Description                                  
The narrator demonstrates game theory, a model that analyzes oligopolistic behavior. 

Narrator: 
Let's check in on the battle for the alternative burger market in Pleasantville. 

Marge: 
I had to fight back with some lower prices and some claims of my own. But these lower prices started killing my profit. I just don't know what my next move should be. If only the two of us could get together and agree to set prices higher. We'd both be better off. Hmmm... but that would be illegal. 

Narrator: 
An oligopoly differs from other market structures because of the interdependence of firms. The primary goal of the firm may not be profit maximization, but rather maximizing market share. 

Narrator: 
The behavior of firms in this situation can resemble the strategic decisions made by players in a game. A new school of thought called game theory attempts to explain this behavior. 

Narrator: 
Marge and Maggie are paired in a two-firm oligopoly known as a duopoly. For simplicity, let's assume that consumers like Emu burgers and Ostrich burgers equally. If both firms charged the same high price they would both earn a profit of $700 a day. If they both charged the same low price, they would both earn $300 a day. However, if one firm charges a high price and the other a low price, the firm charging the low price gains a larger market share earning $1,000 a day, while the other loses $200 a day. 

Narrator: 
Game theory refers to the guessing game that Marge and Maggie play as they set their prices. They both win big if they jointly set higher prices. But neither knows what the other is going to do. Raising prices is a risk because the competition may not follow suit and market share will be lost. It's likely that Marge and Maggie will each try to avoid the worst possible outcome. If Marge charges the high price, she runs the risk of losing $200 per day. If she charges the low price, the worst she could do is earn $300 per day. 

Narrator: 
Marge and Maggie make a rational decision to keep prices low and minimize the chance of losing market share. This is known as the maxi-min strategy. Each firm attempts to maximize the minimum outcome. 

Narrator: 
Even though it's against the law for them to get together and agree to a price, oligopolies often have a tacit agreement to maintain a predictable pricing structure. In many cases it boils down to trust. 

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