Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Oligopoly Game Theory Oligopoly Game Theory is a concept in economics that studies the behavior of firms in an oligopoly market using game theory. This game theory is used to analyze the interactions between oligopoly firms in determining their business strategies and decisions. In an oligopoly market, firms have the power to influence the price and quantity of goods sold because they have a significant market share. Therefore, the strategy taken by each company will influence the decisions taken by other companies. In oligopoly game theory, each firm considers the decisions made by its competitors in determining their strategy. Companies will predict how competitors will react to the strategies they adopt, and they will choose the strategy that will provide the most profit for their own company. In oligopoly game theory, there are several types of strategies, such as cooperative strategies and non-cooperative strategies. The cooperative strategy involves cooperation between companies to optimize mutual benefits, while the non-cooperative strategy involves competition between companies to obtain greater profits compared to their competitors. In an oligopoly market, it often happens that companies imitate each other's strategies taken by competitors. This is called the bandwagon effect, in which companies follow decisions made by competitors for fear of being left behind in the competition. The bandwagon effect often occurs in oligopoly markets because each firm must consider how the decisions they make will affect those of their competitors. Oligopoly Game Theory is the study of the interactions between several firms in an oligopoly market by utilizing mathematical and logical models. Game theory is used to predict the actions that will be taken by firms in oligopoly situations and predict the outcomes of those actions. In game theory, each company is assumed to be a player in the game and must choose certain strategies to maximize their profits. However, the strategy chosen by one company will be influenced by the strategy chosen by other companies. In an oligopoly situation, the decisions taken by one company can affect the profits of other companies, so the strategy chosen must be considered carefully. Oligopoly game theory is very important in economics because it provides a better understanding of how firms interact with each other and how their decisions affect the market as a whole. Game theory can help identify optimal strategies for firms in oligopoly situations and help evaluate the economic implications of those decisions. Following are some of the characteristics of game theory in oligopoly: 1. There are strategic interactions between firms: In an oligopoly, each firm considers the strategic decisions taken by competing firms. Every company considers the actions taken by its competitors before making a decision. 2. The actions of a company depend on the actions of competitors: The actions taken by one company can affect the actions of other competitors, and each company must consider the impact of competitors' decisions on its profits and market share. 3. There are advantages to coordination between firms: Despite competition between firms, coordinating between firms can provide benefits to each firm. Coordination can result in stable price levels and optimal production levels. 4. There is a conflict between short-term and long-term interests: Companies tend to maximize their short-term profits, but these decisions may be unprofitable in the long term. Therefore, companies must consider the long-term effects of their decisions. 5. There are various strategies that can be taken: There are various strategies that can be taken by companies in an oligopoly, such as high price strategy, low price strategy, product differentiation strategy, and product innovation strategy. 6. There is a risk of market failure: While oligopoly can be profitable for firms, there is also a risk of market failure. If there is a market failure, then all companies in the industry can suffer significant losses. Features of oligopoly game theory include: 1. There is strategic interaction between the oligopoly market participants. These participants mutually influence each other, so that the benefits obtained by one participant depend on the actions taken by other participants. 2. The decisions taken by each participant are highly dependent on the decisions of other participants. This is related to the nature of strategic interactions described above. 3. There is limited information about the market and market participants. Participants only have limited information about the actions of other participants, so they must predict the likely decisions that will be made by other participants. 4. Participants in an oligopoly market tend to take actions that influence one another, making it difficult for one participant to make decisions independently without taking into account the actions of other participants. 5. In an oligopoly market, decisions made by one participant can affect the decisions of other participants, and so on. In this case, there is dependence between participants. 6. The participants tend to try to get the maximum profit, but they also have to take into account the reactions of other participants. Therefore, the decisions taken by the participants may vary according to the market situation. 7. Stable market conditions can allow for collusion, namely an agreement between market participants to divide the market or determine the same price. However, unstable market conditions can trigger stiffer competition among participants.