### 날짜 : 2024-04-11 14:40 ### 주제 : Oligopoly and Game Theory #economics ---- # Oligopoly An oligopoly is a market structure characterized by a small number of firms that dominate the market. These firms hold significant market power and face limited competition due to high barriers to entry. Because there are few participants, the actions of one firm can have a direct impact on the others, which often leads to firms acting strategically. #### Characteristics of Oligopoly - **Few Sellers**: The market is dominated by a small number of firms, which are large enough to influence the market price. - **Interdependent Decision-Making**: Firms must consider the potential reactions of other firms to changes in their price, output, and marketing strategies. - **Barriers to Entry**: High entry barriers exist due to economies of scale, access to technology, or governmental regulations, which prevent the easy entry of new firms. - **Product Differentiation or Homogeneity**: Oligopolistic firms may produce either differentiated or homogenous products, depending on the industry. - **Non-Price Competition**: Firms often compete on factors other than price, such as product innovation, branding, customer service, and marketing. #### Oligopoly and Game Theory Game theory is a branch of mathematics and economics that analyzes strategic interactions where the outcome for each participant or "player" depends on the actions of all involved. It is particularly useful in studying oligopolistic markets, where the limited number of firms must consider the reactions of their rivals when making decisions. **Game Theory Concepts Used in Oligopoly Analysis:** - **Dominant Strategy**: A strategy is dominant if it is the best one for a firm, no matter what the other firms do. - **Nash Equilibrium**: A set of strategies is a Nash equilibrium if no firm can do better by changing its strategy while the other firms keep their strategies unchanged. - **Prisoner’s Dilemma**: Often used to illustrate why firms in an oligopoly can struggle to maintain cooperation, even when it is in their best interest. Mutual defection (betrayal) can be the Nash equilibrium even when mutual cooperation would leave both better off. - **Collusion**: Firms may collude, forming a cartel to act as a monopoly and maximize joint profits. The incentive to cheat on the cartel and the enforcement of anti-trust laws make such collusion difficult in practice. - **Repeated Games and Tacit Collusion**: Repeated interaction over time can help firms sustain tacit collusion, where they implicitly cooperate without explicit agreements, as they recognize mutual interdependence. **Examples of Game Theory and Oligopoly:** 1. **Airline Pricing**: Airlines often engage in price wars, with one airline's decision to cut prices usually being matched by its competitors. A Nash equilibrium is reached with lowered prices, where no airline benefits from changing strategy if the others do not. 2. **Telecommunications Industry**: Few major firms dominate. They may tacitly collude to keep prices at a certain level. If one firm lowers its prices, the others may follow suit to maintain market shares, thus changing the equilibrium. 3. **Gas Stations**: Gas stations in close geographical proximity are aware of each other's pricing and may lower or raise prices in response to competitors’ pricing changes. This dynamic decision-making can reach an informal understanding to maintain prices at a certain level, avoiding price wars. 4. **OPEC**: The Organization of the Petroleum Exporting Countries is an example of a cartel where member countries agree on the quantity of oil to supply. However, each member has an incentive to cheat by selling more than agreed, illustrating the Prisoner's Dilemma within collusion. Game theory helps to explain how firms in an oligopoly may not act purely competitively, choosing instead strategies that consider the likely responses of other firms, leading to outcomes that can be less predictable than in other market structures. It also explains why prices in oligopolistic markets can be "sticky" downwards, as firms avoid price battles that can lead to mutually assured destruction in terms of profit margins. # Game Theory Game theory is a theoretical framework for conceiving social situations among competing players. In more formal terms, it's the study of mathematical models of strategic interaction among rational decision-makers. It provides tools for analyzing situations in which parties, called players, make decisions that are interdependent. This interdependence causes each player to consider the other player's possible decisions, or strategies, in formulating their own strategy. #### Key Concepts in Game Theory **Players**: A player in a game is a decision-maker. In game theory, players are usually considered to be rational actors who are trying to maximize their own outcomes (often referred to as utility). **Strategies**: A strategy is a complete plan of action a player will follow throughout the game. In simple games, a strategy may be to always make the same move, while more complex games require a strategy that can change from move to move based on the entire history of the game. **Payoffs**: A payoff is the outcome from a certain move or strategy and can be expressed in terms of the utility received by the player. **Games**: Can be cooperative (where players can form coalitions and make binding commitments) or non-cooperative (binding commitments are not feasible). They can also be symmetrical/identical (all players have the same strategies available and corresponding payoffs) or asymmetrical (players have different strategies and/or payoffs). **Equilibrium**: An equilibrium is a situation in the game where no player has an incentive to deviate from their chosen strategy after considering the choices of other players. In the context of non-cooperative games, the Nash Equilibrium, named after John Nash, is the most widely used concept of equilibrium. #### Types of Games in Game Theory **Static vs Dynamic Games**: A static game is one where all players make their decisions (choose their strategies) simultaneously, without knowledge of the others' decisions. A dynamic game allows players to make decisions at various points (turns), typically with knowledge of previous actions chosen by all players. **Perfect Information vs Imperfect Information**: A game has perfect information if all players know the moves that have taken place so far. Chess is a classic example of a game with perfect information. Most card games, by contrast, have imperfect information because players do not know the cards in other players' hands. **Simultaneous Move Games vs Sequential Move Games**: A simultaneous move game is one in which all players make their decisions at the same time. A sequential move game, like chess, is one where the players take turns playing. **Zero-Sum Games**: A game is zero-sum if one player's gain is equivalent to the other player's loss. Poker and gambling games are typically zero-sum games. **Cooperative Games**: These games are those in which players can bargain and form coalitions, and binding agreements are possible. The focus is often on how to distribute a joint payoff among players. #### Game Theory in Economics and Business In economics, game theory is used to model the behavior of firms, markets, and consumers. The classic example is the Prisoner's Dilemma, which illustrates how self-interest can lead to poor outcomes for everyone involved. Other common scenarios include: - **Price Competition**: Businesses trying to undercut each other’s prices may end up in a price war, leading to minimal profits for each player. - **Product Releases**: Companies must strategize about when to release new products based on when they believe their competitors will do so. - **Auctions**: Bidders must decide how much to bid based on their estimates of what others might be willing to pay for the same good. #### Game Theory Outside Economics While initially developed to address problems in economics, game theory is now used to study a wide array of strategic situations in fields such as: - **Political Science**: To analyze voting strategies, coalition building, and international negotiations. - **Psychology**: To understand the underpinning of human behaviors and decision-making processes. - **Biology**: To model evolutionary strategies. - **Computer Science**: For AI development, particularly in recursive algorithms that predict opponent behaviors. Game theory remains a potent tool for understanding systems of competition and cooperation in a variety of disciplines. It is particularly good at modeling and suggesting optimal strategies in scenarios of conflict and cooperation—essentially anytime the best outcome for an agent depends on the actions of others.