Game Theory and Oligopolies Game

Game Theory and Oligopolies

Game theory, as developed by Princeton mathematics graduate student John Nash, was one of the most influential economic theories of mathematical probability of the 20th century. In the film "A Beautiful Mind" the portrayal of the principles of game theory might be called 'to blonde or not to blonde' -- namely that according to Nash in the film it makes little sense for all of the young male students hanging out in a bar to hit on the most desirable young woman, as she can only choose one of them. (Presumably her friends will be offended if they suspect they are 'second pickings' thus resources of time and energy for the male students are scarce, they can only pick one women in the group of ladies at the bar.) Nash rationalizes that rather than all of the young men focusing on the blonde, it is better that they focus their attentions on someone who is less likely to be the object of everyone else's attention, so they can leave the bar with some female companionship, rather than alone. And some collusion might make their chances even better: "I'll go for the brunette, you go for the redhead," etcetera, rather than increasing the chances only one student will emerge a winner or none of them at all without collusion and allocation of the resources of their time and energy. In other words, excessive participation and competition can result in a negative outcome for everyone without collusion and segmentation of behavior.

Applying this principle to economics, it makes sense in an oligopolistic market where only a few sellers dominate to engage in some collusion, or, if this is not legally possible, for each to concentrate on a specific market segment, rather than waste too many resources, target the entire market or worse, engage in a competitive price war for the same market segment as a competitor in a way that that drives prices down for all the sellers in the market. This type of collusion or segmentation becomes more difficult as more entities enter the market. When a market is no longer an oligopoly, sellers lose out. For example if another group of male students enter the bar and target the blonde, brunette, and redhead in a way that interferes with the agreement of the oligopoly of male graduate students, the original group of students might rationalize that loss is possible with many of the outcomes so why not go for the best looking girl? Thus, this illustrates why oligopoly is a more desirable arrangement for sellers, if not for buyers, as it reduces buyer choice, reduces the likelihood of sellers losing out, increases unpredictability, reduces the likelihood of sellers losing out, increases unpredictability, and also keeps prices higher.