Module 9: Oligopoly and Game Theory

Why this module matters

It helps learners connect Module 9: Oligopoly and Game Theory to the broader course path in Principles of Microeconomics — Part 6: Oligopoly & Game Theory. Learners build working familiarity with Oligopoly, Game theory, and Payoff matrix. The lessons stay grounded in concrete examples and explanations tied to this module's core topics. Learners can check understanding through 21 quiz questions tied to this module.

What this module covers

• Oligopoly
• Game theory
• Payoff matrix
• To understand oligopoly behavior, we are going to look at a certain type of game: the two-player simultaneous game with two possible actions.
• It's called game theory because most games are just such interactive situations.
• Write a two person game in table form and be able to read a two person game presented in table form.

Topical takeaways

• To understand oligopoly behavior, we are going to look at a certain type of game: the two-player simultaneous game with two possible actions.
• It's called game theory because most games are just such interactive situations.
• (There is not a firm threshold at which the market is more like competition than like oligopoly.) With so few firms, the firms are interdependent.
• And that's going to be my friend Alison in this example game that we are going to go through.
• So when we have a two player, simultaneous game, two actions, we can write it in a two-by-two table like this.
• And then the other player is the column player, and they're going to choose the left or the right column.

Lesson arc

1. Module 9 Overview: Oligopoly and Game Theory (10 min)

   To understand oligopoly behavior, we are going to look at a certain type of game: the two-player simultaneous game with two possible actions.

   • To understand oligopoly behavior, we are going to look at a certain type of game: the two-player simultaneous game with two possible actions.
   • It's called game theory because most games are just such interactive situations.
   • (There is not a firm threshold at which the market is more like competition than like oligopoly.) With so few firms, the firms are interdependent.
2. Video 1: we're going to draw a really basic game to see how they work (4 min)

   And that's going to be my friend Alison in this example game that we are going to go through.

   • And that's going to be my friend Alison in this example game that we are going to go through.
   • So when we have a two player, simultaneous game, two actions, we can write it in a two-by-two table like this.
   • And then the other player is the column player, and they're going to choose the left or the right column.
3. Video 2: now we wanna analyze the game (8 min)

   So this is a coordination game and in coordination games, communication really solves the game since nobody's, there's no sort of conflict between the players.

   • So this is a coordination game and in coordination games, communication really solves the game since nobody's, there's no sort of conflict between the players.
   • So that's another important point which is when we write down an equilibrium, it's not three and three.
   • Minor stylistic cleanup (narrator tags, cue numbers) applied by Qualora; the underlying text is verbatim from Professor Solnick's lecture.
4. Video 3: - Now we're going to change things a little bit so we can talk about (5 min)

   Now we're going to change things a little bit so we can talk about This lesson is a transcript of Professor Sara Solnick's , Video 3 lecture.

   • Now we're going to change things a little bit so we can talk about This lesson is a transcript of Professor Sara Solnick's , Video 3 lecture.
   • In the bottom row she can get three by not going and four by going so going is better for her in this bottom row too.
   • You can see that we now have only one Nash Equilibrium and that is going for both players.
5. Video 4: Now we're ready to talk about the most famous game in game theory (7 min)

   Now if one of them is silent and the other confesses, well then, the person who confesses is like the state's witness.

   • Now if one of them is silent and the other confesses, well then, the person who confesses is like the state's witness.
   • So that is the classic tale of the prisoner's dilemma, and what happens in this game.
   • Well, anytime we are seeing this simultaneous game, we wanna use best response analysis, we wanna see if we can find Nash equilibrium.
6. Video 5: This worksheet does a couple things (7 min)

   It is a chance to practice with finding the best response, finding nash equilibrium, finding dominant strategies and identifying them.

   • It is a chance to practice with finding the best response, finding nash equilibrium, finding dominant strategies and identifying them.
   • If player two chooses right, then player two chooses up, because ten is bigger than five.
   • Actually, the payoffs here, when they both play their dominant strategies, are the highest on the board.
7. Video 6: that was fun (8 min)

   So the issues with an oligopoly or, let's say, a duopoly with two firms, is that they can behave as a cartel.

   • So the issues with an oligopoly or, let's say, a duopoly with two firms, is that they can behave as a cartel.
   • And now I want to get back to talking about oligopoly because that is why we wanted to use game theory is to analyze oligopic behavior because of the interactions that go on.
   • Now the thing is, when they enter a cartel, it does create a kind of a prisoner's dilemma.
8. Video 7: there are actually a lot of situations which have the prisoner's (9 min)

   When everybody does it, there are still people better looking than others and it costs a lot of money and it is dangerous.

   • When everybody does it, there are still people better looking than others and it costs a lot of money and it is dangerous.
   • So, there are a lot of different ways to define this cooperation and defection.
   • So that's another way in which, firms and oligopoly market are kind of locked into a prisoner's dilemma when it comes to advertising.
9. Video 8: we can go over the worksheet, and the first question, we're using (4 min)

   Lecture Transcript Okay, we can go over the worksheet, and the first question, we're using game theory because of interdependency.

   • Lecture Transcript Okay, we can go over the worksheet, and the first question, we're using game theory because of interdependency.
   • Video 8: we can go over the worksheet, and the first question, we're using.
   • A dominant strategy is when one player has a strategy that you have the highest pay off, independent of what the other player is doing.

Key concepts

• Oligopoly
• Game theory
• Payoff matrix
• Nash equilibrium
• Dominant strategy
• Prisoner's dilemma
• Collusion

Practice and assessment

Learners reinforce this module through 21 quiz questions and a supporting glossary covering 7 key terms, with practice centered on To understand oligopoly behavior, we are going to look at a certain type of game: the two-player simultaneous game with two poss….

Concept glossary

Oligopoly

A market dominated by a small number of large firms whose strategic choices affect each other.

Game theory

The mathematical study of strategic decision-making among rational agents.

Payoff matrix

A table showing the outcomes of a game for each combination of players' strategies.

Nash equilibrium

A strategy profile where no player can benefit by changing strategy unilaterally.

Dominant strategy

A strategy that yields the highest payoff regardless of opponents' choices.

Prisoner's dilemma

A game where rational, self-interested choices lead to a worse outcome for all players than mutual cooperation would.

Collusion

An agreement among firms to restrict output or raise price; illegal in most jurisdictions under antitrust law.

Continue to the full course

Principles of Microeconomics — Part 6: Oligopoly & Game Theory is the parent course for this module. Use the full course page for pricing, certificate details, and the full curriculum.