🤝 Oligopoly: The Few Dominate
Definition: Oligopoly.
Key characteristics
- Few dominant firms — high concentration ratio (e.g. top 4 firms control 60%+ of the market).
- High barriers to entry — economies of scale, brand loyalty, patents, sunk costs.
- Strategic interdependence.
- Products may be homogeneous or differentiated — oil (homogeneous), cars (differentiated).
- Price rigidity — oligopolists tend to keep prices stable, competing instead through non-price methods.
Real-world examples: Airlines, smartphone manufacturers (Apple/Samsung), social media platforms, oil producers (OPEC), supermarkets, automobile manufacturers.
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🎲 Game Theory and the Prisoner's Dilemma
Game theory: Game theory.
The prisoner's dilemma
Two firms choose between colluding (high price) and competing (low price). Each firm has an incentive to 'cheat' on the agreement — but if both cheat, both are worse off.
- Both collude (high price): BEST joint outcome — both earn high profits.
- One cheats (undercuts): the cheater gains market share; the colluder loses.
- Both cheat (low price): WORST joint outcome — price war, both earn low profits.
- The dominant strategy for each firm is to cheat (compete) — even though mutual collusion would make both better off.
- The Nash equilibrium is where both firms compete — neither can improve by changing strategy alone.
Nash equilibrium.
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