaction patterns of rivals are highly uncertain and almost completely unknown. The reaction functions are linear as shown in Fig. Setting the partial derivatives of 3 equal to zero, we get: Each solution is based on different types of models and each model is based on a different behavioural assumption or a set of assumptions.

This type of reaction of rivals is not found in perfect competition or monopolistic competition where all firms change their price in the same direction and by the same magnitude in order to remain competitive and survive in the long run.

It is a price-searcher. So there is lack of symmetry in the behaviour of rival firms. He can control only his own output level or price, if his product is differentiatedbut he has no direct control over other variables which are likely to or do affect his profits. For example, advertising is often a life and death question in this type of market due to strategic behaviour of all firms.

A special case of oligopoly is monopoly in which there are only two sellers. Each firm must, therefore, recognise that changes in its own policies are likely to elicit changes in the policies of its competitors as well.

It is because an oligopolist does not have control over all the variables which affect his profit. The inverse demand function, stating price as a function of the aggregate quantity sold, is expressed as: But each firm is sufficiently so large a part of the market that its actions will have noticeable effects upon his rivals.

In truth, the profit of each oligopolist is the result of the interaction of the decisions of all players in the market. The essence of the Cournot model is that each firm treats the output level of its competitor as fixed and then decides how much to produce.Game theory concepts have become hugely important in economics and whilst there are limits to how far analysis can stretch, making use of some of the core ideas can add greatly to your evaluation and analysis marks in the summer papers.

Game theory in setting quantity oligopoly Game theory is a formal study of conflict and cooperation in economics. In fact, it is usually concerned with predicting the real outcome of the games of strategy where the potential individuals have incomplete awareness about the others’ plans.

Chapter 15 - Oligopoly Fall Herriges (ISU) Ch. 15 Oligopoly Fall 1 / 25 Outline 1 Understanding Oligopolies 2 Game Theory The Prisoner’s Dilemma Overcoming the Prisoner’s Dilemma 3 Antitrust Policy Herriges (ISU) Ch. 15 Oligopoly Fall 2 / 25 The Oligopoly Monopolies are quiet rare, in part due to regulatory efforts to discourage them.

In an oligopoly market structure, products are either differentiated or are homogeneous. It is also true that a firms behavior in an oligopoly market is highly dependent on the behavior of other firms in the same market. This is the major common feature to all the firms in oligopoly market.

• In oligopoly markets, there is a tension between cooperation and self-interest. If all the firms limit their output, the price is high, but then firms have an incentive to expand output.

The techniques of game theory are used to solve for the equilibrium of an oligopoly market. “Duopoly” example: Jack and Jill choose how many gallons of water to pump. Game theory analysis is a useful tool to study the behaviour of firms in oligopolistic markets- the fundamental economic problem of competition between two or more firms.

In this essay I will focus on two of the most notorious models in .

Game theory in setting quantity oligopoly essay
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