How Business Sector Structure Affects The Game Theory of Financial Markets

Sections

1) Introduction

2) Conflict Between Countries vs Conflict Between Businesses

3) Monopolies

4) Duopolies

5) Oligopolies

6) Perfect Competition

7) Monopolistic Competition

8) The Economics of The Nash Equilibrium – Do They Exist?

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Within economics and financial markets, we have different countries. Within these countries, we have sectors, for example, all those that make up the S&P500.

The collection of businesses within each sector is different. We can have monopolies, duopolies, oligopolies, monopolistic competition, and perfect competition, among others. Monopolies have complete control of all market share (100%), duopolies share the market share between two companies, and an oligopoly is a market with a small number of firms who are interdependent. Monopolistic competition details many companies in an industry that offer similar products or services, but not direct substitutes. Finally, perfect competition contains many small firms, none of which have pricing power.

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Conflict Between Countries vs Conflict Between Businesses

In geopolitics, we often discuss conflict or competition between countries. In a similar way, the conflict between businesses involves many parties with contradicting interests. Within business, the battles are competing for market share and hence profits. In geopolitics, power and influence can be achieved in many ways.

The scale of conflict between countries far exceeds that of business, and businesses are often subject to laws and regulations from the country in which they are contained. We have seen this with China’s crackdown on its technology sector in the last few years as its power and influence were growing on a national scale. The government moved to control the growth of these companies and show them who was truly in charge. China has to carefully manage this as its technology sector contributes to the rapid economic growth that it still appears to be managing to maintain, for now.

How conflicts between businesses are solved involves legal action. Whereas with countries, when conflicts are solved it comes down to negotiation and diplomacy. A business ceasing to exist is much more likely than a country disappearing.

Businesses can be taken over or acquired by other businesses, especially if an acquiring business wants to maintain the current structure of the sector or grow its market share. So what business structures can we see sectors in the financial markets operate under?