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Strategic Behaviour of Oligopoly in Theory and in Practice

On June 14th, 2012, Posted by Author No Comments

What is Strategic Behaviour of Oligopoly?

Strategic Behaviour is the conduct that ensues when what is best for one entity is determined by upon what another does, and what is best for second is subject to what the first entity does. So a firm’s decisions can in turn can influence other firms and cause them to respond in a certain manner and the firm would have to take these into consideration before making its decisions.

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Oligopoly is the market structure where there are only a few sellers catering more or less to the same markets with similar products. The behaviour of oligopoly is not confined to any particular model. It can span two extremes: the behaviour of oligopoly could comprise of cold-blooded competition as well as cooperation.

Types of Strategic Behaviour

For instance, the Cartel model of strategic behaviour: this is when an amalgamation of firms performs as a single entity with a monopoly price fixed for their product. Again, there is the Contestable Market model of strategic behaviour of oligopolies in which barriers to entry and exit regulate price and output decisions and not the structure of the market. In this case a competitive price is fixed. There are also other strategic behaviour models of oligopolies that place their price grades between these two extremes. Collusion is the strategic behaviour of oligopoly when two or more firms conspire about the output or the prices. This is considered illegal and punishable if it can be proved. There is also the Nash Equilibrium of strategic behaviour when the participants choose their best possible strategy taking into consideration the expected strategies of all the other participants.

Analysis of Strategic Behaviour of Oligopoly using Game Theory

Strategic behaviour of oligopoly can be analysed using the mathematical techniques of Game Theory. Game Theory is the study of the behaviour of people in strategic situations. Game Theory offers an illustration of the strategic behaviour of oligopoly as a sequence of moves and countermoves. It helps us to understand the behaviour of oligopoly and other conditions in which the ‘players’ interrelate and exhibit strategic behaviour. The ‘players’ here can represent people, firms, and even countries. The game is the condition under which the players interrelate and the strategy is the plan or decision made by the players that takes into consideration the likely behaviours of the other players in the ‘game’.

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