Main terms to know concerning oligopolies are oligopoly, game theory, collusion,cartel, Nash equilibrium, prisoners’ dilemma, and dominant strategy. Oligopolies are markets where only a few sellers produce a majority of the goods in the market and they offer similar or identical products. Game theory is the study of how people behave in strategic situation, where each firms must act strategically on both how much they produce and how much other firms produce. Collusions are agreements between firms in a market about quantity or price, leading up to a cartel, which is a group of firms acting in unison. The Nash Equilibrium is a situation where economic actors interacting with one another each choose their best strategy given the other strategies the other people have chose. This occurs when none of the actors have any incentive to make a different decision. The prisoners’ dilemma explains the difficulty of maintaining cooperation even when it would be mutually beneficial. It is applicable in multiple situations, including arms races, common-resource competitions, and oligopolies. Dominant strategy is a strategy that is best for a player in a game regardless of other strategies.
Oligopolies maximize their total profits by either creating collusions and acting like a monopolist (leading to a downward sloping demand curve). But, if oligopolies make individual decisions about production, the quantity increases and price decreases. When more firms increase, the quantity and price would become closer to levels that would stay even when there is competition.
Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. These laws can be controversial, since behavior that seems to reduce competition can have underlying reasons for business.
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