A Game-Theoretic Thought Experiment on Oligopoly Pricing Strategies

Abstract

This paper employs game-theoretic methods and constructs a series of thought experiments to analyze how firms set prices in oligopolistic markets and what outcomes ultimately emerge. It first introduces classical models of oligopolistic competition, such as the Cournot, Bertrand, and Stackelberg models. However, since real-world firm behavior is influenced by information asymmetry, forecasting biases, and strategic interactions, traditional models fail to adequately capture actual market dynamics. Therefore, the paper designs several typical thought experiments—such as price war scenarios, tacit collusion scenarios, and signaling scenarios—to simulate firms' optimal response strategies under different information structures and decision sequences. The results of these experiments are analyzed using game-theoretic concepts like Nash equilibrium and sequential equilibrium. The study finds that when information is fully symmetric and the game is repeated, oligopolistic firms are more likely to achieve implicit collusion and thereby earn higher profits. In contrast, under conditions of information asymmetry or one-shot games, price competition becomes more intense, prompting firms to adopt aggressive low-price strategies to capture market share. Additionally, the paper discusses how firm reputation, retaliation capacity, and market entry barriers influence pricing strategies, arguing that these factors significantly affect equilibrium outcomes and thus alter overall market welfare. The paper contends that thought experiments, as a method combining theoretical modeling with logical reasoning, can address the limitations of traditional mathematical models in explaining dynamic strategic interactions, offering new insights into the strategic behavior of oligopolistic firms. Finally, it suggests that future research could integrate behavioral economics and empirical data to further test the validity of the pricing mechanisms proposed in these thought experiments in real-world settings, and explore how regulatory policies might reshape the game structure to deter tacit collusion and promote fair competition. This research contributes to enriching the application of game theory in industrial organization and offers valuable implications for government antitrust policy formulation and corporate competitive strategy development.