The second deals with strategic choices by two firms in a duopoly. The first examines a classic game theory problem called the prisoners’ dilemma. We shall use two applications to examine the basic concepts of game theory. They changed their strategic choices when other airlines chose to slash their fares, and all firms ended up with a payoff of lower profits-many went into bankruptcy. Some firms in the airline industry, for example, raised their fares in 2005, expecting to enjoy increased profits as a result.
The firm’s payoff depends partly on the strategic choice it makes and partly on the strategic choices of its rivals. In general, the payoff in an oligopoly game is the change in economic profit to each firm. The outcome of a strategic decision is called a payoff. Once a firm implements a strategic decision, there will be an outcome. IBM boosted its share in the highly competitive personal computer market in large part because a strategic product-development strategy accelerated the firm’s introduction of new products. The other airlines’ decision to match or ignore their rival’s price decision is also a strategic choice. An airline’s decision to raise or lower its fares-or to leave them unchanged-is a strategic choice. Game theory is an analytical approach through which strategic choices can be assessed.Īmong the strategic choices available to an oligopoly firm are pricing choices, marketing strategies, and product-development efforts. A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account is called a strategic choice. The Start Up feature at the beginning of this module suggested the uncertainty eBay faces as it considers the possibility of competition from Google.
Oligopoly presents a problem in which decision makers must select strategies by taking into account the responses of their rivals, which they cannot know for sure in advance.
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