You are on page 1of 5

1

1
(Mrs) Chi Ching R.G.
P/T Lecturer
Email: cckwj@singnet.com.sg
MITHM
James Cook University Singapore
TO5202: Economic Decision-
Making in the Hospitality Industry
Week Topic/s (chapters) Week Topic/s (chapters)
1
Lecture 1: Intro to Tourism, Hospitality
& Leisure Org (Ch 1 & 2)
7
Lecture 7: Investment in the Private &
Public Sectors (Ch 10 & 11)
2
Lecture 2: The Market for Tourism,
Hospitality & Leisure Products (Ch 3)
8
Lecture 8: Income, Employment &
Prices (Ch 12); Presentations
3
Lecture 3: Demand & Supply;
Elasticity (Ch 4 & 5
9
Lecture 9: Economic Development &
Regeneration (Ch 13); Presentations
4
Lecture 4: Market Structure & Pricing
(Ch 6)
10
Lecture 10: The Balance of Payments
& Exchange Rates (Ch 14)
5
Lecture 5: Market Intervention (Ch 7)
11
Lecture 11: Globalization (Ch 15)
6
Lecture 6: The Environment (Ch 8 &
9)
12
Lectures 12 & 13: Environmental
Impacts (Ch 16 & 17); TOURISM
PROJECT DUE
3
(Mrs) Chi Ching R.G.
P/T Lecturer
Email: cckwj@singnet.com.sg
LECTURE 5:
Oligopoly &
Game Theory
MITHM
James Cook University Singapore
4
Oligopoly
Oligopoly is a market structure dominated
by a few large producers of homogeneous
or differentiated products.
Because of their “fewness”, oligopolists
have considerable control over their price.
– Examples: tires, beer, cigarettes, copper,
greeting cards, steel, aluminum, automobiles
and breakfast cereals
5
Characteristics of Oligopoly
• A few large producers – firms are
generally large and together they
dominate the industry.
• Either homogeneous or differentiated
products – the products are
standardized, or differentiated with
heaving advertising.
• Price maker – the firm can set its price
and output levels to maximize its profit.
6
Characteristics of Oligopoly
• Strategic behavior – Self-interested
behavior that takes into account the
reactions of others.
• Mutual interdependence – each firm’s
profit depends not entirely on its own
price and sales strategies but also on
those of the other firms.
• Blocked entry – barriers to entry exist
which make it hard for new firms to enter.
2
7
Game Theory
• Game theory is the study of how people
behave in strategic situations.
• Strategic decisions are those in which
each person, in deciding what actions to
take, must consider how others might
respond to that action.
8
• Because the number of firms in an oligopolistic
market is small, each firm must act strategically.
• Each firm knows that its profit depends not only on
how much it produces but also on how much the
other firms produce.
• The prisoners’ dilemma provides insight into the
difficulty in maintaining cooperation.
• Often people (firms) fail to cooperate with one
another even when cooperation would make them
better off.
Game Theory
9
• Prisoner’s dilemma
– Two individuals commit a serious crime
together and are apprehended by police
– They know there is insufficient evidence to
convict them of the serious crime.
– There is enough evidence to convict them of
loitering which carries a lesser prison
sentence.
– Each prisoner is interrogated separately with
no communication between them.
Game Theory
10
• Prisoner’s dilemma, con’t:
– Police tell them that if one of them confesses
he will receive a suspended sentence while
the other will receive the maximum sentence.
– If both talk then they will each receive a
moderate sentence.
– What will each suspect do?
Game Theory
11
The Prisoners’ Dilemma
• The prisoners’ dilemma is a particular
“game” between two captured prisoners
that illustrates why cooperation is
difficult to maintain even when it is
mutually beneficial.
Game Theory
Figure 1 The Prisoners’ Dilemma
Copyright©2003 Southwestern/Thomson Learning
Bonnie’ s Decision
Confess
Confess
Bonnie gets 8 years
Clyde gets 8 years
Bonnie gets 20 years
Clyde goes free
Bonnie goes free
Clyde gets 20 years
gets 1 year Bonnie
Clyde gets 1 year
Remain Silent
Remain
Silent
Clyde’s
Decision
3
13
The Prisoners’ Dilemma
• The dominant strategy is the best
strategy for a player to follow regardless
of the strategies chosen by the other
players.
• Cooperation is difficult to maintain,
because cooperation is not in the best
interest of the individual player.
Game Theory
14
The Prisoners’ Dilemma
• Confessing is a dominant strategy for each player.
• This is the best strategy no matter what the other
player chooses
• Equilibrium
– Each player have no incentive to unilaterally change their
strategy.
Game Theory
15
Oligopoly Behavior: A
Game-Theory Overview
• Game theory is the study of how people or
firms behave in strategic situations.
– It can be used to analyze the pricing behavior of
oligopolists.
– Suppose in a two-firm oligopoly (a duopoly), each
firm must chose a pricing strategy, high or low.
– A payoff matrix can be constructed to show payoffs
(profit) to each firm that result from each
combination of strategies.
16
Game Theory Example
• Two firms, A and B,
must decide on a pricing
strategy: price high or
price low.
– Although firms A and B are
mutually interdependent,
both can benefit from
collusion. However, there
may be incentive to cheat.
Firm A
F
i
r
m

B
Price High Price Low
Price
High
Price
Low
$12
$12
$8
$8
$6
$6
$15
$15
B
A
17
Mutual Interdependence
• Each firm’s profit depends on its own
pricing strategy and that of its rival.
• In the example, if both firms adopt a high-
price strategy, each firm will earn $12 million;
if both adopt a low-price strategy, each will
earn $8 million. If one firm adopts a low-price
strategy while the other adopts a high-price
strategy, the low-price firm will earn $15
million while the other firm earns $6 million.
18
Collusive Tendencies
• Oligopolists can often benefit from
cooperation, or collusion.
• Collusion is a situation in which firms act
together and in agreement to fix prices, divide
markets, or otherwise restrict competition.
– In the example, firms A and B can agree to
establish and maintain a high-price strategy so
each can earn $12 million.
4
19
Incentive to Cheat
• Oligopolists might have an incentive
to cheat on a collusive agreement if
they can benefit from such action.
– In the example, suppose firms A and B
agree to establish and maintain a high-
price strategy. Either firm can cheat
and lower its price in order to increase
profit to $15 million (a $3 million
increase).
20
Incentive to Cheat
• Because of possible incentives to
cheat, independent action by
oligopolists may lead to mutually
“competitive” low-price strategies,
which benefit consumers but not the
oligopolists.
– In the example, firms A and B will choose
a low-price strategy and earn $8 million
each.
21
Game Theory
(Low/Low) is a
stable
equilibrium. No
incentive for
either firm to
deviate.
Better off at
(High/High) but it
is not stable.
Each firm has an
incentive to
deviate.
• Efficiency implies that
there is no other strategy
pair that would make one
player better off and no
player worse off.
• (Low/Low) is not efficient.
• (High/High) is efficient.
• (High/High) would be an
equilibrium if the firms
were allowed to cooperate.
22
• Repeated Game
– The game is played over and over.
• In a repeated game, equilibria that are not
stable may become stable due to the threat
of retaliation.
Game Theory
23
Restraint of Trade and the Antitrust
Laws
• Antitrust laws make it illegal to restrain
trade or attempt to monopolize a
market.
– Sherman Antitrust Act of 1890
– Clayton Act of 1914
Game Theory
24
Controversies over Antitrust Policy
• Antitrust policies sometimes may not
allow business practices that have
potentially positive effects:
– Resale price maintenance
– Predatory pricing
– Tying
Game Theory
5
25
Controversies over Antitrust Policy
• Resale Price Maintenance (or fair trade)
– occurs when suppliers (like wholesalers) require
retailers to charge a specific amount
• Predatory Pricing
– occurs when a large firm begins to cut the price of
its product(s) with the intent of driving its
competitor(s) out of the market
• Tying
– when a firm offers two (or more) of its products
together at a single price, rather than separately
Game Theory