This lesson covers Topic 4.5 in the AP Syllabus. Today we will study oligopoly using a new tool, game theory. We will learn that oligopolists find that the problems they face in making decisions about output and price closely resemble those of a classic situation in game theory called the prisoners dilemma.
Learning Target
Analyze the ways in which incentives influence what is produced and distributed in a market system.
Evaluate the extent to which competition among sellers and among buyers exists in specific markets.
Describe the consequences of competition in specific markets.
Criteria for Success
I will be able to use ideas related to oligopoly and the prisoners dilemma to analyze economic problems.
I will be able to demonstrate this understanding using a graph of the aforementioned model.
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Assignments
Read: Krugman (Module 64-66).
Watch: The video lecture for today's topic (linked above).
Optional: The videos linked below.
Khan Academy (not required)
AC/DC Economics: Once you think you understand these ideas, watch this video to test your knowledge.
Formative Assessment (MCQ's): You will take a formal assessment during class. The assessment will consist of multiple-choice questions and one FRQ from an old AP Exam. Doing the problem of the day and ensuring that you understand it will help you prepare for today's formative assessment and help to ensure that you understand the concepts in this lesson.
Problem of the Day
Assume that the market for airline travel is an oligopoly and that the airline companies can collude. Draw a graph showing all of the following: Equilibrium price, equilibrium quantity, and economic profits in the airline industry.
A case study in the chapter describes a phone conversation between the presidents of Braniff Airways and American Airlines. Suppose each company can charge either a high price or low price for tickets. If one company charges $100, it earns low profits if the other company company charges $100 too. It earns high profits, if the other company charges $200. On the other hand, if the company charges $200, it earns very low profits if the other company charges $100 and medium profits if the other company charges $200 too. The same set of choices applies to the second company.
Draw a payoff matrix/decision box for this game.
What is the Nash equilibrium in this game? Explain.
Is there an outcome that would be better than the Nash equilibrium for both airlines? How would it be achieved? Who would lose, if it were achieved?
And for fun watch this video: