Oskar Morgenstern, Oligopoly, Monopolistic Competition, and the Theory of Games (1948)

Morgenstern’s journal article, presented as a conference paper, proposes a fundamental reorientation of economic theory around strategic interaction. Its immediate subject is imperfect competition, but its ambition extends to rational conduct on all kinds of markets. Moving from a critique of conventional maximization through two-person games to coalitions and distributions, Morgenstern argues that game theory supplies concepts appropriate to economic relations that mechanics-inspired models obscure. The paper offers a qualitative introduction rather than a detailed mathematical exposition; its central claim concerns the structure of economic problems, not merely a new technique for calculating prices.

The inadequacy of existing oligopoly theories lies in their piecemeal treatment of assumptions about competitors’ reactions. Marginal costs, marginal revenues, and product differentiation cannot by themselves resolve situations in which participants anticipate and influence one another’s conduct. For Morgenstern, this reciprocal anticipation is the defining problem, not a complication to be added to an otherwise complete model. Conventional competitive theory suppresses it by holding other conditions constant and excluding agreements that could reduce the effective number of independent actors.

In this case no trick whatever will help disguise the fundamental fact that, while each of the participants wishes to maximize his own gain, the problem as a whole is not a maximum problem.

This statement concerns bilateral monopoly: each party controls only part of the variables determining price and quantity. Individual intentions to maximize therefore do not make the transaction an ordinary optimization problem. The isolated Robinson Crusoe, or an economy organized under a single controlling will, supplies the contrasting case. Introducing another independent will changes the logical structure of the problem. Morgenstern accordingly rejects mechanics as economics’ governing model: strategic bargaining resembles poker or military maneuver more closely than the movement of molecules.

I wish to emphasize the claim that there is not merely an analogy between the two fields of games of strategy and economics but a strict identity.

The strength of this claim explains why the proposed theory reaches beyond monopoly and oligopoly. Games formalize situations whose outcomes depend jointly on independent participants, including their conjectures, combinations, and defensive strategies. Their mathematics is intrinsic to this structure, not decorative formalism. Morgenstern nevertheless distinguishes competitive games from exchange: a two-person zero-sum game makes one player’s gain another’s loss, whereas economic exchange can produce gains for both.

The exposition begins with two-person games and the danger of having a strategy discovered. Randomized conduct can protect a player where a predictable plan cannot. Morgenstern invokes von Neumann’s minimax theorem to establish the existence of solutions for zero-sum two-person games, while separating this existence result from the computational task of solving a particular game. The claim is carefully bounded: this theorem does not itself establish solutions for every economic interaction. Adding participants introduces new structural properties, and Morgenstern leaves open whether large markets will display a convenient limiting behavior.

With three or more participants, coalitions become central. Their members may obtain more together than separately; the characteristic function expresses coalition values, while compensatory payments account for bargaining over membership and shares. Cartels, production quotas, profit sharing, and labor unions give these concepts an empirical setting. Monopolistic elements thus become fundamental features of organization rather than departures from an independently established competitive norm.

Clearly, free competition will not continue to prevail when people can gain by combining.

The argument also works against treating monopoly as inherently secure: customers may combine against a monopolist. A theory that excludes coalition formation therefore overlooks instabilities within both competitive and monopolistic arrangements. What matters is not simply the number of firms initially present but the combinations that participants can profitably form.

Morgenstern’s most consequential conceptual move concerns the meaning of a solution. An “imputation” distributes the proceeds of a game, including payments within coalitions. In “inessential” games, combining brings no advantage; in “essential” games, coalition value is non-additive, and a solution cannot consist of a single distribution.

In the case of essential games there is never a solution made up of one single imputation or distribution.

Stability consequently belongs to a set of alternative distributions rather than to one uniquely superior outcome. Within a solution, imputations do not dominate one another; proposed distributions outside it can be defeated by distributions belonging to it. The alternatives that remain unrealized are nevertheless crucial: their availability supports the stability of the distribution actually adopted. Morgenstern interprets such a solution as an accepted standard of behavior. Multiple solutions, each containing multiple imputations, express the possibility of different internally coherent organizations and income distributions on the same economic foundation.

The closing applications show why this broader conception matters. Privileges need not remain secure even when embedded in the rules; discrimination may arise under complete information; and winners may refrain from maximum exploitation to preserve stability. In bilateral monopoly, game-theoretic and conventional results can agree on transaction volume while differing over the possible range of prices once premiums and rebates are admitted. A monopolist facing two buyers introduces further possibilities through buyer coalitions and agreements between a buyer and the seller. Morgenstern expressly declines to assume that increasing the number of participants must ultimately yield unique prices.

The article concludes by characterizing game theory as empirical and, at this stage, purely static. Its fuller development requires more economic information. Its relevance lies in replacing a single maximizing outcome with an analysis of strategic dependence, coalition possibilities, and alternative stable distributions—complexities Morgenstern regards as properties of economic life rather than defects of the theory.