ABSTRACT
This chapter discusses how game theory might be used to analyse strategic interactions in an oligopoly market. Oligopolies have the following characteristics: few seller and many buyers, price maker, barriers to entry, and product differentiation. Oligopolists often need to make a decision about what type of product they should sell–should a car manufacturer concentrate on high-end luxury vehicles or should it produce family cars? Should a firm developing a new breakfast cereal aimed at the health-conscience consumer, or make a sugar-filled cereal designed for kids. Oligopolists might find it difficult to not strongly compete with one another. When firms take their actions in sequence, profit-maximizing firms will try to anticipate what their rivals will credible do in the future. In sequential games, there can be either first- or second-mover advantages, depending on the economic environment firms find themselves in.
