MONOPOLY AND OLIGOPOLY IN

MARKET STRUCTURE

INTRODUCTION TO MARKET STRUCTURE:

A market is a physical form like a retail outlet, where the sellers
and buyers can meet face-to-face, or in a virtual form like an online
market, where there is an absence of direct physical contact
between the buyers and sellers.
A market can be defined as a place where two parties are able to
gather, which will facilitate the exchange of goods and services.
The parties that are involved are usually the buyers and sellers.
‘Market’ is a term used in many instances like the securities market
or the normal physical market where the people come together for
the procedure of buying and selling. 

MEANING OF MARKET STRUCTURE:

Market structure, in economics, refers to how different industries
are classified and differentiated based on their degree and nature of
competition for goods and services.
It is based on the characteristics that influence the behavior and
outcomes of companies working in a specific market.
TYPES OF MARKET STRUCTURE IN SHORT:
1.Perfect Competition:
In a perfect competition market structure, there are a large
number of buyers and sellers. All the sellers of the market are
small sellers in competition with each other. There is no one big
seller with any significant influence on the market. So all the
firms in such a market are price takers.

2.Monopolistic Competition:

This is a more realistic scenario that actually occurs in the real

world. In monopolistic competition, there are still a large number
of buyers as well as sellers. But they all do not sell homogeneous
products. The products are similar but all sellers sell slightly
differentiated products.

3.oligopoly:

In an oligopoly, there are only a few firms in the market. While

there is no clarity about the number of firms, 3-5 dominant firms
are considered the norm. So, in the case of an oligopoly, the
buyers are far greater than the sellers.

The firms in this case either compete with another to collaborate

together, they use their market influence to set the prices and in
turn maximize their profits. So, the consumers become the price
takers. In an oligopoly, there are various barriers to entry in the
market, and new firms find it difficult to establish themselves.

4. Monopoly:

In a monopoly type of market structure, there is only one seller, so

a single firm will control the entire market. It can set any price it
wishes since it has all the market power. Consumers do not have
any alternative and must pay the price set by the seller.
 Monopolies are extremely undesirable. Here the consumer loose all
their power and market forces become irrelevant. However, a pure
monopoly is very rare in reality.

MONOPOLY
INTRODUCTION OF MONOPOLY:
✔ A monopoly is characterized by the absence of competition,
which can lead to high costs for consumers, inferior products
and services, and corrupt business practices.
✔ A company that dominates a business sector or industry can
use that position to its advantage at the expense of its
customers. It can create artificial scarcities, fix prices, and
circumvent the natural laws of supply and demand. It can
impede new entrants to the field and inhibit experimentation
or new product development. The consumer, denied the
recourse of choosing a competitor, is at its mercy.
✔ A monopolized market often becomes unfair, unequal, and
inefficient.

MEANING OF MONOPOLY:
✔ Monopoly is made of two words: ‘Mono’ and ‘Poly’.
✔ ‘Mono’ means single and ‘Poly’ means seller.
✔ Thus, “Monopoly refers to a market situation where one firm
or a group of firms which are combined to have a control
over the supply of the product.”
✔ In a monopoly market, factors like government license,
ownership of resources, copyright and patent and high
starting cost make an entity a single seller of goods.
✔ Monopolies also possess some information that is not known
to other sellers.
EXAMPLES OF MONOPOLY:

WHY MONOPOLY ARISE?

A firm is a monopoly if it is the sole seller of its product an if its
product does not have close substitutes. The fundamental cause of
monopoly is barriers to entry: other firms cannot enter the market
and compete with it. Barriers to entry have three main sources:

1. Monopoly resources:
The simplest way for a monopoly to arise is for a single firm to own a
key resource. In practice monopolies rarely arise for this reason.
2. Government-created Monopolies:
In many cases, monopolies arise because the government has given
one person or firm the exclusive right to sell some good or service.
The patent and copyright laws are two important examples of how
government creates a monopoly to serve public interest.

3. Natural Monopolies:
An industry is a natural monopoly when a single firm can supply a
good or service to an entire market at a lower cost than could two or
more firms. When a firm is a natural monopoly, it is less concerned
about new entrants eroding its monopoly power. Normally, a firm has
trouble maintaining a monopoly position, but in the case of a natural
monopoly the entering of the market for another firm is unattractive.
Thus, as a market expands, a natural monopoly can evolve into a
competitive market.

FEATURES OF MONOPOLY:
Monopoly market structure features differ from the other forms of
market. For the better elaboration of monopoly meaning in
economics, here are the characteristics of the monopoly market:

Single Seller and Many Buyers

A monopoly firm is a single seller or producer in an industry.  A

monopoly firm comprises the whole industry, as they are the sole
sellers in the market. Hence, a monopoly firm is also called an
industry.

Entry Barriers

The reason which give the rise to the monopoly is the same which
restricts the new firms to enter the market. Such things are:

● Government license
● ownership of resources
● copyright, patent
● high starting cost

This is the primary feature of a monopoly market and elaborates on

the monopoly markets in economics.

No Substitute

Because of no availability of close substitute products in the market

firms can achieve a monopoly in the market. Firms have the whole or
the maximum market share due to a single seller in the industry. As a
result, consumers do not have multiple options to choose their
product.

Price Maker

As the firm is the single seller and there are no substitutes in the
market, which gives the firm power called ‘monopoly power’.  Due to
this firm can make and charge their prices, which creates the firm as a
‘price maker’. Therefore, firms have the power to set prices as their
desires.
Being the price maker of the industry is their basic feature because it
is the primary reason for its profits and equilibrium. It will give a
more elaborate explanation of monopoly meaning in economics.

Price Discrimination

Because of being a price maker of the industry, firms can charge

different prices from people which is called ‘price discrimination’ in
pricing under monopoly. Moreover, monopoly firms have the power
to charge different prices from different customers for the same
quantity of product.

Profit Maximization

Practices like price maker and price discrimination in monopoly firms

give rise to profit maximization in these firms. Prices are formed by
the firm which are the desired prices of the owners. Plus, due to the
absence of substitutes in the market, monopoly firms can enjoy profit
maximization for a long period.

These features of the monopoly market have described the monopoly

meaning in economics and monopoly characteristics.

ADVANTAGES OF MONOPOLY:
Here are advantages of monopoly firms, for our better understanding
on topic monopoly meaning in economics:

Economies of Scale

The cost of production starts to decrease with the increase in the level
of production, which makes the price of the product also lower and
affordable for consumers. industries like mineral water, steel
production have a high fixed cost. So, in this case, it is beneficial to
have a low variable cost.

Research and Development

There is a huge cost which is spent on research and development to

keep the cost of the product effective. Therefore, it becomes an
important part of many industries, for example, aircraft
manufacturing, pharmaceuticals, telecommunication. Developing
medicines have a huge risk, but monopoly profits give sufficient
support to take the risk.
International Competitiveness

A monopoly firm enjoys its power in its home country, but in some
cases, firms face global competition. Like, British Steel enjoys having
a domestic monopoly. But, at the global level, they have huge
competition. Domestic monopoly becomes the competitive edge in
global competition. Monopoly is not always as same as it is in one
country. Monopoly meaning in economics has differed in different
countries.

Successful Firms

Consistency also gives the firm a monopoly position. Firms success

can also create monopoly power. One of the best examples is
‘Google’. It has created a monopoly by being the most dynamic
algorithm for search engine.

Subsides Loss-Making Services

Monopoly firms make another big use of super-normal profits in

subsidizing socially useful but loss-making services. For example
metro in India charges higher prices during office hours due to this
metro subsidize the prices during odd timing- at night or early
morning.

Avoid the Duplication of Services

Some firms gain monopoly power by being the most hardworking

firm in the industry.  Let’s suppose the example of neighbourhood
grocery stores.  One store is more efficient and dynamic. Which
results in the loss of other stores in the area. And, a monopoly of one
store in a neighbourhood

These advantages of a monopoly market illustrate the monopoly

meaning in economics and its benefits to the economy.
DISADVANTAGES OF MONOPOLY:

A monopoly market is not always good for the economy. Monopoly

meaning in economics have some disadvantages, which are:

Higher Prices

There is a presence of inelastic demand in the case of monopoly

which can create an increase in prices. Since there are no close
substitutes, forces consumers to buy the product at a higher price. For
example, Microsoft increased its prices in the 1980s. This is because
of the monopoly in computer software.

Decline in Consumer Surplus

Prices of products are high in case of monopoly because they are the
sole seller and price-makers of the industries. And it was said earlier
in the post about monopoly meaning in economics, that buyers face
burden because of maximum profits. As a result, there are few
consumers, which creates allocative inefficiency.
Fewer Incentives

Due to the monopoly power firms do not have to pursue the

consumers to buy the products. Sellers do not have to use promotional
tools to attract consumers. Therefore, it encourages x-inefficiency
(organizational slack)

Possible Diseconomies of Scale

When monopoly firms start to grow, firms have difficulty in handling

internal operations. As a result, the firm starts going downhill and it
becomes difficult to survive the business.

Monopoly Power

monopoly power is also abused against suppliers. Such as, in the case
of farmers and supermarket’s, due to the supermarket’s monopoly
farmers faces price discrimination. Moreover, it has an impact on
worker’s salaries and wages.

These are the disadvantages of monopoly to illustrate the monopoly

meaning in economics, and problems related to it in the economy.

TYPES OF MONOPOLY:
Natural Monopoly
It depends upon the natural factors of the area such as Karnataka has a
Monopoly of the coffee market as the climate of Karnataka suits best
for coffee cultivation.

Social Monopoly
When the government controls the production for public welfare, it is
said to be a social monopoly.

Legal Monopoly
It is a Monopoly which arises because of legal barriers or provisions
such as copyrights; the law prohibits an action of replicating any
design registered under a particular brand name.

Fiscal Monopoly
The government governs this Monopoly for printing currency and the
minting of coins, etc.

Simple Monopoly
In this type of Monopoly, uniform charges are charged by the traders
to all the buyers for its products.

Discriminating Monopoly
It discriminates amongst the buyers for selling similar products,
different prices are charged on divergent buyers such as lawyer
charges different fees from his every client.

Chosen Monopoly
This type of Monopoly comes into existence to avoid the
throat-cutting competition in the market and creates a group of
monopolists to escalate their profits.

One of the best examples of this type of Monopoly is (OPEC)

Organization of Petroleum Exporting Countries.

PUBLIC POLICIES TOWARDS MONOPOLY:

The government may wish to regulate monopolies to protect the
interests of consumers.
Government and public authorities run these monopolies directly or
impose price ceilings, which are not too low from monopoly price.
This saves the consumers from having to pay high monopoly prices.
This limits monopoly power.

Policymakers in the government can respond to the problem of

monopoly in one of four ways:

1.By trying to make monopolized industries more competitive

A monopoly is a company that exists in a market with little to no

competition and can therefore set its own terms and prices when
facing consumers, making them highly profitable. so competitive
industry is more useful.

2.By regulating the behaviour of the monopolies:

Monopolies eliminate and control competition, which increases prices

for consumers and limits the options they have. That’s why
government regulates monopolies.

3.By turning some private monopolies into public enterprise:

If a business is a private monopoly then it will use its market power to

extract maximum profit from consumers. but public enterprise is not
working for only profit. They trying give more profit give to
consumers.

4.Doing nothing:
The foregoing policies all have problems, so the best policy may be
no policy.

PRICE DISCRIMINATION IN MONOPOLY:

So far, we have been assuming that the monopoly firm charges the
same price to all customers. Yet in many cases firms try to sell the
same good to different customers for different prices, even though the
costs of producing for the two customers are the same. This practice is
called price discrimination.

Purpose
The purpose of price discrimination is to capture the market’s
consumer surplus. Price discrimination allows the seller to generate
the most revenue possible for a good or service.

Characteristics of Price Discrimination

1. "Selling to different purchasers": We ought to add "buying from
different sources of supply" (because there is price discrimination in
buying as well as in selling) and "leasing and hiring."
2. "Commodity": This should include services as well as goods,
productive factors as well as products.
3. "At the same time": This means "under given conditions." The
transactions surely need not be simultaneous; indeed, there is
temporal discrimination, such as between Sunday rates and week. day
rates, matinee and evening prices, peak rates and off-peak rates,
season and off-season prices.
4. "Homogeneous": The commodities need not be homogeneous;
they may be differentiated in many ways and, indeed, in several types
of price discrimination differentiation is of the essence.
5."At different prices": To sell different qualities or products with
different marginal cost at the same price, or to buy different qualities
or factors of different efficiency at the same price, is also
discriminatory.

Degree of Price discrimination

First degree price discrimination: the monopoly seller of a good or
service must know the absolute maximum price that every consumer
is willing to pay and can charge each customer that exact amount.
This allows the seller to obtain the highest revenue possible.
Second degree price discrimination: the price of a good or service
varies according to the quantity demanded. Larger quantities are
available at a lower price (higher discounts are given to consumers
who buy a good in bulk quantities).
Third degree price discrimination: the price varies according to
consumer attributes such as age, gender, location, and economic
status.

Conditions for Price Discrimination

● The firm must have market power.
● The firm must be able to recognize differences in demand.
● The firm must have the ability to prevent arbitration, or resale of
the product.

Examples of Price Discrimination

Movie Tickets Many movie theatres charge a lower price for children
and senior citizens than for other patrons. The marginal cost of
providing a seat for a child or senior citizen is the same as the
marginal cost of providing a seat for anyone else. In this case, movie
theatres raise their profit by price discriminating.
Coupons:  A manufacturer can charge a higher price for a product
which most consumers will pay. By using price discrimination, the
seller makes more revenue, even off of the price sensitive consumers.
Quantity Discounts So far in our examples of price discrimination, the
monopolist charges different prices to different customers. For
example, many firms offer lower prices to customers who buy large
quantities.
Premium pricing: Premium products are priced at a level that is well
beyond their marginal cost. For example, a regular cup of coffee
might be priced at $1, while a premium coffee is $2.50.
Airlines: Airline industry is a classic example of price discrimination.
They charge higher prices to last-minute consumers who are desperate
to get the last seat. By contrast, consumers who book months in
advance benefit from lower prices. 

DEAD WEIGHT LOSS:

DEAD WEIGHT-LOSS:

MEANING OF DEAD WEIGHT LOSS:

✔ A deadweight loss occurs when supply and demand are not in
equilibrium, which leads to market inefficiency.
✔ Market inefficiency occurs when goods within the market are
either overvalued or undervalued.
✔ While certain members of society may benefit from the
imbalance, others will be negatively impacted by a shift
from equilibrium.
WHAT IS DEADWEIGHT LOSS IN MONOPOLY?
✔ When a firm has a monopoly, it is under little or no competitive
pressure to reduce its costs. In turn, this can lead to
inefficiencies as well as higher costs to the consumer. On top of
this, monopolies may also be prone to increase prices as the
consumer has no alternative. So, the consumer ends up paying
more than they would under a competitive environment. This
presents a deadweight loss as customers are paying more than
they should.

KEY POINTS TO UNDERSTAND DEAD WEIGHT

LOSS:
✔ Deadweight loss is usually as a result of government
intervention which creates a shift in the supply and demand
curve – thereby pushing it out of its natural equilibrium.
✔ if we look at what a deadweight is – it is a heavy and oppressive
burden.
✔ In economics, that burden refers to what is preventing supply
and demand meeting an equilibrium – resulting in an economic
loss.
✔ This loss can be seen in either an oversupply or undersupply in
the market.
✔ We can also look at the deadweight loss as a reduction in the
producer or consumer surplus.

WHAT CAUSES DEAD WEIGHT LOSS:

1. PRICE FLOORS:
 ✔ A price floor is a government- or group-imposed price control or
limit on how low a price can be charged for a product, good,
commodity, or service. 
✔ Best example to understand what causes dead weight loss in
price floors is MINIMUM WAGE RATE.
✔ With reference to the minimum wage, employees receive more
money but comes at a cost.
✔ Often inexperienced workers get left out of the market as
employees look for more experienced workers to justify a higher
wage.
✔ At the same time, many companies will decide on just hiring
fewer workers or look to technological solutions such as
self-service.
✔ In turn, young and inexperienced workers are the most likely to
lose out as a result.
✔ This represents a deadweight loss as their labour could have
been contributing to the economy, but is not because of such
laws.

2. PRICE CEILINGS:

✔ Price ceiling examples include rent controls, gasoline, and

interest rates.
✔ What these price ceilings do is set a maximum price that
producers can charge.
✔ This reduces the incentives for producers to increase supply as
they have to invest in more capital equipment, labour, and
other factors of production.
 ✔ So, what we have as a result is an undersupply to the market.

3. TAXATION:
✔ The government charging above the selling price for a good or
service. An example of taxation would be a cigarette tax.
✔ The deadweight loss occurs in the fact that fewer customers are
demanding goods and services in the economy.
✔ This provides a sub-optimal output for society as there is
potential demand with companies able to fulfil that demand.
✔ However, taxes push these prices up and demand down.
✔ In turn, the profits businesses could make fall, and the consumer
surplus declines – producing a deadweight loss.
4. SUBSIDIES:
✔ Governments provide businesses with cash in order to help
reduce the final price to consumers and keep them in business.
✔ These are known as subsidies and have the opposite effect of
taxes – they shift the demand curve to the right.
✔ Assuming subsidies have the intended effect and suppress
prices, demand will increase.
✔ With consumers attracted by lower prices, we see an artificial
increase in demand.
✔ This creates a deadweight loss for society as consumers are
paying more than what the good takes to bring to market.

5. MONOPOLIES:
✔ Monopolies occur when one business owns the whole of the
market.
✔ That allows it to dictate price and the quantity it supplies to the
market.
 ✔ In turn, deadweight loss can occur through an overcharge of
consumers.
✔ Under normal market conditions, consumers would not have to
pay such high prices as firms would compete for business.

SOME EXAMPLES FOR EASY UNDERSTANDING:

EXAMPLE – 1
Suppose a baker may make 100 loaves of bread but only sells 80. The
20 remaining loaves will go dry and mouldy and will have to be
thrown away – resulting in a deadweight loss.

When goods are undersupplied, the economic loss is as a result of

demand going unfulfilled. If we take the baker example again – the
baker makes 100 loaves of bread and sells them all. However, there
are 20 customers who still want bread. This is a deadweight loss
because the customer is willing and able to make an economic
exchange, but is prevented from doing so because there is no supply.

EXAMPLE – 2
Imagine that you want to go on a trip to Vancouver. A bus ticket to
Vancouver costs $20, and you value the trip at $35. In this situation,
the value of the trip ($35) exceeds the cost ($20) and you would,
therefore, take this trip. The net value that you get from this trip is
$35 – $20 (benefit – cost) = $15.
Prior to buying a bus ticket to Vancouver, the government suddenly
decides to impose a 100% tax on bus tickets. Therefore, this would
drive the price of bus tickets from $20 to $40. Now, the cost exceeds
the benefit; you are paying $40 for a bus ticket from which you only
derive $35 of value.
In such a scenario, the trip would not happen and the government
would not receive any tax revenue from you. The deadweight loss is
the value of the trips to Vancouver that do not happen because of the
tax imposed by the government.
HOW TO CALCULATE DEAD WEIGHT LOSS WITH
DIAGRAM:

✔ The equilibrium price and quantity before the imposition of tax

are Q0 and P0.
✔ With the tax, the supply curve shifts by the tax amount
from Supply0 to Supply1. Producers would want to supply less
due to the imposition of a tax.
✔ The buyer’s price would increase from P0 to P1 and the seller
would receive a lower price for the good from P0 to P2.
✔ Due to the tax, producers supply less from Q0 to Q1.

The deadweight loss is represented by the blue triangle and can

be calculated as follows:
 OLIGOPOLY
INTRODUCTION:
⮚ It represents the presence of a few firms in the market, producing
either a homogenous product or products which are close but not
perfect substitutes to each other.

⮚ Sometime, also known as ‘competition among the few’ as there are

few sellers in the market and every seller influences and is influenced
by the behaviour of other firms.

⮚ Example of oligopoly: - markets for automobiles, cement, steel,

aluminium, etc.

MEANING:
⮚ The term oligopoly derives from the Latin word ‘oligoi’ meaning
“few”, and ‘poleo’ meaning “to sell”, so, translated, it means ‘few
sellers’.

⮚ An oligopoly is a form of market where only a small group of

companies or suppliers’ control all of the market. This is different
than a monopoly, which is where only one company or business
control the entire market.

FEATURES OF AN OLIGOPOLY:
Few firms or seller
A market may have thousands of sellers, but if the top 2 to 5 firms
have a market share of over 50 precent plus it can be classified as an
oligopoly market. Under the Oligopoly market, the sellers are few,
and the customers are many. Few firms dominating the market enjoys
a considerable control over the price of the product.
Ex: Huda beauty, mac studio there is a two firm in beauty product.

Lack of uniformity:
All firms in an oligopoly market may not be of the same size in terms
of revenue, number of employees, number of subscribers, etc. Some
firms may be big while others might be small.
Ex: Mobile, telecommunication...

Interdependence:

Firms under oligopoly are interdependent. Interdependence means

that actions of one firm affect the actions of other firms. We take an
example when vi and jio recharge price is 901 that time both of firm
have a consumer is 100. Sometime after vi decrease price 901 to 851
and that time jio stable their recharge price 901. So jio lose their
consumer 100 to 85 and that time vi gain 115 consumer. that’s the
reason jio indirectly decrease recharge price 901 to 851. So, it is
called interdependence.
Example:

Advertising:
Advertising is a powerful instrument in the hands of oligopolists. A
firm under oligopoly can start an aggressive and attractive advertising
with the intention of capturing a large of the market.

Non -price competition:

If a firm tries to reduce the price, the rivals will also react by reducing
their prices. However, if it tries to raise the price, other firms might
not do so. It will lead to loss of customers for the firm, which
intended to raise the price. So, firms prefer non- price competition
instead of price competition.
Example:
ADVANTAGES OF AN OLIGOPOLY:
Low level of competition:
The primary idea behind an oligopoly market is that a few companies
rule over many in a particular market or industry, offering similar
goods and services. Because of a limited number of players in an
oligopoly market, competition is limited, allowing every firm to
operate successfully.
EX: hero, Honda …

High profits:
since there is such little competition, the companies that are involved
in the market have the potential to bring a large amount of profits. The
services and goods that are controlled through oligopolies are
generally highly needed or wanted by the large majority of the
population. It’s simple if competition is low so firms add more margin
that’s the reason profit is high.
Simple choices:
Having only a few companies that offer the goods or service that you
are looking for makes it easy to compare between them and choose
the best option for you. In other markets it can be difficult to
thoroughly look at all of the competitors to compare pricing and
services offered.
Ex (Apple, mi, vivo)

Price stability within the market:

A society can experience significant price stability benefits because of
the actions of each organization. This advantage allows consumers to
start planning ahead for needed expenses so that there is less debt for
them to manage. It allows work to stabilize their expenditure habits.
In oligopoly market a substitute product has similar price stability.
Ex: coca cola, Pepsi …
A great Demand for product and services:
A great demand for product and services because it’s not substitutes
product or service and necessary in lifestyle uses. we take an example
of electricity, we also know electricity is the most important in our
daily life uses. We can't imagine our life without electricity, so that's
the reason A great demand for product and service.
Ex: (Electricity, PGVCL, Torrent)

DISADVANTAGES OF AN OLIGOPOLY:
High barriers to entry:
It is impossible for the small companies to enter this market because
the huge firms completely control the whole market.
Ex. In car Maruti Suzuki, Hyundai 70% in India, Mahindra, kia,
Renault, Nissan

Limited customer choice:

There is really a limited choice for the consumer to choose between
the firms that are involves in this market. Because high price of
products, consumer don’t want to pay high rate of products. If
consumer want high security in phone but they are not able to pay
high rate of products so that’s limited choice.
Customers must put up with poor service:
When there is an oligopoly present, then the companies know that
customers have no choice but to work with them to have their needs
met. There is no desire to provide excellent customer service or a
quality product because no competitors exist to challenge them. That
leaves a customer in a position where they must accept to get the bare
minimum of what they require or to go without.

Companies are not interested in innovations:

Since there is no competition in this market, the firms lose the feeling
of the need of creative or innovate ideas.
Ex: Apple
Companies can add fees and charges:
A company is started and then they are realised there is not any
competitor so sometime after they are adding a charge of fees.
Ex: Hotstar, amazon prime, Netflix.

GAME THEORY AND ECONOMICS OF COOPERATION:

INTRODUCING GAME THEORY
● Game theory is the study of how people behave in strategic
situations.
● Game theory is applied during situations in which decision
makers must take into account the reasoning of other decision
makers.
 ● In economics and business, game theory seeks to logically
determine the strategies that individuals and firms should take to
secure the best outcomes for themselves in wide array of
competitive circumstances.
● Game theory is quite useful for understanding the behavior of
oligopolies.
● A particularly important “game” is called the prisoners’
dilemma. This game provides insight into the difficulty of
maintaining cooperation. Many times, in life, people fail to
cooperate with one another even when cooperation would make
them all better off.
● An oligopoly is just one example. The story of the prisoners’
dilemma contains a general lesson that applies to any group
trying to maintain cooperation among its members.

Let's start by defining a few terms commonly used in the study of

game theory:
Game: Any set of circumstances that has a result dependent on the
actions of two or more decision-makers (players)
Players: A strategic decision-maker within the context of the game
Strategy: A complete plan of action a player will take given the set of
circumstances that might arise within the game
Payoff: The pay-out a player receives from arriving at a particular
outcome
Equilibrium: The point in a game where both players have made
their decisions and an outcome is reached

According to game theory, the actions and choices of all the

participants affect the outcome of each. And it's assumed players
within the game are rational and will strive to maximize their payoffs
in the game.

How Game Theory Works

● The key pioneers of game theory were mathematician John von
Neumann and economist Oskar Morgenstern in the 1940s.
● Mathematician John Nash is regarded by many as providing the
first significant extension of the von Neumann and Morgenstern
work.
● The focus of game theory is the game, which serves as a model
of an interactive situation among rational players. The key to
game theory is that one player's payoff is contingent on the
strategy implemented by the other player.
● The game identifies the players' identities, preferences, and
available strategies and how these strategies affect the outcome.
Depending on the model, various other requirements or
assumptions may be necessary.

PRISIONER’S DILEMMA
● Prisoners’ dilemma a particular “game” between two captured
prisoners that illustrates why cooperation is difficult to maintain
even when it is mutually beneficial.
● A prisoner's dilemma describes a situation where, according to
game theory, two players acting selfishly will ultimately result
in a suboptimal choice for both.
● In business, understanding the structure of certain decisions as
prisoner's dilemmas can result in more favorable outcomes.
● This setup allows one to balance both competition and
cooperation for mutual benefit.
● Consider the example of two criminals arrested for a crime.
Prosecutors have no hard evidence to convict them.
 ● However, to gain a confession, officials remove the prisoners
from their solitary cells and question each one in separate
chambers. Neither prisoner has the means to communicate with
each other. 
● Following are the options given by the Prosecutors:
1) If both confess, they will each receive a two years prison
sentence.
2) If Prisoner 1 confesses, but Prisoner 2 does not, Prisoner 1
will get zero years and Prisoner 2 will get three years.
3) If Prisoner 2 confesses, but Prisoner 1 does not, Prisoner 1
will get three years, and Prisoner 2 will get zero years.
4) If neither confesses, each will serve one year in prison.

SIDE NOTE: PAYOFF MATRIX

● A payoff matrix is a way to express the result of players' choices
in a game.
● A payoff matrix does not express the structure of a game, such
as if players take turns taking actions or a player has to make a
choice without knowing what choice the other will make.

WHY PEOPLE SOMETIMES COOPERATE

● As it is shown in prisoner’s dilemma, it can be difficult to
cooperate between individuals as both rational individuals often
look for personal benefits/payoffs.
 ● But sometimes, it can be beneficial for individuals to cooperate
which creates synergy.
● To understand anything about when real people might cooperate,
we must think about how they decide when to cooperate – and
which strategy to choose – and how these changes over time.
● In an evolving game, we think about players who interact with
each other many times – which makes it resemble life a lot more
and opens up far greater practical usefulness to its study. Players
change their strategies and over time they try out many different
types, and also copy those of other players who are more
successful.

PUBLIC POLICY TOWARDS OLIGOPOLY

● Governments can sometimes improve market outcomes. The
application of this principle to oligopolistic markets is, as a
general matter, straightforward.
● As we have seen, cooperation among oligopolists is
undesirable from the standpoint of society as a whole,
because it leads to production that is too low and prices that
are too high.
● To move the allocation of resources closer to the social
optimum, policymakers should try to induce firms in an
oligopoly to compete rather than cooperate.
● Governments sometimes respond to oligopolies with laws
against price-fixing and collusion. Yet, a cartel can price fix if
they operate beyond the reach or with the blessing of
governments.
● Alternatively, in mixed economies, oligopolies often seek out
and lobby for favorable government policy to operate under
the regulation or even direct supervision of government
agencies.
⇒ Let’s consider how policymakers do this and then examine the
controversies that arise in this area of public policy.
RESTRAINT OF TRADE AND THE ANTITRUST LAWS
● One way that policy discourages cooperation is through the
common law. Normally, freedom of contract is an essential part
of a market economy. Businesses and households use contracts
to arrange mutually advantageous trades.
● Policymakers use the antitrust laws to prevent oligopolies from
engaging in behavior that reduces competition. The application
of these laws can be controversial, because some behavior that
may seem to reduce competition may in fact have legitimate
business purposes.
● Over time, much controversy has centred on the question of
what kinds of behavior the antitrust laws should prohibit. Most
commentators agree that price fixing agreements among
competing firms should be illegal. Yet the antitrust laws have
been used to condemn some business practices whose effects are
not obvious.

To summarize,
● Oligopolies would like to act like monopolies, but self-interest
drives them closer to competition. Thus, oligopolies can end up
looking either more like monopolies or more like competitive
markets, depending on the number of firms in the oligopoly and
how cooperative the firms are. The story of the prisoners’
dilemma shows why oligopolies can fail to maintain
cooperation, even when cooperation is in their best interest.
● The prisoners’ dilemma shows that self-interest can prevent
people from maintaining cooperation, even when cooperation is
in their mutual interest. The logic of the prisoners’ dilemma
applies in many situations, including arms races, advertising,
common-resource problems, and oligopolies. By using
agent-based models, we can investigate embodied agents and
discover that in many cases, stable game-theoretic solutions
depend on embodiment and context.