An oligopoly is a market with only a few firms (think 2–10 big players) that face high barriers to entry and act interdependently—each firm’s price/output choices affect the others (CED EK PRD-3.C.1). Unlike a monopoly (one firm with market power) or perfect competition (many firms, price takers), oligopolists can influence price but can’t unilaterally set the monopoly outcome. They often have incentives to collude or form cartels (EK PRD-3.C.2), but strategic problems (Prisoner’s Dilemma, dominant strategies, Nash equilibrium—EK PRD-3.C.3–6) make stable collusion hard. Result: prices are usually higher and output lower than in perfect competition, but closer to competitive than a pure monopoly (EK PRD-3.C.7). For AP review, focus on strategic interdependence, payoff matrices, dominant strategies, and Nash equilibrium—see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and Unit 4 overview (https://library.fiveable.me/ap-microeconomics/unit-4). For extra practice, use the practice problem bank (https://library.fiveable.me/practice/ap-microeconomics).

Barriers to entry are the obstacles that stop new firms from entering an industry—and they help explain why oligopolies have only a few firms that can earn long-run profits (CED EK PRD-3.C.1). Common examples: - High startup costs or capital requirements (airlines, carmakers). - Economies of scale: incumbent firms produce cheaply at large scale, so a small entrant can’t match prices (utilities). - Legal barriers: patents or licenses (pharma, telecom spectrum). - Control of key inputs (De Beers historically with diamonds). - Strong network effects (social networks or platforms become more valuable as more users join). These barriers make collusion or tacit collusion easier because few firms face real competition (CED EK PRD-3.C.2). On the AP exam you should be able to define barriers and give examples; see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and more unit review (https://library.fiveable.me/ap-microeconomics/unit-4). For extra practice, check Fiveable’s practice problems (https://library.fiveable.me/practice/ap-microeconomics).

Game theory models strategic interactions where each firm’s payoff depends on its own action and others’ actions (CED: EK PRD-3.C.3, 3.C.4). In oligopoly, few firms are interdependent, so you use payoff (normal-form) tables to list strategies and outcomes. Key AP concepts: a dominant strategy (best no matter what rivals do), Nash equilibrium (no one can profitably deviate unilaterally), and the Prisoner’s Dilemma analogy showing why firms want to collude but often don’t (EK PRD-3.C.5–3.C.7). Game theory explains why oligopoly prices/quantities sit between monopoly and perfect competition: firms could raise profits by cooperating, but incentives to cheat prevent stable monopoly outcomes. Practice reading payoff matrices and identifying dominant strategies and Nash equilibria for the exam (topic 4.5). For a focused review, see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and extra practice (https://library.fiveable.me/practice/ap-microeconomics).

A dominant strategy is an action that gives a player a higher payoff no matter what the other player does—it’s best for that player in every possible case (CED EK PRD-3.C.5). A Nash equilibrium is a set of actions (one for each player) where no single player can increase their payoff by changing only their own action, given the other players’ choices (CED EK PRD-3.C.6). So: if a player has a dominant strategy, the action they choose in every Nash equilibrium (if one exists) will be that dominant action—but a Nash equilibrium can exist without any player having a dominant strategy. Example: in the Prisoner’s Dilemma each player has a dominant strategy to “defect,” and (defect, defect) is the Nash equilibrium; but many games have Nash equilibria that require mutual best responses without any dominant strategy. For AP review, see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and practice problems (https://library.fiveable.me/practice/ap-microeconomics).

The Prisoner’s Dilemma is a 2-player, 2-action normal-form game showing why two profit-seeking firms don’t cooperate even when cooperation would raise both their payoffs. Example payoffs (years of utility): if both “cooperate” (collude) they each get 3; if one defects while the other cooperates, the defector gets 5 and the cooperator gets 0; if both defect, they each get 2. Each firm has a dominant strategy to defect (it’s better no matter what the other does), so the Nash equilibrium is (defect, defect) with payoff 2, even though (cooperate, cooperate) with payoff 3 each is Pareto-better. In oligopoly, this explains why cartels are unstable (EK PRD-3.C.2, EK PRD-3.C.6). Firms face strategic interdependence and incentives to cheat, so monopoly outcomes are hard to sustain; prices end up lower and output higher than a cartel but still above perfect competition (EK PRD-3.C.7). For more AP-aligned examples and practice, see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe), Unit 4 overview (https://library.fiveable.me/ap-microeconomics/unit-4), and lots of practice problems (https://library.fiveable.me/practice/ap-microeconomics).

Read the matrix by remembering it shows each player’s payoff for every combo of actions (first number = row player, second = column player). To find a Nash equilibrium: 1. Identify players, actions, and payoffs in each cell. 2. Look for dominant strategies: for each player, compare payoffs down columns (row player) or across rows (column player). If one action gives a higher payoff no matter what the other does, that’s a dominant strategy (EK PRD-3.C.5). 3. To find Nash equilibrium (EK PRD-3.C.6), check each cell: ask “If the other player’s choice is fixed, can this player increase payoff by unilaterally switching?” If neither player can improve by switching, that cell is a Nash equilibrium. 4. If both players have dominant strategies, the outcome where they play those is a Nash equilibrium. (AP scope: two players, two actions; mixed strategies are out.) Practice this on examples in the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and try more problems at the Unit 4 page (https://library.fiveable.me/ap-microeconomics/unit-4) or the practice bank (https://library.fiveable.me/practice/ap-microeconomics).

When firms “have an incentive to collude” it means they can all earn higher joint profits by cooperating—setting higher prices or cutting output—than by competing. In an oligopoly (few firms, high barriers) each firm’s profit depends on rivals’ choices, so cooperating can move the group closer to the monopoly outcome: higher price, lower quantity, bigger profits (EK PRD-3.C.1, 3.C.7). They form cartels to coordinate those actions and split the extra profit. But collusion is unstable: individual firms face a Prisoner’s Dilemma—each has an incentive to cheat (undercut price) to raise its own profit, so cartels often collapse unless there’s enforcement, legal immunity, or tacit collusion (repeated interaction, price leadership). This is exactly why Nash equilibrium and dominant-strategy reasoning matter on the AP (EK PRD-3.C.3–3.C.6). For a clear study guide and practice problems on this topic, see Fiveable’s Topic 4.5 guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and Unit 4 overview (https://library.fiveable.me/ap-microeconomics/unit-4). Practice questions: (https://library.fiveable.me/practice/ap-microeconomics).

Good question—oligopolies do compete, but that competition often doesn’t push the market to the efficient outcome. With only a few firms, each one’s profit depends on what the others do (strategic interdependence). That creates incentives to collude (explicitly or tacitly) because a cartel-like outcome raises price and profit—but collusion is unstable: each firm also has a short-run incentive to “cheat” (like cut price) to grab extra share. That situation looks like a Prisoner’s Dilemma: the Nash equilibrium (what firms actually choose) typically leaves price higher and quantity lower than in perfect competition, so deadweight loss remains. In short: they compete, but imperfect competition + barriers to entry + incentives to collude/cheat mean outcome is less efficient than perfect competition (and closer to monopoly). On the AP, you should be able to show this with payoff matrices, dominant strategies, and identify Nash equilibria (see the Topic 4.5 study guide for examples) (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe). For more practice, check (https://library.fiveable.me/practice/ap-microeconomics).

Find the payoff matrix, identify the player’s current dominant action, then ask: how big a transfer (incentive) t makes the other action at least as good for every possible opponent choice? Mathematically: t = max_over_opponent_actions [ payoff(other action, opp) − payoff(current dominant action, opp) ] If that max is ≤ 0, no incentive is needed. If positive, t equal to that max (or slightly larger to break ties) is the smallest incentive to change the dominant strategy. Quick numeric example: suppose Player A’s payoffs when Opponent chooses Left or Right are: - If A plays D (dominant): Left → 5, Right → 7 - If A plays C (other): Left → 8, Right → 6 Differences (C − D): Left = 3, Right = −1. The max is 3, so an incentive of at least 3 makes C at least as good in every case (and thus become A’s dominant strategy). This uses CED ideas of dominant strategies and payoff matrices (EK PRD-3.C.5, 3.C.6). For more examples and practice, see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and lots of practice questions (https://library.fiveable.me/practice/ap-microeconomics).

A cooperative outcome is when players (or firms) coordinate their strategies to maximize joint payoffs—think collusion or a cartel where firms agree to restrict output and raise price to get closer to monopoly profits. A non-cooperative outcome is when each player chooses independently to maximize their own payoff given others’ choices; the result is a Nash equilibrium if no one can do better by unilaterally changing strategy. The Prisoner’s Dilemma shows why cooperation is hard: each player has a dominant strategy that leads to a worse joint payoff than if they’d cooperated (CED EK PRD-3.C.5–3.C.7). In oligopoly, tacit or explicit collusion can yield cooperative-like payoffs, but incentives to deviate and antitrust laws make non-cooperative Nash outcomes more likely. For AP review, focus on payoff matrices, dominant strategies, and Nash equilibrium (see Fiveable’s Topic 4.5 guide: https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe).

Even with only a few firms, oligopolies usually can’t get the monopoly outcome because firms are strategically interdependent and each has an incentive to cheat on any collusive agreement. If firms try to act like a single monopolist (cut output, raise price), each firm can increase its own profit by secretly increasing output or cutting price—that unilateral gain makes collusion unstable. Game-theory: the cooperative (monopoly) outcome isn’t a Nash equilibrium because one firm can raise its payoff by deviating, so the equilibrium is a noncooperative outcome (like the Prisoner’s Dilemma). Practical limits—legal anti-trust rules, lack of enforceable contracts, and imperfect information—also prevent sustained cartel behavior. Models show the range: Bertrand price competition can drive price toward marginal cost, Cournot quantity competition yields output above monopoly but below perfect competition. Review these CED concepts (collusion, Nash equilibrium, Prisoner’s Dilemma) in the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and try practice problems (https://library.fiveable.me/practice/ap-microeconomics).

Look at one player at a time. For each possible action the other player could take, compare that player’s payoffs across their own choices. If one action gives a strictly higher payoff in every column (or row)—i.e., no matter what the other player does—then that action is a dominant strategy (CED EK PRD-3.C.5). Quick steps: 1. Pick a player. 2. For each of the other player’s actions, write the payoffs from your two actions side-by-side. 3. If action A ≥ action B in every case and strictly > in at least one, A weakly (or strictly if always >) dominates B. 4. Repeat for the other player. Example: If your payoffs are 10 vs 6 when opponent chooses X, and 12 vs 8 when opponent chooses Y, the first payoff column (10,12) shows your first action dominates the second (6,8). AP note: AP covers two-player, two-action normal-form games only (CED limits). For more practice and examples, see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and extra problems (https://library.fiveable.me/practice/ap-microeconomics).

In short: oligopoly outcomes sit between perfect competition and monopoly. With few interdependent firms, prices in oligopoly are typically higher and output lower than in perfect competition because firms have market power and can (explicitly or tacitly) collude (cartels) to raise price. But oligopolies rarely reach the monopoly’s extreme price-high/quantity-low outcome because strategic incentives (think Prisoner’s Dilemma and Nash equilibrium) make cheating attractive. So: perfect competition = lowest price, highest quantity (efficient); monopoly = highest price, lowest quantity (most inefficient); oligopoly = usually higher price and lower quantity than competition but often lower price and higher quantity than a monopolist unless firms successfully collude. This tradeoff and the role of dominant strategies/Nash equilibrium is tested on the AP (Topic 4.5)—see the unit study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and Unit 4 overview (https://library.fiveable.me/ap-microeconomics/unit-4). For extra practice, use the 1,000+ problems (https://library.fiveable.me/practice/ap-microeconomics).

Interdependence means each firm’s best choice depends on what rival firms do. In an oligopoly (few firms, high barriers) each firm’s profit payoff changes with rivals’ actions—so you can’t pick price or output in isolation. Game theory models this with payoff matrices: a strategy lists actions; a dominant strategy always gives a higher payoff no matter what the other firm does (CED EK PRD-3.C.5). A Nash equilibrium is a set of actions where no firm can improve its payoff by changing strategy alone (EK PRD-3.C.6). Think Prisoner’s Dilemma: both firms would be better if they cooperated (cartel), but each has an incentive to deviate, so the cooperative (monopoly-like) outcome is hard to achieve (EK PRD-3.C.2, 3.C.7). Practice reading payoff tables and finding dominant strategies/Nash equilibria—that’s exactly what AP questions test. For more examples and practice, see the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and the practice bank (https://library.fiveable.me/practice/ap-microeconomics).

Real examples: airlines (Delta, American, United) and oil producers (OPEC) are classic oligopolies—few firms, high barriers, and strategic interdependence (CED EK PRD-3.C.1–3.C.3). How they use game theory: - Tacit collusion/price leadership: One firm raises fares and others match (price leadership). That’s like a repeated Prisoner’s Dilemma where matching is profitable but each firm has an incentive to cut price for market share. - Cartel (explicit collusion): OPEC tries to limit output to raise price—a cartel outcome that’s hard to sustain because individual members have an incentive to cheat (defect). - Strategic quantity/price models: Airlines often act Cournot-like (compete on quantity/routes) while price competition in consumer electronics resembles Bertrand (price undercutting). - Game-theory concepts: dominant strategy (an action best regardless of the other), Nash equilibrium (no one can gain by changing unilaterally), and the Prisoner’s Dilemma explain why oligopolies often end up with higher prices than perfect competition but below monopoly. For step-by-step tables and AP-style payoff matrices (2 players, 2 actions), review the Topic 4.5 study guide (https://library.fiveable.me/ap-microeconomics/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) and practice questions (https://library.fiveable.me/practice/ap-microeconomics).