Multiple Choice
Based on the payoff matrix shown, which outcome represents a Nash equilibrium in a duopoly where both firms can choose either 'High Price' or 'Low Price' strategies?
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14. Oligopoly
Game Theory and Oligopoly Profit
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Which of the following best describes how game theory is used in economics to analyze oligopoly profit strategies?
A
It focuses only on government intervention in monopolistic markets.
B
It determines the exact market price for goods in perfectly competitive markets.
C
It models the strategic interactions between firms, allowing prediction of outcomes like collusion or competition.
D
It is used exclusively to analyze consumer preferences and utility maximization.
Verified step by step guidance1
Understand that game theory in economics is a tool used to analyze strategic interactions where the outcome for each participant depends on the actions of others.
Recognize that in an oligopoly, a few firms dominate the market, and each firm's profit depends not only on its own decisions but also on the decisions of rival firms.
Identify that game theory models these interactions by considering firms as players in a game, each choosing strategies to maximize their own payoffs (profits).
Use game theory to predict possible outcomes such as collusion (where firms cooperate to increase profits) or competition (where firms act independently, possibly leading to price wars).
Note that game theory is not about government intervention, exact pricing in perfect competition, or consumer utility maximization exclusively, but about strategic decision-making among interdependent firms.
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