Write a note on Game theory under oligopoly.

Game theory analyzes the way that two or more firms (players) choose their strategies that jointly affect the profits of each other. Game theory has been used by the economists to study the interaction of oligopolists, union management disputes, countries trade policies, international environment agreements and a host of other conditions.

In order to show the representation of behavior of oligopoly firms, we may analyse dynamics of price cutting by two firms. Suppose the firm 1 comes up with an objective that it will not be undersold. Then, firm 2 follow up and tries to grab the market for the same product and therefore declares its goal in the advertisement stating that “it would sell for 10% less than the market price.”

Now this kind of behavioral announcements will lead to a pattern of certain reactions and counter reactions, which would result in a mutual ruin for both the firms. Because whenever firms 2 would give a discount of 10% less, firm 1 would also have to follow the suit. Then once again a 10% decline in price will take place and this would continue till the time price is reduced to zero bringing their profits to zero and only increasing their sales.