Game Theory in Oligopoly (Chapter Ten, Baye)

The market in district 6SW is clearly an Oligopoly. This type of industry is characterized as being
dominated by a small number of firms, The product(s) or service(s) sold by an individual company
can either being differentiated from or homogenous to, those sold by its competitors, and some
barriers to entry exist. Indeed, since the afore mentioned consumer base is controlled by only two
corporations, it can more accurately be identified as a duopoly.

In order to draw a conclusion as to the optimal price that the company should charge, it is
necessary that we first estimate the various revenues that the firm can expect to accumuate
under each corresponding scenario. Application of the mathematical concept of Game theory is
the best tool by which to make this analysis. For simplicity, we will assume that at this stage the
only prices available to the individual players are those that are mentioned in the memo; namely
$84.95 (low) or $93.45 (high).

From the memo we can conclude that a scenario that sees the company charging the high rate
for its service whilst the competitor charges the low fee will yield roughly a sixty percent market
share for the firm. When these pricing strategies are reversed, the firm can expect to control
approximately seventy percent of the market. In the case where both companies charge the same
usage fee, be it the high or low price, the firm will assume roughly a sixty-five percent market
share. Please click on the icon for a graphical representation of these figures;