Game Theory and Industry Essay

Submitted By jmorrison57
Words: 1266
Pages: 6

John Morrison
Micro economics
4/26/14

This essay is dedicated to the market structure oligopoly, the different industries that are involved, and the main dynamics of how companies conduct business in this type of market place. An oligopoly is an occurrence in business where a few companies account for the majority of the sales in a particular industry. The presence of oligopoly can stifle competition which allows the few companies that are already established to have a stronghold on the industry. This allows those involved to have a great influence over government and policy which can be detrimental to society.
You may be asking “How do the firms gain power over an industry?” Many companies undergo mergers and acquisition to help grow their business and minimize their costs. Two types of mergers discussed in this chapter are vertical and horizontal. A vertical merger is when two specialized firms that produce different products combine. The book definition is “The joining of a firm with another to which it sells an output or from which it buys an input.” One example they give is, when a shoe manufacturer purchases a shoe outlet store (575). This type of merger doesn’t directly add to the issue of oligopoly, but it does give the merged company a bit more leverage in terms of cost. The other type, horizontal does directly add to this particular market structure. This merger occurs when two firms that produce a similar product join together. An example is two companies that both produce television’s merge.
One way economists measure or determine if an industry is comprised of an oligopoly is through the concentration ratio. This ratio highlights top companies in a given industry based upon output and sales. There is no set percentage that deems an industry an oligopoly because every market is different, but it does demonstrate who dominates among the selected group of companies. The example in the text breaks down the Cellphone Industry. They state that the total revenue of the cellphone service industry, of a recent year, was $117.1 billion. Of that total revenue AT&T received $30.8 bil, Verizon $29 bil, Sprint/Nextel $22.8 bil, and T-Mobile $13.3 bil. These four firms accounted for 82 percent of the cellphone service providing industry, 82 percent being the concentration ratio (576).
Another important aspect of understanding oligopoly is by analyzing how firms determine prices and how they react when other firms set their prices. One mechanism economists use to describe this behavior is through Game theory. Game theory describes possible outcomes when two firms set hypothetical prices, each price will have a corresponding benefit. More specifically there are different types of games, two examples are: a cooperative game and a non-cooperative game. A cooperative game is when the players or firms involved collude or agree on a situation that will give them the most beneficial outcome, or the most revenue. Non-cooperative games occur when the parties involved do not agree on setting a certain price, which happens most commonly, mainly because collusion is illegal.
One industry that is dominated by an oligopoly is the meat industry. Christopher Leonard wrote a book entitled “The Meat Racket”, and he discusses thoroughly how the meat industry is controlled by four firms: Tyson chicken, JBS, Cargill, and Smithfield food. He says as a result of the strong market power these companies can freely raise prices, making meat subsequently more expensive than it otherwise would be. Tyson accounts for 22 percent of the U.S. market for chicken; so the power that was once in the hands of the restaurants or supermarkets is now controlled by this mass producer. These companies have huge leverage in Washington due to the consolidation of the industry. Obama attempted to make anti-trust reforms on the industry and the meat companies dismantled the efforts completely. Not only do these companies have control over the prices, they also…