Defining Oligopoly and Game Theory

When I used to live in Winnipeg, Manitoba the company that provided your cable television service was determined by which side of the Red River you lived on.  On the west was Shaw and on the east was Videon.  I always thought this was very strange and wondered why I couldn't choose?  I now realize that there must have been collusion between the two oligopolistic companies where the divided the Winnipeg cable television market in half in order to minimize competition, which would have resulted in lower fees being charged and minimal advertising expenditures.  This would allow both companies to maximize profit, by being able to charge customers more and reduce their expenditures on maintaining market share.  Eventually, Shaw bought out Videon, but it is now competing against satellite cable providers and digital television through the phone company, resulting in lower rates for consumers and more aggressive advertising, which would all result in lower profits for everyone.

In this case, the two companies (Shaw and Videon) followed through with their agreement to the end. From the point of view of Game Theory, this is an unexpected result.  Assuming there were no physical or technological barriers that would prevent the two companies from cheating, they should have attempted to "steal" customers from the other side of the river in order to maximize their gains, assuming the other company would do the same.

		Videon’s Service Area in Winnipeg
		Limit Service		Expand Service
Shaw’s Service Area in Winnipeg	Limit Service	Videon Profit $500k	Shaw Profit $500k	Videon Profit $650k	Shaw Profit $250k
	Expand Service	Videon Profit $250k	Shaw Profit $650k	Videon Profit $300k	Shaw Profit $300k

With the increase in competition the two companies would need to reduce their rates and spend more on advertising to attract the new customers resulting in lower total overall revenues for the two companies combined.    If Videon broke the agreement and started hooking up additional customers from Shaw's service area, then Shaw's profit would decline and Videon profit would increase.  Therefore, Shaw should consider cheating as well to prevent Videon from having an advantage.  The final result should be that both companies cheat and sign up customers from both sides of the river, removing any advantage of the collusion and resulting in both companies having lower profits.

I think that from a business perspective an oligopoly can be the best and worst situation.  It provides a business with the ability to set prices to a certain degree, but it prevents it from realizing allocative and productive efficiency.  However, the competition between these companies and the profit generated create a technology race that will ultimately decrease the cost to consumers as the technology is improved and becomes less expensive to produce.  The surge in cellular phone technology is a great example.  There are several major players (HTC, Motorola, Nokia, Samsung, Google, Blackberry), but by having each one continually trying to push up the performance or feature bar the technology is becoming less expensive and more powerful.  This may not occur in a monopoly where there is no incentive to make things better or cheaper.  As well, the barrier to entry into some of these high-tech industries prevents monopolistic competition or pure competition from being a realistic model.  The larger companies get larger by acquiring smaller firms that specialize in a specific facet of technology, but there are very few cell phone manufacturers that just "start up".  Even Google got into the cell phone market by buying Motorola.  Why reinvent the wheel?

For consumers, an oligopoly gives the perception of choice due to the competing advertising campaigns, but in reality the choices are much slimmer than they appear and the low prices usually come with strings attached.  Remember there is no such thing as a free lunch!