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Why do firms in Oligopoly appear to be colluding even when it is known that they...

Why do firms in Oligopoly appear to be colluding even when it is known that they are not?

Why is Game Theory uniquely suited for analyzing the Oligopoly market structure?

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Answer #1

a) Firms in the oligopoly market appear to be colluding because they are all interdependent. i.e. they cannot take a decision alone without considering the options which the competitors will have and the repercussion it will have in the market. For example, if the firm in an oligopoly reduces the price other firms will follow and make the price reduction ineffective. But if the firm increases the price it will no one will follow and the firm will lose.

b) In an oligopoly market, the firms are interdependent and they can take any decision only after contemplating what the other firms in the market will do. Game theory involves all the option which the firm in the market has.

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