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Oligopoly: Strategic Decision Making in Oligopoly Markets

This document discusses strategic decision making in oligopoly markets. It explains that strategic behavior occurs when the best decision for one firm depends on what its rivals do, and vice versa. There are three types of strategic moves firms can use: commitments, threats, and promises. Credible strategic moves are those that are in a firm's best interest to carry out. Commitments involve unconditional actions that manipulate rivals' decisions. Threats and promises are conditional moves that involve retaliation or rewards depending on a rival's actions. Cooperation is possible through repeated strategic interactions if firms avoid cheating and retaliate against each other using trigger strategies when cheating occurs.

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akshat mathur
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45 views12 pages

Oligopoly: Strategic Decision Making in Oligopoly Markets

This document discusses strategic decision making in oligopoly markets. It explains that strategic behavior occurs when the best decision for one firm depends on what its rivals do, and vice versa. There are three types of strategic moves firms can use: commitments, threats, and promises. Credible strategic moves are those that are in a firm's best interest to carry out. Commitments involve unconditional actions that manipulate rivals' decisions. Threats and promises are conditional moves that involve retaliation or rewards depending on a rival's actions. Cooperation is possible through repeated strategic interactions if firms avoid cheating and retaliate against each other using trigger strategies when cheating occurs.

Uploaded by

akshat mathur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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OLIGOPOLY

Strategic Decision Making in Oligopoly


Markets
Strategic Moves: Strategic actions
Strategic behavior: Actions taken by firms
to plan for and react to competition from
rival firms.
• is the behavior that occurs when what is best for A
depends upon what B does, and what is best for B depends
upon what A does.

Three kinds of actions that can be used to put rivals


at a disadvantage: Commitments, threats, promises
•Can be used separately or simultaneously

Jan 3, 2021 Session 14 Oligopoly 2


Strategic Moves
• Credible: A strategic move that will be carried
out because it is in the best interest of the
firm making the move to carry it out
• Commitments: Unconditional action taken for
the purpose of increasing payoffs to the
committing firms

Jan 3, 2021 Session 14 Oligopoly 3


Principle
Firms make credible commitments by taking
unconditional, irreversible actions.
Credible commitments give committing firms the
first moves in sequential games, and by taking
the first actions, and by taking the first actions,
committing firms manipulate later decisions their
rivals will make in a way that improves their own
profitability.

Jan 3, 2021 Session 14 Oligopoly 4


Strategic Moves
• Threats: Conditional strategic moves that
take the form: “if you do A, I will do B, which is
costly to you”
• Promises: Conditional strategic moves that
take the form: “if you do A, I will do B, which is
desirable for you”

Jan 3, 2021 Session 14 Oligopoly 5


Principle
• Managers make strategic moves to
manipulate their rivals’ decisions for the
purpose of increasing their own profits by
putting rivals at a strategic disadvantage.
• Only credible strategic moves matter, rivals
ignore any commitments, threats, or promises
that will not be carried out should the
opportunity to do so arise

Jan 3, 2021 Session 14 Oligopoly 6


Cooperation in Repeated Strategic
Decisions
• Cooperation: When firms make decisions that
make every firm better off than in a non-
cooperative Nash equilibrium
• Repeated Decisions: Decisions made over and
over again by the firms
• Cheating: When a manager makes a non-
cooperative decision.
Cooperation is achieved when all firms in the market
decide not to cheat
Jan 3, 2021 Session 14 Oligopoly 7
Principle
• Cooperation is possible in every prisoner’s
dilemma decision, but cooperation is not
strategically stable when the decision is made
only once.
• In one-time prisoners’ dilemmas, there can be
no future consequences from cheating, so both
firms expect the other to cheat, which then
makes cheating the best response for each
firm.
Jan 3, 2021 Session 14 Oligopoly 8
• Punishment for cheating: Making a retaliatory
decision forces rivals to return to a non-
cooperative Nash outcome

• Trigger Strategies: Punishment strategies that


choose cooperative actions until an episode of
cheating triggers a period of punishment

• Tit-for-tat: A trigger strategy that punishes after


an episode of cheating and returns to
cooperation if cheating ends.
Jan 3, 2021 Session 14 Oligopoly 9
• Grim Strategy: A trigger strategy that punishes
forever after an episode of cheating

• Facilitating practices: Generally lawful methods


of encouraging cooperative pricing behavior

• Price matching: A commitment to match any


rival’s lower price

Jan 3, 2021 Session 14 Oligopoly 10


• Cartel: A group of firms or nations entering on
explicit agreement to restrict competition for
the purpose of driving up prices.
• Tacit Collusion: Cooperation among rival firms
that does not involve any explicit agreement.

Jan 3, 2021 Session 14 Oligopoly 11


Thank you

Jan 3, 2021 Session 14 Oligopoly 12

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