The Concepts of Game Theory:
Mutual Interdependence, price setting and different forms of collusion are common among firms in a Oligopoly Market.
Game theory is related to the economics example of the "Prisoners Dillema". It explores collusion and competition among competetive forces using a payoff matrix to outline variable profits received against the decision to cheat or not to cheat.
A Payoff Matrix is used to graphically compare the pros and cons of cheating or being honest when pricing their products. Firms may choose to cooperate with their rival and if cooperation is reciprocated each firm will share the combined maximum of profits. Increased profits are temptations to cheat and also result in punishing the honest firm. Combined cheating offers the lowest possible result.
Game Theory measures behaiviour and interdependence of firms. John Nash discovered and did initial research in this economic concept. Nash Equilibrium is used in Game Theory to measure the anticipated actions of game participants. (Sayre,Morris)
Game Theory is evident in our local marketplace in the competition among phone, cable and internet providers. The two major suppliers of fully bundled services in Calgary are Shaw and Telus. These companies periodicly lower prices, aggressively advertise and offer incentives to change consumers over to the competition. The high cost of exchanging back and forth a small percentage of the total market is unproductive and wasteful.
A Cartel is a form of Collusive Oligopoly where the member/suppliers of the cartel agree upon a set price and influence the market by controlling the output of product. A cartel is only successful if all the members stay honest and do not sell below the agreed upon price. A cooperative cartel acts like a large monopoly.
Links:
http://www.web-books.com/eLibrary/ON/B0/B63/056MB63.html
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