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Topic 8: Oligopoly and game theory

This lecture explores the role of oligopolies in the economy and how firms’ strategic interactions shape competitive dynamics. Oligopolies consist of a small number of dominant firms that exert significant influence on industry practices. The discussion emphasizes the importance of game theory in analyzing these interactions, highlighting concepts such as the payoff matrix, dominant strategies, and Nash equilibrium. Participants will gain an understanding of how these principles apply to real-world economic scenarios and inform competition policy.

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Topic 8: Oligopoly and game theory

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  1. Antitrust Economics 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, ITAM, CPI Topic 8: Oligopoly and game theory Topic 8 | Part 1 30 May 2013 Date

  2. Overview

  3. Role of Oligopolies in the Economy

  4. The “rough” spectrum of competition

  5. Firms act largely independently of each other in competition and monopoly but not in oligopoly

  6. A small number of firms dominate many industries

  7. Concentration in selected US industries Source: US Economic Census

  8. Oligopoly industries are ripe for competition issues

  9. Economic models of oligopoly account for strategic interactions among firms

  10. Modeling interactions among firms and people is tricky

  11. Game Theory and Strategic Behavior

  12. “Game theory” provides insights into many problems involving interactions

  13. Basics of game theory

  14. Components of games

  15. The “payoff matrix” describes the game Player 2 (player 1 payoff, player 2 payoff) Player 1 Player 1 gets 6 and Player 2 gets 3 if Player 1 moves Down and Player 2 moves Left

  16. Optimal strategies with simple one-period non-cooperative game Player 2 (player 1 payoff, player 2 payoff) Player 1

  17. The “dominant strategy” is a key concept Player 2 Player 1

  18. The dominant strategies point to game equilibrium Player 2 (player 1 payoff, player 2 payoff) Player 1

  19. The cost of not cooperating Player 2 Player 1

  20. The prisoner’s dilemma game Player 2 (player 1 payoff, player 2 payoff) Prisoner 2 goes free and prisoner 1 gets 40 years. Player 1

  21. The Nash equilibrium John Forbes Nash (1928)

  22. Games don’t always have just one equilibrium He (Her Payoff, His Payoff) She

  23. What to do when there are many equilibria?

  24. End Part 1, Next Class Part 2

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