Comparing Monopolistic Decisions and Game Theory

1 Comparing Monopolistic Decisions and Game Theory A firm operating in a monopolistic environment experiences a downward slope in the demand curve because the demand is elastic; its marginal revenue curve slopes downward and is located below the average revenue (demand curve). The marginal revenue is always less compared to the market price. The profits are pegged on the average revenue curve concerning the average cost curve; if the average cost is below the market price, then the firm it will generate a profit (Boundless, 2016). Therefore, monopolistic firms can only maximize profits by producing where the marginal revenue matches marginal cost in both the short and long run.

Such a company can only increase the demand for its products by reducing the prices of all the units of its products. Firms produce a quantity on the Marginal Curve less than quantity on the Price Curve at a price on the Marginal Curve greater than a price on the price curve (Lukas & Pereira, 2016). To ensure profit maximization, a monopolistic firm will equate the market price to the average total cost and produce where the marginal cost is equal to the marginal revenue.

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2 Both oligopoly and a monopoly are economic market structures where imperfect competition exists. The main feature that distinguishes oligopoly from monopoly is that of competition. A monopolist has no competitors in the industry (a single firm that produce an entirely heterogeneous product), whereas an oligopolist’s freedom to act depends on how it believes its competitors will react (an industry with a limited number of reasonably large companies that deal in similar but relatively different goods) (Lukas & Pereira, 2016). In a monopoly, firms charge high prices due to lack of competition, but prices are moderate in an oligopoly because of the competitors in the market. Barriers to entry in a monopoly market include the huge capital requirement and government regulation whereas barriers in an oligopoly are due to large economies of scale (Boundless, 2016). A monopoly firm has considerable control over the prices it charges. Resultantly, discrimination exists where different customers pay various products in contrast to oligopoly firms where prices remain the same for long periods.

The game theory is the study of strategic behavior that takes into account the expected behavior by others when interdependency exists. In an oligopoly, a firm’s decision affects its decisions and decisions of other companies in the market. The game theory offers a framework for understanding how decisions affect businesses where interdependency exists. This decision, in business terms, is the payoff and the value of the decision is the profit that follows a particular output decision (Boundless, 2016).

A fair reward to each firm only occurs when both firms choose to limit supply and keep prices of the market relatively high. A dominant strategy is one that follows, irrespective of any firms’ choice. If two companies decide to collude, then they will operate as a monopoly in the market and can set their prices relatively high (Lukas & Pereira, 2016). They act as a cartel;

3 however, these collusions do not usually hold because one firm can have an incentive to undercut the other by suddenly charging different prices, thereby causing losses to the other firm.

4 References Boundless. (2016). Boundless economics. https://www.boundless.com/economics/textbooks/boundless-economics-textbook/ oligopoly-13/oligopoly-in-practice-77/gam-theory-applications-to-oligopoly-293-12390/ Lukas, E., & Pereira, P. J. (2016). Greenfield investment or acquisition? The decision under hidden competition. http://www.realoptions.org/openconf2016/data/papers/33.pdf