Oligopoly and Game Theory

Topics: Christmas tree, Oligopoly, Christmas Pages: 3 (898 words) Published: December 12, 2013

ECO 152
December 9, 2013

Photo by Christian Gooden, cgooden@post-dispatch.com St. Louis Christmas Tree Lots: Oligopoly and Game Theory

Since Christmas is drawing near, the annual Christmas tree lots are beginning to open. This brings memories of my father cursing in the car every Sunday before mass because half the church lot is taken up by trees. For a few weeks Ted Drew becomes the king of Christmas not the king of custard in St. Louis. Pretend the image I selected is not taken from the St. Louis Post Dispatch but is in fact my family having a wonderful time together at the St. Peter’s Church Christmas tree lot in Kirkwood. This picture does not exist because our time spent at the Christmas tree lot is usually spent arguing over what tree to choose and ultimately ending in my sister crying because my father says we cannot bring a 30 foot tall tree into our home. The Christmas tree market in St. Louis can be considered an oligopoly because there are relatively few locations which sell Christmas trees in St. Louis. An oligopoly is a market structure in which a small number of independent firms compete, somewhere in between a monopoly and a competitive industry with many firms. In this case let us just consider the Ted Drewes lot and the St. Peter’s Church lot as a duopoly to represent the St. Louis Christmas tree market.

Christmas tree prices are determined by St. Peter’s and Ted Drewes in order to maximize profits. The prices are not only determined by demand, but also by the price at which competitors choose to sell. We analyze this price competition by what economists call game theory. Game theory is the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms. In oligopolies, firms are very large compared to the market therefore their interactions are what determine success and profit. Three...
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