A combination of the barriers to entry created by monopolies and the product differentiation that characterizes monopolistic competition can create the framework for an oligopoly. For example, if a government grants a company a patent for an invention, it can create a monopoly. For example, if the government grants patents to three different pharmaceutical companies, each with its own drug to lower high blood pressure, these three companies can become an oligopoly. Game theory provides a framework for understanding how companies behave in an oligopoly. The simple example here underestimates the problem of a government agency whose job it is to regulate a duopoly or even a monopoly by imposing the socially efficient price on it. The prisoner`s dilemma is a specific type of game in game theory that shows why cooperation is difficult for oligopolists to maintain, even if it is mutually beneficial. In the game, two members of a criminal gang are arrested and imprisoned. Prisoners are separated and have to think about their options. If both prisoners confess, each will serve a two-year prison sentence. If one confesses but the other denies the crime, the one who confessed will be released, while the one who denies the crime will be sentenced to three years in prison.
If both deny the crime, both are serving only one year in prison. Betraying the partner through admission is the dominant strategy; This is the best strategy for any player, regardless of how the other player plays. This is called the Nash equilibrium.