Game theory in setting quantity oligopoly
Game theory in setting quantity oligopoly
Game theory is a formal study of conflict and cooperation in economics. In fact, it is usually concerned with predicting the real outcome of the games of strategy where the potential individuals have incomplete awareness about the others’ plans. The game theoretic concepts usually apply whenever the actions of several agents are interdependent. Probably, these agents are either, groups, individuals or firms. The concepts of game theory give a language to prepare a structure, analyze, and comprehend deliberate scenarios.
Game theory has straight relevance to the study conduct of the venture as well as the performance of the firms in oligopolistic markets. A good approach is the decisions that companies takeover pricing and levels of production. Also, how much money needs to be invested in research and development expenditure (Binmore, 1993).
Oligopoly is a type of imperfectly competitive markets. It has only a few sellers, provide a related or identical product to the buyers in the market. Collusion in economics is simply an agreement of two or more firms with an aim to exclude a couple of competing companies in the market so that may obtain high profits. It is clearly that competition in the oligopolistic markets reduces accelerating the performance of that collusion. For that reason many firms quit the marketing operations enhancing profitability to the relating competitors hence deteriorating their economic decisions. This results to complete dissolution of the firms. The output of the collusion increases since most of the firms have quit the market; others loosen their momentum to adhere to the upcoming changes launched in by the oligopolistic markets (Mertens, 1994). As a matter of fact, this becomes advantageous to the remaining firms in the market (Thomas, 2003).
It is noted that collusion is a characteristic trait of oligopolistic firms. Stiff competition and interdependent decision-making encourage oligopolistic firms to cooperate. In fact, one way to lessen the oligopolistic rival is joined together and meets targeted forces forming collusion. There are two main types of collisions in an oligopolistic market. Exclusively, include explicit collusion and implicit collusion. Explicit collusion is a type of collusion which has more two than firms in the same industry. It is formally agreed to control the market force on their own way whereas implicit collusion also more than two firms in the same business but informally they have the similar outlook in the market, habitually with nothing more than interdependent (Binmore, 1993).The price collusion is a form of criminal offense since several firms work as a team so as to keep the price of commodity high with an aim to receive huge income. The relating firms involved necessarily try to chase out their competitor.
History and impact of game theory
In 19th century, game theory was first discovered by one of the early inventors. Consequently, in 1838, the first publication was done by Antoine Cornet. In broad spectrum, he came up with well-formulated researchers on the Mathematical Principles of this kind of theory basing on wealth. He went further to illustrate more on the principles of the publication relating to the game theory. Notably, he tried to explain the underlying rules constituting the actual behavior of the duopoly in the discipline. Even though this publication was associated with the theory of Games and Economics character in 1944, it had the latest principles of game theory that were formulated in it. The game theory has been greatly applied to the behavior of producers with few or one competitor. This perspective of the game theory was conceived by Von Neumann in 19th century.
In macroeconomics, oligopolistic markets are characterized by a few, large firms and its differences from the other market structures as stated above. It is noted that more competitive markets in the firms are of smaller size and its firm’s behavior have slight or no effect on its close competitors. Besides this oligopoly markets changes its output, enlarge into a new market, provides modern services and even advertize. This will have a consequential impact on the market competitors, therefore, increasing the profitability. This enhances more power in the market operation hence deviating losses had to be encountered. For this reason, the firms in oligopolistic markets are always considering the act of their competitors when implementing their economic decisions. The oligopolistic owners strictly tackle any leakages in their market so that they may attain their set goals and formulated objectives.
Information exchange in collusion
In broad spectrum, information is an essential tool in planning to come up with mature and complete mechanization of the involving firms. Basing this argument on the game theory, it is realized that in decision making, information is significantly employed. For that reason, a successful collusion in the oligopoly market has sophisticated means on how to underlie its perspectives in a manner that no rival firm come to know. Therefore, crude ideas empower any collusion with a vision to reduce their competitors in the market. Advances in economic theory have enabled the economists to set competitive distinctions between different types of information exchanged between the firms. The required beneficial effect on the consumers and potential side-effects for competition depend on the nature and characteristic of the information that exchanged and also the type of competition in the market. Therefore, it should be known that firm owns the secret in the industry such as firm’s prices, sales, cost demand and other parameters.According to game theory, the competitors are not supposed to get any of this secretive information. Competition authorities are strictly suspicious when information is conveyed especially about prices and quantities because this information is normally significant for monitoring deviations from collusive arrangements and hence empowering collusion. Mostly exchange of information on the cost and demand is seen in another dimension and more favorably. However, information about the prices and quantities is used to convey information about the cost or demand in collusion. For instance, when the firms share information on the past or current prices and quantities inform other players about the demand in the market. This enables their rivals to obtain inferences on how to predict the future period which is against the game theory. Notably, this will weaken their collusion that later on begins to deteriorate in their existence in the market. As a matter of fact, demand and cost information is useful since is the central element for predicting future demand.
Effective collusion needs good coordination that is well supported by the exchange of information about their plans. This monitors the performance of the collusion in some days to come. In so doing, their rivals will be unable to out-compete them. They become prominent in the market achieving their set goals and objectives. The aggregated information determines whether the collusion will succeed or not. This depends on how the decision making is done. The aggregated information means anonymous or individualized information. Probably, such information may be valuable to the firms. Therefore, it is necessary to know who or where a certain estimate has been made or whether it is enough to comprehend the private signals in the entire industry. In addition, information can be either private or public. The effects of information exchange extremely differ depending on whether the information is made public or kept private, especially in the industry that exchange information. The game theory does not support exposure of the firm’s intentions. Definitely, they try it, their rival players will come up with the newest perspectives to out-compete them. Therefore, this should be done privately for future success (Thomas, 2003).
It realized that if the information does not give rise to competition distress it will be definitely positive to welfare. Indeed, the usefulness from information exchange is large compared to its demerits. There are quite number of the ways in which information exchange is useful in the welfare. Information exchange is a great part of the discovery mechanism in the industry economy. This implies that through exchange of information in between the formed collusion encourages expansion of the market economy. It also improves investment decision and organization learning. It is only through information where collusion members come up with complete ideas to uplift their set goals. Information exchange also results to output adjustments and lowering search costs in the firm. In the world, information is really required about the demands and rival activities. Notably, the firms would have to become accustomed to the changing circumstances by a trial and error process. Information exchange is a great tool in playing the role of uplifting market economy in collusion hence output in the firms.
Impact of rational behavior in collusion
Rationality is one way of decision-making practice wherein a firm exercises prudent choice making that gives it a maximum amount of benefit. Rational behavior usually facilitates decision making that is not productive in collusion. But it only strives to achieve benefits that are mostly achievable in nature. This usefulness can be either monetary or non-monetary. The word monetary stands for finance activities whereas non-monetary is associated with non-financial activities in a company. Therefore, any successful firm considers the following perspectives. This kind of decision making may not possible return materially to the firms at that moment on (Chatterjee, 2014). Therefore, rational choice theory is an economic principle. It states that firms make prudent and logical decisions so as to attain a complete satisfaction in the firm due to its abundant benefits.
The output of collusion increases over time due to changes made in by the decision makers. The identified plans that based on rational behavior usually alter operation of oligopolistic market. Operations may greatly expand performance of the company undermining its valuable transactions. When the collusion need to uplift its operation have to be economical on the way do operate their activities so that can observe a slight differences. Notably, some measures need to be employed to overcome its competition from its rivals. The firms recruit innovative and competent staffs to invest great fortune in the organization.
Competent economists formulate ideas flourishing functionality of the collusion hence uplifting profits, quantity, and its dignity. This shows how game theory is significantly applied in the oligopolistic market basing on the rational behavior. It is preferably considered as a means of competition through decision making. This scares rival players in the market such that are unable to operate their firms. Due to this condition, many firms in the markets are readily to be dissolved. The cause of this is just continuous losses experienced on every end fiscal year resulting to dissolution.
According to game theory, rational behavior is greatly a crucial tool required to make decisions that are needed to eliminate relating firms in the market. Most importantly, competing firms’ quantity reduces as well as its income accelerates due to well-played game theory in the oligopolistic market. Mainly rationality has a positive impact to the prudent collusion. Therefore, game theory is correlated to rationality behavior as far as decision making is concern in an oligopolistic market as mentioned earlier. Only that rational behavior is conditions suitable for accomplishing this specified theory (Mertens, 1994). Even though, participating firms can employ it, frequently is determined by competency of the collusion.
Impact of time horizon in the collusion
In economics, time horizon is also referred to as a planning horizon, is a fixed point of time in the future at which some activities will be evaluated. It is noted that is specified a time when all planned activities or processes are supposed to terminate. Therefore, time horizon is a vital condition to any successful stakeholders. It enhances a strict time layout on how to operate your business transactions before targeted deadline. This minimizes time wastage and considers it as a significant factor in implementing business laws. Actually, the set objectives and underlain goals, with the cooperation of competent experts in business, are easily achieved. Time horizon has optimum benefits to those who put it into consideration.
Collusions have unique pathways on how they operate their organizational activities. Additions to that have business ethics for guiding set goals to reach its financial year and attain them. For a successful collusion, time horizon is much in demand to eradicate other firms out of the market. Especially, it needs strictness so that the set firm’s goal is accomplished on reaching time horizon. It confers bright future to competing firms enhancing increased output in the collusion. Time horizon sharpens performance of the most firms with an aim to make more profits in their organizations. Similarly, time horizon is a beneficial condition on practicing game theory in an oligopolistic market. It creates immense difference in the industry. The time horizon can be a month, a week or a year depending on the decision of the firm (Mertens, 1994).Broadly, time horizon is a viable and secret “tool” that empowers collusion to diminish performance of its rivals in the industry. Eventually, it becomes determinant condition in collusion leading the business to enjoy huge profits and crude output. Collusion lowers its products’ price encouraging more sales whereas its rivals remain constant to the initial price. Cost is usually lower hence encouraging more sales due to high demand. The collusion stagnates in the same price until time horizon comes. At that planning horizon, several firms would have left the industry enabling collusion with uncompetitive environment to work on (Chatterjee, 2014).
In broad spectrum, game theory deals with decision making that reinforce competition perspectives in the market. It is kind of a game whereby participating individuals hide their intentions purposely to win over the other. In this case, information, rationality, and time horizon are determinant conditions that boost succession of collusion in an oligopolistic market. It signifies that to acquire viable benefits in the market has to employ well-formulated conditions.Therefore, cost, demand, and quantity differ from relating firms in the industry. Strictly, collusion tries to lower its prices with an aim to increase its output and eliminate the number of firms in the industry. Similarly, quantity in the industry increases with increased prices from other firms. Due to that reason number of consumers in those firms reduces joining newly formed collusion. This enforces rivals to reduce its prices of their products leading to uncountable losses hence leading to collapsing of many firms. The collusion succeeds its target of eliminating other firms from the industry henceforth starts enjoying oligopolistic benefits including profits.
Binmore, K. (1993). Frontiers of game theory. Cambridge, Mass. [u.a.: MIT Press Telser, L. G. (1971). Competition, collusion, and game theory. London: Macmillan.
Chatterjee, K., & Samuelson, W. (2014). Game theory and business applications. New York: Springer.
Mertens, J.-F., & NATO Advanced Study Institute on ‘Game-Theoretic Methods in Economic Equilibrium Analysis’. (1994). Game theoretic methods in general equilibrium analysis: [proceedings of the NATO Advanced Study Institute on Game Theoretic Methods in General Equilibrium Analysis, Long Island, NY USA, July 1 – 12, 1991]. Dordrecht [u.a.: Kluwer.
Thomas, L. C. (2003). Games, theory and applications.Voigt, S., & Schmidt, A. (2005). Making European merger policy more predictable. Dordrecht: Springer.
Subject: Business & Economy,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 7 November 2015
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