Chapter 6 Theories of oligopoly behavior

The study of oligopolistic industries lies at the heart of the field of industrial organization. The belief of an individual about the behavior of large firms in concentrated markets colors the individual's views on a broad range of antitrust and regulatory policies. These beliefs derive in turn from theory and evidence of oligopolists' behavior. This chapter presents and evaluates the primary competing theories of oligopolistic behavior. The chapter clarifies the way oligopoly theory has, and has not, progressed in the 150 years since Cournot developed his theory. Although oligopoly fits conceptually between the extremes of monopoly and perfect competition, its study requires a rather different set of toolsthat is, those of game theory. The hallmark of oligopoly is the presence of strategic interactions among rival firms, a subject well suited for game-theoretic analysis. The chapter presumes a working knowledge of such concepts as Nash equilibrium and subgame perfect equilibrium.