Gas Station on All Four Corners Discussion

Imagine you own a gas station that resides at an intersection with 3 other competing gas stations. You have your gas priced at 4.09 per gallon, and it has been at this price for a week. On your way to work, you notice one of your competing stations across the intersection has increased their price to 4.19 per gallon. You know all of your competitors buy gas from the same whole distributor, so there was no reason for them to increase their price based upon cost. The nearest other competitors for gasoline are 10 miles away in the neighboring town.

Using the oligopoly PowerPoint and concept of game theory, discuss the following:

Oligopoly - Oligopoly markets are markets dominated by a small number of suppliers. They can be found in all countries and across a broad range of sectors. Some oligopoly markets are competitive, while others are significantly less so, or can at least appear that way. Characteristics of oligopoly: Raised barriers to entry, price-making power, non-price competition, the interdependence of firms, and product differentiation

Game Theory - game theory can be used to model situations in which each actor, when deciding on a course of action, must also consider how others might respond to that action. For example, game theory can explain why oligopolies have trouble maintaining collusive arrangements to generate monopoly profits.

1. How would you react to your competitors increase in price? Explain why.

2. What is your incentive to keep your price at 4.09? How about matching your competitor's price?

3. Would Nash equilibrium apply to this scenario? How?

Nash Equilibrium Equilibrium in oligopoly markets means that each firm will want to do the best it can given what its competitors are doing, and these competitors will do the best they can given what that firm is doing.