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3.4.4 Oligopoly - Game Theory (Edexcel A-Level Economics Teaching PowerPoint)

Level:
A-Level
Board:
Edexcel

Last updated 23 Sept 2023

This PowerPoint covers game theory applied to oligopolistic markets

Game theory applied to an oligopoly is a mathematical and strategic analysis that models how firms in an oligopolistic market interact and make decisions. It helps to predict and understand the behavior of firms in such markets. Key aspects of game theory in an oligopoly include:

  1. Players: Firms in the oligopoly are viewed as players in the game, each making decisions based on their strategies.
  2. Strategies: Firms choose strategies (such as pricing, production levels, advertising, and entry or exit decisions) to maximize their profits, taking into account the potential responses of their competitors.
  3. Payoffs: Firms anticipate the outcomes or payoffs of their chosen strategies, considering the actions of their rivals.
  4. Nash Equilibrium: Game theory often identifies Nash equilibrium, where no firm can improve its payoff by unilaterally changing its strategy, assuming that all other firms' strategies remain constant.

Game theory helps analyze how firms in an oligopoly might cooperate, compete, or engage in strategic behaviors like price wars, collusion, or product differentiation. It provides insights into the dynamics of market competition and can inform policymakers and businesses about possible outcomes and strategies in such markets.

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