Oligopoly as a coalitional game

Nir Dagan

Read a PDF presentation


The mainstream theory of oligopoly is established on the foundations of Cournot (1838). A market with a small number of firms is modeled as a strategic game in which the firms interact, while the consumers are passive price takers. This approach has several shortcomings. First, it assumes that a price system always exists both in and out of equilibrium. Second, in strategic models, market power is not derived as an equilibrium phenomenon, but is assigned to firms by making them the only active players. And third, direct trading or collusion among firms is prohibited.

Here I study a mixed continuum model as a coalitional game. In this game I assume, like in the strategic framework, that prices exist in and out of equilibrium. On the other hand, both oligopolists and consumers are active in trade and coalition formation, and no limitation on cooperation among oligopolists is imposed. The model, therefore, should predict the extent of market power of firms, and whether collusion is sustainable in equilibrium.

In the consumer-wise competitive coalitional game (C3-game) every coalition that contains (a positive measure of) consumers can choose only those allocations that are competitive in the consumers' sector. A reasoning, based on the theory of coalitional games, for this assumption was developed in Dagan (2008).

In order to compare the coalitional theory with strategic theories, the core of the C3-game is applied to an extensively studied oligopoly model with hetrogeneous products and linear cost and demand functions.