Question

Understand how to apply game theory to evaluate the pricing strategies of oligopolistic firms

Short answer

• Despite the fact that they both collaborated, they would both be sentenced to years in jail.
• If one confessed, the confessor would be freed, while the other would be sentenced to 10 years in jail.
• They would both be sentenced to two years in jail if neither confessed.

Step-by-step solution

Step 1:Introdution to oligopolistic 

• An oligopoly is a market structure in which a few businesses may prevent others from exerting significant influence.
• The concentration ratio is used to assess the largest firms' market share.

Game theory to evaluate the pricing strategies of oligopolistic firms 

• The prisoner's dilemma is a common scenario in which behavioral economics is used to help people make decisions.
• Bank robbery has been charged against Bennie and Stella.
• Each person was interrogated in their own room, with the interrogators offering them with the following options:
• They would both be condemned to five years in prison if they confessed.
• The confessor would be let free, while the other would be condemned to ten years in prison if they both confessed.
• If none of them confessed, they would both be condemned to two years in prison.

Step 3:Oligopolistic firms 

• Because quantity and pricing are inversely connected, oligopolistic organizations should consider what other firms would do when deciding on quantity and marketing.
• Because every company produces too much, the cost may fall below their average overall expenses, resulting in a loss.
• They can maximize their earnings by reducing the amount to the point when the marginal product for the whole oligopoly becomes cost-neutral.