Is Collusion Possible Essays - Game Theory, Oligopoly, Collusion

Is Collusion Possible? Essay in Microeconomics. Topic: Is Collusion Possible? 18.12.2000 Contents: 1. Introduction. 2. Two types of behaviour (Collusive and non-collusive). 3. Game theory. a.) Concept. b.) The problem of collusion. c.) Predatory pricing. 4. Repeated games approach. a.) Concept. b.) Finite game case. c.) Infinite game case. i.) Trigger strategy ii.) Tit-for-Tat. d.) Finite game case, Kreps approach. 5. The motives for retaliation. 6. Conclusion. 7. Bibliography. 1. Introduction. In this essay I would discuss the price and output determination under the one essential type of imperfect competition markets- oligopoly. Inter-firm interactions in imperfect markets take many forms. Oligopoly theory, those name refers to competition among the few, lack unambiguous results of these interactions unlike monopoly and perfect competition. There is a variety of results derived from many different behavioural assumptions, with each specific model potentially relevant to certain real-world situations, but not to others. Here we are interested in the strategic nature of competition between firms. Strategic means the dependence of each person's proper choice of action on what he expects the other to do. A strategic move of a person influences the other person's choice, the other person's expectation of how would this particular person behave, in order to produce the favourable outcome for him. 2. Two types of behaviour (Collusive and non-collusive). Models of enterprise decision making in oligopoly derive their special features from the fact that firms in an oligopolistic industry are interdependent and this is realised by these firms. When there are only a few producers, the reaction of rivals should be taken into account. There are two broad approaches to this problem. First, oligopolists may be thought of as agreeing to co-operate in setting price and quantity. This would be the Collusive model. According to this model, firms agree to act together in their price and quantity decisions and this would to exactly the same outcome as would have been under monopoly. Thus the explicit or co-operative collusion or Cartel would take place. Second approach of the oligopoly analysis is based on the assumption that firms do not co-operate, but make their decisions on the basis of guesses, expectations, about the variables to which their competitors are reaching and about the form and the nature of the reactions in question. The Non-collusive behaviour deals with this model. Here, though in equilibrium the expectations of each firm about the reactions of rivals are realised, the parties never actually communicate directly with each other about their likely reactions. The extreme case of this can even imply competitive behaviour. Such a situation is much less profitable for firms than the one in which they share the monopolistic profit. The purpose of this paper is to analyse the case of the possibility of collusion between firms in order to reach the monopolistic profits for the industry, assuming that they do not co-operate with each other. This would be the most interesting and ambiguous case to look at. 3. Game theory. a.) Concept. The notion of game theory would a good starting point in the study of strategic competition and would be very helpful in realising the model and the problems facing oligopolistic firms associated with it. Game theory provides a framework for analysing situations on which there is interdependence between agents in the sense that the decisions of one agent affect the other agents. This theory was developed by von Neumann and Morgenstern and describes the situation, which is rather like that found in the children's game Scissors&Stones. Each firm is trying to second-guess the others, i.e. the behaviour of one firm depends on what it expects the others to do, and the in turn are making their decisions based upon their expectations of what the rivals (including the first firm) will do. In our case, the players of the game are the firms in the industry and each of them wants to maximise its pay-off. The pay-off that a player receives measures how well he achieves his objective. Let's assume in our model the pay-off to be a profit. Their profits depend upon the decisions they make (the strategies chosen by the various players including themselves). A strategy in this model is a plan of actio n, or a complete contingency plan, which specifies what the player will do in any of the circumstances in which he might find himself. The game