Classroom Companion: Business

 
Chapter 13 · Digital Monopolies and Oligopolies

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nues of firm B will drop considerably; firm B may even be pushed out of the 
market.
5
Firm A also knows that if firm B lowers the price and firm A does not, firm A 
will face the same destiny.
5
If both firms lower the price, the market size of the two firms will be unchanged, 
but the revenues have become smaller for both firms because the user pay less 
for the service.
The worst outcome for firm A happens if it keeps the same price, while firm B low-
ers the price. At the same time, the best outcome for firm A happens if it lowers the 
price and firm B does not. So, what shall firm A do? The likely outcome (called the 
Nash equilibrium) is that firm A lowers the price and, by the same reasoning, firm 
B does the same. This benefits the users, but the revenues of both firms are now 
lower, and the business is less profitable.
Price unchanged
Lowers price
Lowers price
Price unchanged
A
B
No change
No change
A loses 
Revenue
B gains
revenue
A loses
Revenue
B loses
revenue
A gains
Revenue
B loses
revenue
. Fig. 13.3 Payoff matrix for the prisoner’s dilemma game. (Authors’ own figure)
13.3 · Formation of Oligopolies

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The discussion above applies to two competing companies but can easily be 
extended to an oligopoly consisting of more than two companies.
An iterated prisoner’s dilemma game is a game which is played several times in 
succession. Price war is one outcome of iterated prisoner’s dilemma games where 
each competitor tries to follow the actions taken by the other competitors. One 
example is the continuous price war between regional gasoline stations: if one 
station reduces the gasoline price, then all the other stations are likely to do the 
same.
In the early days of mobile communications, price war forced the operators to 
offer heavily subsidized mobile phones to the customers. Since the mobile commu-
nication business is an oligopoly, all operators had to choose this strategy; other-
wise, they would soon be out of business. The strategy had one advantage, namely, 
that it increased the adoption rate of mobile phones causing the market to increase 
rapidly. As the market matured, the practice changed because it simply meant less 
revenue for the operators and did not create any new market opportunities. The 
competition then changed, and the operators began to offer complex subscription 
packets consisting of various combinations of price, bandwidth, data volume, and 
other features to differentiate one another. The market then became more like 
monopolistic competition.