A game like the prisoners’ dilemma is played in duopoly. A duopoly is a market in which there are only two producers that compete. Duopoly captures the essence of oligopoly. This chapter provides knowledge of oligopoly games. | Oligopoly Games An Oligopoly Price-Fixing Game A game like the prisoners’ dilemma is played in duopoly. A duopoly is a market in which there are only two producers that compete. Duopoly captures the essence of oligopoly. Figure on the next slide describes the demand and cost situation in a natural duopoly. A Cartel Game. The prisoner’s dilemma to a cartel game on pages 291–295 has been carefully designed to get the maximum payoff from the knowledge your students have of the perfect competition and monopoly results of the two preceding chapters and to introduce them to game theory in a setting that is as close to the previously studied settings as possible. 1. The natural duopoly setting ensures that there is a zero profit equilibrium that corresponds to perfect competition and monopoly profit equilibrium. 2. Instead of just asserting a payoff matrix, the numbers in the matrix come directly from monopoly profit-maximizing and competitive outcomes. You need to do a bit of work | Oligopoly Games An Oligopoly Price-Fixing Game A game like the prisoners’ dilemma is played in duopoly. A duopoly is a market in which there are only two producers that compete. Duopoly captures the essence of oligopoly. Figure on the next slide describes the demand and cost situation in a natural duopoly. A Cartel Game. The prisoner’s dilemma to a cartel game on pages 291–295 has been carefully designed to get the maximum payoff from the knowledge your students have of the perfect competition and monopoly results of the two preceding chapters and to introduce them to game theory in a setting that is as close to the previously studied settings as possible. 1. The natural duopoly setting ensures that there is a zero profit equilibrium that corresponds to perfect competition and monopoly profit equilibrium. 2. Instead of just asserting a payoff matrix, the numbers in the matrix come directly from monopoly profit-maximizing and competitive outcomes. You need to do a bit of work (and so do your students) to generate the payoff numbers, but the whole story hangs together so much better when the student can see where the numbers come from and can see the connection between the oligopoly set up and those of competition and monopoly. 3. Start with Figure (page 291) and after you’ve explained the cost and demand conditions shown in the figure, ask the students what they think the price and quantity will be in this industry. There will be differences of opinion. This diversity of opinion motivates the need for a model of the choices the firms make. 4. The game is set up so that the competitive equilibrium is the Nash equilibrium. You might want to emphasize that this outcome is efficient even though it is not the best joint outcome for the firms. Oligopoly Games Part (a) shows each firm’s cost curves. Part (b) shows the market demand curve. Oligopoly Games This industry is a natural duopoly. Two firms can meet the market demand at the least cost. .
