incentives for improved products and services. There is some controversy over whether a market-oriented

economy generates too much variety.

10.2 Oligopoly

An oligopoly is a situation where a few firms sell most or all of the goods in a market. Oligopolists earn their

highest profits if they can band together as a cartel and act like a monopolist by reducing output and raising

price. Since each member of the oligopoly can benefit individually from expanding output, such collusion

often breaks down—especially since explicit collusion is illegal.
254 10 • Self-Check Questions

The prisoner’s dilemma is an example of the application of game theory to analysis of oligopoly. It shows how,

in certain situations, all sides can benefit from cooperative behavior rather than self-interested behavior.

However, the challenge for the parties is to find ways to encourage cooperative behavior.

Self-Check Questions
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