Question: The unique element of oligopolies is that they are made up of a small number of mutually interdependent firms. Each firm engages in strategic decision making – they take into account the expected reaction of other firms to a decision that they are making. Oligopolies tend to engage in strategic pricing and their strategic decision making is carried out with explicit or implicit use of game theory.

Game theory is concerned with how individuals make decisions when they are aware that their actions affect each other and when each individual takes this into account. The fundamental aspects of game theory are that players are interdependent. Prisoner's dilemma is a known game that demonstrates the difficulty of cooperative behavior in certain circumstances. It assume that each player cares only about minimizing his/her own time in jail, then the prisoner's dilemma forms a non-zero-sum game in which two players may each either cooperate with or betray the other player. Another example of game theory is a beach kiosk game which supposes that two companies provide snacks and sunscreen on a beach; (a) beachgoers will spread themselves out evenly along the beach; -or- (b) both companies ultimately locate at the midpoint of the beach, otherwise the other company has an advantage (closer to more beachgoers).

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