Game Theory Intro - The Prisoner's Dilemma as a Model for Oligopoly Behavior

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Күн бұрын

Two men are in custody for a crime they may or may not have committed: armed robbery. The police have the men in separate cells and have told them the following:
Confess to the crime of armed robbery and we will let you off with a light term of three years in jail with parole after one year.
Remain silent and we will throw everything we have at you, you will get 10 years in jail, because we promise you, your accomplice will talk.
However, if you both remain silent, we have to let you go with a slap on the wrist, just six months in jail for trespassing.
With this information in mind, the men, who are unable to communicate with one another both confess and get three years in jail. Why didn't they both remain silent, though, and get just six months in jail?
This story is what's known as the Prisoner's Dilemma. It is a popular story used by economists to illustrate the challenges faced by non-collusive oligopolistic firms in deciding how to determine what prices to set for their products, whether to advertise or not to advertise, and many other strategic decisions that will affect the level of profits being earned.
The oligopolistic market structure, more than any other, requires that firms act strategically, taking into account the decisions of their competitors, on whom they are highly inter-dependent. This lesson will apply the Prisoner's Dilemma game to two firms deciding whether to charge a high price or a low price for their output, and analyze the most likely outcome in such a game. As we will see, without the ability to collude with one another, the strategic behavior of oligopolistic firms tends to result in an outcome that is not optimal for the sellers, but may benefit consumers.
Want to learn more about economics, or just be ready for an upcoming quiz, test or end of year exam? Jason Welker is available for tutoring, IB internal assessment and extended essay support, and other services to support economics students and teachers. Learn more here! econclassroom.com/?page_id=5870

Пікірлер: 67

@millarhannah 10 жыл бұрын

you are the biggest legend. Totally killed my micro exam today. Why do they take 2 hour lectures to explain what you can in 10 minutes-- it is straight to the point and so easy to comprehend.

@sergioochoa9219 7 ай бұрын

I've been following your lessons since pure monopoly and may I say that you've been helping tremendously!! Thank you!

@ryanbrunton9154 9 жыл бұрын

either way, wendy's doesn't have a chance.

@yamax1 11 жыл бұрын

I love the way you explain this....microeconomics became the subject i started to like and it is because of You . Thanks Jason.

@vivyyy3590 4 жыл бұрын

Best explanation so far, couldn't understand from my lecture so I came here, thx!

@mannymonas 10 жыл бұрын

You are way more than awesomeness itself!

@MsSamarakoon 9 жыл бұрын

THANK YOU SOOO MUCH. It is sooo happy to say that I got an 'A' pass for my Micro Economics paper in my Master of financial Economics degree. I learnt all these theories clearly and perfectly because of your videos...

@huldaadriyannah1633 8 жыл бұрын

Very nice explanation!

@Michelle930911 10 жыл бұрын

watching this makes so hungry now

@wingbliss 12 жыл бұрын

Thank you! with Gratitude.

@temanokaitaua5146 8 жыл бұрын

Thank you, it very helpful and clear explanation.

@flankspankrank 8 жыл бұрын

Thank you for this, explained it well.

@dinariperera3146 8 жыл бұрын

this was so helpful =)

@abdulwasay55 5 жыл бұрын

Thanks sir.

@gurmeetsliet 2 жыл бұрын

Wonderfull'explanation

@Pt.GirirajSharma 7 жыл бұрын

nicely explained ✌✌

@bobbydelorisconrad3733 6 жыл бұрын

Thank you...

@squeekycheese 7 жыл бұрын

Meanwhile the local burger joint goes out of business.

@vinayak186f3 3 жыл бұрын

Thanks

@educationguideyt 6 жыл бұрын

thank you so much

@LucisFerre1 11 жыл бұрын

I've never heard the prisoner's dilemma described so well.

@FlamingBasketballClub 11 жыл бұрын

Hello Mr. Welker! Great lesson on the introduction of Oligopoly. However, I would like to know the theme song used in your videos. Epic song!

@cloverladida1637 7 жыл бұрын

THANK YOU SO MUCH! This is very helpful :) wish me luck for microeconomics test tmrowwww!

@MegaSandman77 11 жыл бұрын

Good video. Only issue I have is that the $7/$7 price would usually be thought of as a collusive price that would maximize total market profits (splitting total cartel profits of $30m). When moving from a cartel outcome by having BK drop its price to $5, the total market profits should go down (instead of up to $35m total profit between the two of them), although BK should indeed gain and McDonald's profit goes down.

@professorgaming2578 8 жыл бұрын

But hey, that's just a theory... A *GAME THEORY*!

@456z00ts654 6 жыл бұрын

This reminds me when all the fast foods were trying to do a "4 for 4" or "4 for 5" and a bunch of stuff like that!

@NnRNoAh 8 жыл бұрын

I rather use Sweezy's kinked curve than game theory to explain oligopolistic behavior. The issue is that the game theory model implies that firms in an oligopolistic market structure tend to compete with price. That's far from the truth. It, of course, explains what would happen if one of the firms decides to reduce the price, but it does not show that, despite collusion being illegal, firms have the incentive to not reduce price. In this hypothetical case, for instance, firms would have decided to stay at $7. A naive student will think that oligopolies are benign, or weak, because they have to reduce price. Likewise, students who are exposed to mainstream theories without a proper critic, like perfect competition structures, will think that firms do not set prices. "They are set by the forces of supply and demand" Sweezy's model illustrates the best firms' reluctance to decrease prices, price setter power, inefficiency, desire to colude and others that these mainstream techniques will not be able to show.

@olivershurville 11 жыл бұрын

Yeah, this point annoyed me too. Well explained... but the figures are just ridiculous. In this example, when one firm charges $5 and the other $7 the total market size jumps by $5m from $30m to £35m. This is fine if it is explained by a market increase due to the cheaper burgers from whichever company is charging $5 for a burger. However, having a market that drops to $20m in total size when both charge $5 is just ridiculous! Change $30m and $5m to something more sensible!

@saksham2779 12 жыл бұрын

thanks :D

@yidenekachewworku7744 10 жыл бұрын

The market structure course i am taking is turns easy , in your awesome video lecture thanks.

@rubenortiz1461 6 жыл бұрын

Of course, the resource management of the equation is not present here, therefore, whoever has better logistics and cost of goods (i.e. resource management) will keep on trying to choke the other competitors, until the competitor can no longer bring its services or products lower than its competitor.

@kevtherev8194 5 жыл бұрын

Therefore, they ignore game theory. Instead, they (secretly) Fix the Price - a win-win for them, a Big Loss for us.

@shairozsohail1059 11 жыл бұрын

Wouldn't the lower aggregate price at 5/5 attract more buyers into the market, therby increasing demand and possibly giving both firms increased profits then at original 7/7?

@710418oo 11 жыл бұрын

All of this made me hungry.

@ivandate9972 7 жыл бұрын

where the number proportion came from.... surely different proportion can change the result

@lindanimaqetuka757 10 жыл бұрын

could u please come lecture ecos at my university?

@moreblessingchitongo5806 5 жыл бұрын

He sounds better than our lecturers righy

@krisives 3 жыл бұрын

someone reposted this video, I suggest you send out a complain to youtube

@joshuahua8364 8 жыл бұрын

Did anyone else think this video was going to be about Matt's Game Theory?

@zzanzare 11 жыл бұрын

very nice explanation of classic game-theory prisoners dilemma. However it is lacking the final point - explaining the creation of oligopoly. If either side realizes, that the "game" is symmetrical (the decision is always the same whether you look at it from either side's point of view), it can expect that the other party will end up with the same price as us. With this in mind, Burger King will leave the price at $7, McDonald also, and they would both enjoy higher profits, screwing the customer

@kostas1x2 11 жыл бұрын

Assuming that in the begining we start with 50/50 spilit in the market and 15/15 profits, how could we have 30/5 profits? with what split? It only works with 100/17 split and works for only in a new market 17% larger. It is correct only if you assert that the price fall will atract new consumers in the market.

@husseinmostafa4227 9 жыл бұрын

With all due respect for the one who made the video. The whole idea of Oligopoly is: Firms understands that they have to cooperate to keep the market value as high as possible regardless to the customer interest. Oligopoly is keeping the price at 7$ in this example. And compensating the market demand with promotion. In simple have you ever seen McDonald prices going down?

@paulharris8551 9 жыл бұрын

More precisely, they can both make more profit if they collude than if they compete. But I'm not sure it's necessary for them to talk to each other. If each knows the other will respond to a price cut by matching it, there is no incentive to cut price unless one hopes to drive out the other by going lower than the other can go.

@marceli1109 9 жыл бұрын

You're starting to go into cartels, and Oligopoly assumes that there's competition and firms are trying to gain market share rather than cooperate to achieve maximum profits. What you said is usually the result of oligopoly.

@abhirao4006 9 жыл бұрын

Hussein Mostafa WHat you are suggesting is illegal.

@NnRNoAh 8 жыл бұрын

+Marceli Scuba No! Oligopoly assumes that firms are attentive to the decisions of other firms if collusion is illegal. Also, this model assumes that firms want to maximize profits. Given this assumptions, competition is undertake rather by advertisement (and other strategies) than price. This is Sweezy's kinked demand curve point.

@aneettaraj3134 9 жыл бұрын

good

@CMVB92 7 жыл бұрын

I really don't understand how you get those numbers 15M, 30M etc..?

@kostas1x2 11 жыл бұрын

Moreover in real life the firms will collide with each other in order to maximize their profits, not falling in the trap of game theory and raise the price to the point that the products market starts to shrink.

@LucisFerre1 11 жыл бұрын

Don't you wish a Big Mac really looked like that?

@zzanzare 11 жыл бұрын

in another words: /watch?v=2d_dtTZQyUM they both realize they are part of a group, then they act in the best interest of themselves *and the group* considering the strategies of others.

@LucisFerre1 9 жыл бұрын

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