И.К.)Models of oligopoly and game theory applications

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists).[citation needed] Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Characteristics of Oligopoly:

1 A few large producers. Usually three, four, or five firms occupy the market, e.g. "Big Three" in the U.S. aluminum industry and companies such as Nokia or Motorola in the cell phone industry, as well as companies in the video game console market. The four largest firms in the market occupy greater than 40% of the market.

2 Homogenous OR differentiated products. Some oligopolistic industries offer homogenous, or standardized, products, e.g. those of steel, zinc, copper, lead, industrial alcohol. Other industries, e.g. those of automobiles, tires, electronics, breakfast cereal, offer different products and place an emphasis on nonprice competition, such as advertising.

3 Price maker, but still mutually interdependent. The small number of firms let oligopolies to set prices and output levels, to some extent. However, because there are rival firms, oligopolies must take note at how they react to its change in price, output, product or advertising.

4 Strategic Behavior: self-interested behavior that takes into account the reactions of others.

5 Mutual interdependence: profit doesn't depend entirely on its own price and strategies.

6 Relatively high entry barriers. Most important barriers are economies of scale, patents, brand loyalty, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy entering (new) firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.

7 Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs. MR=MC.

Modeling. There is no single model describing the operation of an oligopolistic market. The variety and complexity of the models is due to the fact that you can have two to 102 firms competing on the basis of price, quantity, technological innovations, marketing, advertising and reputation. Fortunately, there are a series of simplified models that attempt to describe market behavior under certain circumstances. Some of the better-known models are the dominant firm model, the Cournot-Nash model, the Bertrand model and the kinked demand model