Game Theory: Pricing, Collusion & Oligopoly

Learning Goal: Apply game theory concepts, such as Nash Equilibrium and sequential moves, to analyze strategic pricing, collusion, and entry deterrence in oligopolistic markets.

  • Prerequisites: Basic microeconomics (demand and supply curves, marginal revenue, marginal cost, and perfect competition/monopoly principles).
  • Estimated Total Study Time: 10 Hours

Module 1: Introduction to Market Structures & Oligopoly

This module establishes the foundational economic landscape. You will learn what characterizes an oligopoly, how it sits dynamically between the extremes of perfect competition and monopoly, and why strategic interdependence—where one firm's decision directly affects another's payoffs—is its defining feature.

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56 Monopoly vs. Perfect Competition vs. Monopolistic Competition vs. Oligopoly
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@CourseCompanion16:5018,099
56 Monopoly vs. Perfect Competition vs. Monopolistic Competition vs. Oligopoly

This video compares four fundamental market structures in economics: perfect competition (many firms, costless entry/exit, no product differentiation, zero economic profit in long run), monopoly (single firm, no entry/exit, product differentiation, can earn positive profits), monopolistic competition (many or few firms, costless entry/exit, product differentiation, zero economic profit in long run), and oligopoly (two or more firms, no entry/exit, product differentiation, produces between perfec

@CourseCompanion · 16:50
  • Why this video: This video offers a comprehensive comparative framework of the four main market structures. It details barriers to entry, pricing power, and profit outcomes, helping you ground your understanding of where oligopolies sit relative to perfect competition and monopolies.
  • Describe the four main market structures and identify their key characteristics.
  • Explain why oligopolies face high barriers to entry and how they differ from monopolistic competition.
  • Understand the concept of mutual interdependence in oligopolistic decisions.
What are Oligopolies and Oligopolistic Markets, an Introduction
What are Oligopolies and Oligopolistic Markets, an Introduction
@FreeEconHelp03:5544,855
What are Oligopolies and Oligopolistic Markets, an Introduction

An oligopoly is a market structure defined by three essential characteristics: a small number of firms (typically 2-10), significant barriers to entry, and interdependent decision-making among firms. Unlike perfectly competitive markets where firms are price takers, oligopolistic firms must anticipate and react to competitors' actions. Barriers to entry manifest as either legal restrictions (government-imposed limits on firm numbers, such as utility monopolies) or natural conditions arising from

@FreeEconHelp · 03:55
  • Why this video: This video focuses on the fundamental traits of an oligopoly (typically 2 to 10 firms dominating a market). It is essential for understanding how the actions of a single competitor force a response from others, laying the groundwork for game theory.
  • Define what constitutes a concentrated market structure.
  • Explain why strategic planning is necessary in an oligopoly but unnecessary in perfect competition.
Episode 30: Oligopoly
Episode 30: Oligopoly
@mjmfoodie05:38432,937
Episode 30: Oligopoly

An oligopoly is a market structure characterized by a small number of sellers where each firm's actions significantly impact competitors, resulting in a kinked demand curve where price increases lead to elastic demand (rivals don't follow) while price decreases lead to inelastic demand (rivals match), allowing firms to maintain profits in the long run due to high entry barriers.

@mjmfoodie · 05:38
  • Why this video: This classic video introduces the practical pricing dynamics within an oligopoly, illustrating concepts like the kinked demand curve, price rigidity, and the basic tension between competing and colluding.
  • Explain the logic behind the kinked demand curve model.
  • Identify why prices in oligopolies tend to remain sticky or rigid even when costs fluctuate slightly.

Module 2: Foundations of Game Theory & Nash Equilibrium

Game theory provides the mathematical toolkit needed to model strategic interdependence. In this module, you will master the components of a game—players, strategies, and payoffs—and learn to find Nash Equilibria and dominant strategies in simultaneous-move games.

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@yale · 03:46
  • Why this video: A concise, high-level introduction from Yale University explaining what strategic thinking is and why game theory is vital when the outcomes of your decisions rely on the decisions of other actors.
  • Define a "strategic situation" in economic terms.
  • Differentiate between strategic decisions and non-strategic decisions (such as those made by a pure monopolist).
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This segment introduces game theory applied to oligopolistic markets using a sandwich shop example. It covers the definition of dominant strategies, how to analyze payoff matrices, and the concept of Nash equilibrium where no firm can benefit from unilaterally changing its strategy. The analysis shows how strategic interdependence affects pricing decisions in markets with few competitors.

@khanacademy · 06:11
  • Why this video: This video uses a practical pricing game between two sandwich shops to teach you how to read a 2×22 \times 2 payoff matrix, locate dominant strategies, and identify Nash Equilibria.
  • Construct and interpret a simultaneous-move payoff matrix.
  • Mathematically define a dominant strategy.
  • Find the Nash Equilibrium in a standard 2×22 \times 2 simultaneous game.
[Game Theory Introduction] | Dominant Strategy Equilibrium | Meaning of Nash Equilibrium | 19 |
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@nishantmehraecopoint04:0923,387
[Game Theory Introduction] | Dominant Strategy Equilibrium | Meaning of Nash Equilibrium | 19 |

To find Nash equilibria, use best response analysis by identifying which strategies are optimal responses to each possible opponent strategy. For each player, underline the best payoff for each of their own strategies given what you think the opponent will do. A cell in the payoff matrix represents a Nash equilibrium when both players' strategies are simultaneously optimal responses to each other. In the modified game shown, there are two Nash equilibria: (top, left) and (bottom, right), where b

@nishantmehraecopoint · 04:09
  • Why this video: This tutorial teaches you how to systematically find Nash Equilibria using the "best-response analysis" method (underlining the best payoffs). This systematic approach is essential for analyzing more complex, multi-strategy games.
  • Apply best-response analysis systematically across any payoff matrix.
  • Explain the conceptual difference between a dominant strategy equilibrium and a Nash Equilibrium.

Module 3: Strategic Pricing: Cournot vs. Bertrand Models

This module covers static pricing models in duopolies. You will compare the Cournot model, where firms compete by choosing quantities, with the Bertrand model, where firms compete on price. This section bridges the gap between conceptual game theory and rigorous microeconomic math.

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@intromediateecon11:07129,558
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In oligopoly theory, Bertrand competition involves firms competing on price, leading to aggressive undercutting that drives prices down to marginal cost and eliminates profits, while Cournot competition involves firms competing on quantity (capacity), resulting in more moderate competition where firms earn positive profits; Stackelberg competition extends Cournot by introducing a first-mover advantage where the leader can anticipate and influence the follower's response.

@intromediateecon · 11:07
  • Why this video: This video compares how choosing quantity as a strategic variable yields different market prices and profit margins than choosing price.
  • Differentiate between the core assumptions of Cournot and Bertrand competition.
  • Explain why Bertrand competition leads to more aggressive market outcomes than Cournot.
Cournot oligopoly
Cournot oligopoly
@kfhinde05:11143,304
Cournot oligopoly

This section explains how to derive the Cournot equilibrium using reaction curves. Each firm's optimal output depends on its belief about competitor output. For Firm 1, the reaction curve q1 = 9 - 0.5q2 shows that if Firm 2 produces 18 units (competitive level), Firm 1 produces nothing; if Firm 2 produces nothing, Firm 1 acts as a monopolist producing 9 units. Similarly for Firm 2. The equilibrium occurs where both reaction curves intersect at q1 = 6 and q2 = 6, demonstrating how strategic inter

@kfhinde · 05:11
  • Why this video: This video provides a step-by-step mathematical demonstration of how to construct a firm's profit function and derive its reaction curve (best-response function) in a Cournot duopoly.
  • Set up the profit maximization problem for a Cournot duopolist.
  • Mathematically derive a firm’s reaction curve (q1=f(q2)q_1 = f(q_2)) from its profit function.
  • Solve for the Cournot-Nash equilibrium quantities and prices.
Duopoly with Bertrand (price) Competition
Duopoly with Bertrand (price) Competition
@MattBirch08:4988,730
Duopoly with Bertrand (price) Competition

In Bertrand competition with two firms, if firms have identical constant marginal costs, they will undercut each other's prices until reaching marginal cost, resulting in zero economic profits; however, if one firm has lower marginal costs than the other, the low-cost firm can price just below the high-cost firm's marginal cost and capture the entire market, earning positive profits while the high-cost firm earns nothing.

@MattBirch · 08:49
  • Why this video: This video covers the Bertrand model under identical marginal costs. It explains how undercutting drives prices down to marginal cost (P=MCP = MC), resulting in zero economic profit.
  • Explain the Bertrand Paradox and why two competing firms can drive prices down to perfectly competitive levels.
  • State the critical assumptions (such as homogeneous goods and no capacity constraints) that cause the Bertrand Paradox to hold.
How to Solve Cartel, Bertrand, Cournot, and Stackelberg Models
How to Solve Cartel, Bertrand, Cournot, and Stackelberg Models
@EconomicsinManyLessons09:3860,961
How to Solve Cartel, Bertrand, Cournot, and Stackelberg Models

This video demonstrates how to solve for profit-maximizing price and output levels under four different market structures (Cartel, Bertrand, Cournot, and Stackelberg) using a market with two identical firms facing inverse demand P = 180 - 2Q and constant marginal cost MC = $20. Under Cartel (collusion), firms act as a monopoly to maximize joint profits, yielding Q = 40 and P = $100. Under Bertrand competition, price equals marginal cost (P = $20) resulting in Q = 80. In Cournot competition, firm

@EconomicsinManyLessons · 09:38
  • Why this video: An excellent comparative math session. It uses a single market demand function and cost structure to solve for the pricing and output levels of all major models: Cartel (Collusion), Bertrand, Cournot, and Stackelberg.
  • Compare the equilibrium market price across Cartel, Cournot, Stackelberg, and Bertrand structures using the same demand curve.
  • Order these four models by total market output and industry profits.

Module 4: Collusion, Cartels, and Repeated Games

While single-stage games predict competition or defection (as in the Prisoner's Dilemma), real-world firms interact repeatedly. This module covers repeated games and shows how dynamic trigger strategies can sustain collusion and Cartels.

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In a repeated prisoner's dilemma with uncertain termination, cooperation can be sustained through a grim trigger strategy where states begin by cooperating and continue doing so as long as all parties cooperate; however, if any state defects, all states defect permanently thereafter. This strategy works because the threat of eternal punishment creates sufficient incentive for cooperation when the probability of future interaction (p) exceeds 0.5, meaning cooperation is possible without requiring

@Gametheory101 · 11:27
  • Why this video: This video covers the mechanics of the Grim Trigger strategy. It details how the threat of permanent future punishment can sustain cooperation among rational, self-interested players.
  • Define the Grim Trigger strategy in repeated games.
  • Explain how the "shadow of the future" (discount factor δ\delta) determines if cooperation can be sustained.
  • Contrast Grim Trigger with other punishment systems, such as Tit-for-Tat.
4. Infinitely Repeated Games and Grim Trigger Strategies (Game Theory Playlist 8)
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@selcukozyurt25:0835,931
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In infinitely repeated games, the One Deviation Property allows verification of Subgame Perfect Nash Equilibrium by checking only one-period deviations rather than all possible deviations; grim trigger strategies can sustain cooperative outcomes (like mutual cooperation in the Prisoner's Dilemma) as SPNE when players are sufficiently patient (discount factor δ ≥ 2/3), as the threat of permanent punishment deters deviation.

@selcukozyurt · 25:08
  • Why this video: A mathematically rigorous lecture explaining how to prove a Grim Trigger Strategy Profile constitutes a Subgame Perfect Nash Equilibrium (SPNE) in infinitely repeated games.
  • Use the One-Period Deviation Property to check if a strategy is an SPNE.
  • Calculate the critical value of the discount factor (δ∗\delta^*) needed to prevent cheating on a collusive agreement.
OPEC: The Cartel Controlling the World's Oil
OPEC: The Cartel Controlling the World's Oil
@TLDRnewsGLOBAL10:04113,173
OPEC: The Cartel Controlling the World's Oil

OPEC (Organization of the Petroleum Exporting Countries) is an international cartel formed in 1960 by five oil-producing nations (Venezuela, Saudi Arabia, Kuwait, Iraq, and Iran) to coordinate oil production and control global oil prices, emerging as a response to the dominance of the 'Seven Sisters' major oil companies that had previously controlled global oil markets through coordinated production restrictions; OPEC's most significant moment came in 1973 when it imposed an oil embargo that dro

@TLDRnewsGLOBAL · 10:04
  • Why this video: This video uses OPEC to show how international cartels coordinate production quotas to keep global prices high, as well as the challenges they face with cheating and changing supply dynamics.
  • Describe how real-world cartels manipulate supply to influence prices.
  • Identify the main incentives and pressures that lead cartel members to cheat on their production quotas.
The DRAM Cartel | Price Fixing, Anti-Consumer Collusion, & Corporate Conspiracy
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The DRAM Cartel | Price Fixing, Anti-Consumer Collusion, & Corporate Conspiracy

The original DRAM cartel operated through surreptitious phone calls and emails that required active DOJ investigation to discover. Today, similar coordination appears in quarterly earnings reports rather than secret communications. There is no explicit evidence of current price fixing collusion, but the same patterns of coordinated behavior persist. Fourth quarter earnings reports from major DRAM manufacturers show coordinated language suggesting ongoing collusion: SK Hynix announced plans to re

@GamersNexus · 03:55
  • Why this video: This video examines the DRAM price-fixing scandal, showing how tech firms colluded in the real world and how regulatory bodies investigate and prosecute corporate collusion.
  • Differentiate between explicit collusion (such as price-fixing agreements) and tacit collusion.
  • Explain why collusion is illegal in most major global markets and identify the legal risks involved.

Module 5: Sequential Games & Entry Deterrence

In many industries, firms do not act at the same time. This module covers sequential-move games, game trees, and backward induction. You will study Stackelberg quantity leadership, entry deterrence games, and the difference between credible and non-credible threats.

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Backwards induction is a solution method for sequential move games where you start at the end of the game tree and work backwards, eliminating dominated strategies at each decision node to determine the subgame perfect equilibrium; players make optimal choices based on anticipating future players' rational responses, which may mean they cannot achieve their most preferred outcomes even if they desire them.

@AshleyHodgson · 08:27
  • Why this video: This video shows you how to read a sequential game tree (extensive form game) and use backward induction to find the subgame perfect Nash equilibrium.
  • Draw and label an extensive form game tree with decision nodes and payoffs.
  • Apply backward induction by working from the terminal nodes back to the initial node.
Quantity Leadership (Stackelberg Oligopoly)
Quantity Leadership (Stackelberg Oligopoly)
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Quantity Leadership (Stackelberg Oligopoly)

In a Stackelberg oligopoly where one firm (the leader) chooses its quantity first and the other firm (the follower) observes and then chooses its quantity, the leader produces more than the follower because it can anticipate the follower's response. Given the demand function P = 100 - 2(Qa + Qb) and marginal cost of $4 for both firms, Firm A (the leader) will produce 24 units, Firm B (the follower) will produce 12 units, and the market price will be $28.

@AshleyHodgson · 07:42
  • Why this video: This video explains quantity leadership under the Stackelberg model. It shows why the first mover (leader) enjoys a strategic advantage over the follower.
  • Explain the concept of a first-mover advantage.
  • Describe how the follower's reaction function is used by the leader to maximize profits.
(AGT2E13) [Game Theory] Extensive Form Games: Subgame Perfect (Nash) Equilibrium
(AGT2E13) [Game Theory] Extensive Form Games: Subgame Perfect (Nash) Equilibrium
@selcukozyurt03:364,052
(AGT2E13) [Game Theory] Extensive Form Games: Subgame Perfect (Nash) Equilibrium

The entry deterrence game demonstrates how SPNE eliminates non-credible threats. Player 1 chooses to enter or stay out; if entering, Player 2 can fight (both get -1) or accommodate (both get +1). While two pure strategy Nash equilibria exist—(Out, Fight) and (Enter, Accommodate)—only (Enter, Accommodate) survives subgame perfection. Using backward induction on the subgame after Entry reveals Player 2 would prefer Accommodate over Fight. Thus, the threat to fight is non-credible because Player 2

@selcukozyurt · 03:36
  • Why this video: This video uses an entry deterrence game to show how Subgame Perfect Nash Equilibrium (SPNE) eliminates non-credible threats, such as a monopoly threatening to wage a price war if a new competitor enters.
  • Define what makes a strategic threat "credible" or "non-credible."
  • Explain how backward induction eliminates Nash equilibria that rely on non-credible threats.
Live Q&A: A-Level Edexcel Economics - Paper 1 - Sunday 14th May 2023
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@expert.tuition14:048,879
Live Q&A: A-Level Edexcel Economics - Paper 1 - Sunday 14th May 2023

This section covers limit pricing as a strategy to deter new firms from entering a market. The instructor explains: (1) Limit pricing involves setting prices below the average cost of potential entrants but above the firm's own average cost, (2) This is possible because established firms can exploit economies of scale to achieve lower average costs, (3) New entrants cannot match these low prices without making losses, (4) The established firm sacrifices short-term profits to prevent entry, (5) O

@expert.tuition · 14:04
  • Why this video: This segment covers limit pricing, explaining how dominant firms set prices below the average cost of potential entrants to deter them from entering the market.
  • Explain the mechanics of limit pricing and how it deters entry.
  • Contrast limit pricing with predatory pricing.
  • Describe how strategic capacity expansion serves as a credible commitment to fight entry.

Course Map

This map outlines the recommended progression through the material.

Key People Index

  • John Nash (1928–2015): An American mathematician who developed the Nash Equilibrium, a foundational concept in game theory where no player has an incentive to unilaterally deviate from their chosen strategy.
  • Antoine Augustin Cournot (1801–1877): A French philosopher and mathematician who formulated the first formal model of oligopoly, where firms compete by choosing production quantities.
  • Joseph Louis François Bertrand (1822–1900): A French mathematician who challenged Cournot's model by showing that if firms compete on price instead of quantity, the equilibrium price drops to marginal cost.
  • Heinrich Freiherr von Stackelberg (1905–1946): A German economist who expanded oligopoly theory by introducing sequential-move games, where a market leader moves first and a follower moves second.

Final Self-Assessment

Test your understanding of the entire curriculum with this comprehensive checklist:

  • Explain why firms in an oligopoly are strategically interdependent and cannot make decisions in isolation.
  • Construct a 2×22 \times 2 payoff matrix and identify any dominant or dominated strategies for both players.
  • Find all pure-strategy Nash Equilibria in a simultaneous-move game matrix using best-response analysis.
  • Derive the reaction curves and calculate the equilibrium price, quantities, and profits for a Cournot duopoly.
  • Explain why Bertrand price competition leads to perfectly competitive outcomes (P=MCP = MC) and list the assumptions required for this result.
  • Define the Grim Trigger strategy and calculate the discount factor (δ\delta) required to sustain a collusive cartel agreement.
  • Explain why cartels are inherently unstable and identify the economic incentives that lead members to cheat.
  • Solve a sequential game tree using backward induction to find the subgame perfect Nash equilibrium (SPNE).
  • Solve the Stackelberg duopoly model and explain why the leader earns higher profits than the follower (first-mover advantage).
  • Identify a non-credible threat in an entry deterrence game and explain how SPNE rules it out.
  • Explain how limit pricing and capacity expansion can be used as credible commitments to prevent new firms from entering a market.
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