This article revolves around the application of game theory to several irreverent issues associated with the markets especially oligopoly market conditions. It has led me to examine the changing nature of organizations and economic institutions, in response to the changing external environment, and to repeated strategic interactions, such as the rivalry amongst the small number of sellers in an oligopoly. So we can try to learn the adaptive strategic market behavior in an oligopoly market using this concept named "Game Theory" by Dr. John Nash.
Here, I have taken the case of oligopoly market condition where the market is dominated by small number of sellers (players) and after a certain period of time they are very much aware of each other’s actions. So within the framework of repeated interactions between different sellers, rationality demands a high level of pattern recognition, memory and computing. So the concept of “Bounded Rationality” comes into play where the players’ memory, computing ability or even competences are retarded which may however be sufficient to generate the set pattern or behavior in an oligopoly market.
Game theory champions say that "Compete without destroying the pie and cooperate without getting your lunch eaten" in business.
So, through Game theory, competing business can cooperate to achieve win-win situations for all players in the market. Game theory also points out the importance of repeated or ongoing interaction between businesses.
If, for example, two competing businesses (let’s take an example of retail stores with similar business models) are playing this game just once, then each has an overwhelming temptation to undercut the other since they are very much aware of the competitor’s strategies. But suppose they are in this business together for the long run, and are trying to achieve a cartel that keeps prices high (I am taking only the prices i.e. profitability aspect as of now). If one of them undercuts the other, the gain is temporary.
So what happens here is - when the other store finds out that the first one has cheated on their agreement, it will not trust the first any more and will retaliate by lowering its own price (in most of the cases). This will reduce the cheater’s future profits below what they would have been if it had honored the cartel agreement. So the cheater suffers in the future in exchange for its immediate gain. If the future is sufficiently important in its calculations, it will be deterred from cheating in the first place.
So, these situations gives us a live business scenario which can be further thoroughly understood by in-depth study of game theory and oligopoly market and the inter-relations amongst them.
P.S. This article shows how "Game Theory" can be utilized to gain the maximum in a given business paradigm.