Game Theory and Oligopoly: Crash Course Economics #26

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Would you like to play a game, Dr. Falken? Actually, this episode isn’t really about games, or Matthew Broderick, or Thermonuclear War. But enough with the long references to 1983’s best movie, War Games. Today Jacob and Adriene are going to teach you about Oligopolies, which are kind of like the monopolies that we talked about last week, except with more companies involved. Then we’ll get to the games, or rather, the game theory. Which is all about how companies try to compete with each other in the real world.

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48 COMMENTS

  1. Main Notes:
    1- 4 types of markets
    A- Perfect competition

    Low barriers, identical products, no control over price (eg strawberries)
    B- Monopoly

    There is one large company that produces a product with few substitutes. And because high barriers prevent competition, a monopoly has a lot of control over price.

    C- Monopolistic competition

    a market with many producers and relatively low barriers; their products are very similar but not identical. (eg furniture stores or fast food)
    D- Oligopolies

    markets that have high barriers to entry and are controlled by a few large companies. Similar to monopolistic competition, their products are similar but not identical. That gives them some control over their prices. How?

    2- Non-price competition:
    Companies focus on things like style, quality, location, or service. The goal is to distinguish their product from their competitors.
    The most recognizable form of non-price competition is advertising.

    3- Game theory: the study of strategic decision making.

    4- Collusion: If businesses don’t compete at all and they agree to charge the same high price, conspiring to form what economists call a cartel. They split the customers 50/50, but now they make even more profit — benefiting at the expense of consumers. It’s illegal in the US.

    5- Price leadership is when one company changes its prices, and its competitors have to decide if they’re going to follow suit.

    6- Pay off matrix: In game theory, a payoff matrix is a table in which strategies of one player are listed in rows and those of the other player in columns and the cells show payoffs to each player such that the payoff of the row player is listed first.

  2. The way Apple convinced so many people its basically equivalent phones (actually less capable, and which admittedly expire forcing you to spend more) are better than Android has always amazed me. That's a good example of differentiating to keep your cost high even though you at many points in time had an inferior product. In this case though I think it has more to do with the competition not being streamlined. One year I'd need the top of the line LG to have something better, the next year I'd need the best Samsung. It was hard to anticipate which would come out on top in the next iteration if you were happy to stick to that OS.

  3. The video was great until that lame ending. I hope neutral Crash Course will give us "Co-ops and The Economics of Cooperation" someday.

  4. Prisoner's Dilemma explains a lot of things, like why the power blackout last so long, why workers sometimes don't go on strike and other stuff.

    Great video, thanx!

  5. "Do you remember the ad that ran before this video?"
    Kek, I had ad block on. There was no ad that played before this video. xD

    Though I understand the concept.

  6. That last pitch for free markets was weak. You explained 100% why the free market cannot exist…because rivals are meant to cooperate & regardless of government oversight find ways to charge consumers more.

  7. 3:12 Lady: "can you remember the Ad that ran before this video?"
    Me who uses ad blocker: "My goals are beyond your understanding…"

  8. Lowering the price until the competitor will be exhausted is the main route to success. The first will always finished last, and the last will always finished first. The game of business is infinite and will always destroy those who are thinking that business is a finite game. inifinite thinkers: Lose a little and win big later; finite thinkers: we must win no matter what, and disregard what happens after this. You can’t win on finite games in business. Be the offense not the defense.

  9. Well the one farmer wishing to control the price in the local area could just offer to buy every other local farmer's strawberries at a slightly higher price than market price and once he has his monopoly he could then set his own prices.

  10. 0:14 In this kind of game, if you lose, you're bankrupt.
    Capitalism is Monopoly with billions of players. Life has gotten so much fun.

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