Game Theory in Oligopoly
Market Failure: Market Power
AO3·AO4·Diagram required·HL
Syllabus requirement
Simple payoff matrix showing strategic decision-making under interdependence. Illustrates price wars, collusion, and cheating.
Assessment objectives
AO3 Synthesis and EvaluationAO4 Use of Appropriate Skills
Required diagram: 2x2 payoff matrix comparing collusion vs cheating, demonstrating dominant strategy and Nash equilibrium.
Higher LevelThis topic is assessed at HL.
Summary
This topic explains how game theory models strategic interdependence between firms in oligopolies, using payoff matrices to show how choices to collude or compete can produce outcomes like a Nash equilibrium. It also describes price and non-price competition strategies used by oligopolists, and shows how market concentration is measured using concentration ratios and the Herfindahl–Hirschman Index, which indicate the degree of market power in an industry.
