Oligopoly and Game Theory
| English | Chinese | Pinyin |
|---|---|---|
| oligopoly | 寡头垄断 | guǎ tóu lǒng duàn |
| cartel | 卡特尔 | kǎ tè ěr |
| mutual interdependence | 相互依存 | xiāng hù yī cún |
| collusion | 合谋 | hé móu |
| game theory | 博弈论 | bó yì lùn |
| payoff matrix | 收益矩阵 | shōu yì jǔ zhèn |
| dominant strategy | 优势策略 | yōu shì cè lüè |
| Nash equilibrium | 纳什均衡 | nà shén jūn héng |
| prisoner's dilemma | 囚徒困境 | qiú tú kùn jìng |
When rivals watch each other
- Just a handful of phone networks. A few big airlines.
- Each one is large enough that its choices change the market.
- So before any firm acts, it asks: "what will my rivals do?"
- That strategic tension defines an oligopoly 寡头垄断.
Interdependence and cartels
- An oligopoly's defining feature is mutual interdependence 相互依存 — each firm's best move depends on its rivals'.
- Firms would love to act like one monopoly. Through collusion 合谋 they may form a cartel 卡特尔 to cut output and raise prices.
- But cartels are unstable: every member is tempted to cheat by secretly selling more.
The defining feature of an oligopoly is:
With only a few firms, each must consider how rivals will react.
When firms collude to restrict output and raise prices, they form a ______.
A cartel acts like a monopoly, but cheating makes it unstable.
Game theory and the payoff matrix
- Game theory 博弈论 studies these strategic choices with a payoff matrix 收益矩阵.
- A dominant strategy 优势策略 is a choice that is best no matter what the rival does.
- A Nash equilibrium 纳什均衡 is an outcome where neither firm can do better by changing its own choice alone.
Name the game-theory idea
A dominant strategy is best no matter what the rival does; a Nash equilibrium is where no one can improve alone; a cartel is a collusive agreement.
A dominant strategy is a choice that is best:
It beats the alternatives regardless of the rival's choice.
At a Nash equilibrium, no firm can improve its payoff by changing only its own choice.
That is exactly what makes a Nash equilibrium stable.
The prisoner's dilemma
- In a prisoner's dilemma 囚徒困境, both firms have a dominant strategy to compete.
- So they reach a Nash equilibrium where both earn less than if they had cooperated.
- Rational self-interest blocks the better joint outcome — which is exactly why cartels keep collapsing.
Both firms earn 10 if both keep prices high, 5 if both go low, but a lone undercutter earns 12 (rival gets 2). The Nash equilibrium is:
"Low" is each firm's dominant strategy, so both pick it — earning 5 each, worse than the cooperative 10.
The result where both firms compete and end up worse off than cooperating is the prisoner's ______.
Rational self-interest leads to a worse joint outcome — the prisoner's dilemma.
An oligopoly has a few firms and mutual interdependence. They may collude into a cartel, but cheating makes it unstable. Game theory finds the dominant strategy and Nash equilibrium; the prisoner's dilemma shows why rivals compete even when cooperating would pay both more.