Game Theory and Oligopolistic Competition

Game Theory and Oligopolistic Competition

Game theory can be used to analyze decision-making process of firms in oligopolistic competition. When there are few firms in a market, it is easy for each firm to guess (predict) what the other firms will do in a given situation. For example, without any illegal price-fixing scheme, the leader of the market can fix its price and level of production and expect the competitors to follow its lead and not engage in price cutting strategies that will put all in a bad position.
That's why, in an oligopolistic market, it's NOT possible to reach the equilibrium price of the free market theory. In fact, because most market are in oligopolistic competition, due to differentiation, most firms have the ability to fix their prices more or less.