11.3 Oligopoly and Game Theory LO 4
Oligopolies are dominated by a few large firms that have significant
market power. They can maximize their joint profits if they cooperate
to produce the monopoly output. By acting individually, each firm has
an incentive to depart from this cooperative outcome.
Oligopolists have difficulty cooperating to maximize joint profits
unless they have a way of enforcing their output-restricting
agreement.
Economists use game theory to analyze the strategic behaviour of
oligopolists—that is, how each firm will behave when it recognizes
that other firms may respond to its actions.
A possible non-cooperative outcome is a Nash equilibrium in which
each player is doing the best it can, given the actions of all other
players.