Lesson 7 of 8 · 13 min
Oligopoly strategy: Nash equilibrium, collusion and the long run
When oligopolists act in their own interest, they settle in a Nash equilibrium that usually leaves joint profit on the table, which makes collusion tempting but hard to sustain, and over time entry erodes even dominant positions.
In short
- Nash equilibrium: no firm can raise its profit by changing its strategy alone, given what rivals do.
- Self-interest often leads to an outcome worse for both firms than the cooperative one, so collusion is tempting (and usually illegal). A formal, open agreement is a cartel.
- Collusion is more likely with few firms or one dominant firm, homogeneous products, similar costs, small and frequent orders, severe retaliation and little outside competition.
- There is no single optimal price and output for oligopoly: it depends on the model. In each case output comes from MR = MC and price from the demand faced.
- Long-run economic profits are possible, but dominant firms' shares tend to decline as profits attract entry. An oligopoly facing easy entry behaves almost like perfect competition; a cartel behaves like a monopoly.
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