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8.4: Interdependency

  • Page ID
    210860
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    Firms in perfectly competitive industries are not very concerned about the actions of their rivals. This is because all the firms are so small that actions taken by one will not affect overall market conditions.

    It goes without saying that a monopolist is not concerned about the actions of its rivals because a monopolist has no rivals.

    So far profit maximization has only dealt with internal production decisions. Each firm in both market structures simply produced a rate of output that maximized profit (or minimized losses).

    With the oligopoly market structure, firms do not have it so easy. The complication comes from the fact that actions taken by one firm in the industry will affect other firms. In other words: “An action taken by one will cause a reaction from others.”

    A good analogy that may help you understand the situation firms face in an oligopoly market structure involves an elevator (see figure 9).

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    Figure 9

    Let’s say you take an elevator with two other people and one of is a pizza delivery person. On your way to the top floor the elevator gets stuck between floors. To reassure all the people in the elevator the building maintenance manager announces, through the emergency speaker, that everyone is safe, but it will take a while to get everyone out of the elevator. After everyone calms down the pizza delivery person gets a great idea. Since his pizza will soon be cold, he offers to cut the pizza in to thirds so everyone can have a tasty meal while awaiting rescue.

    While eating your portion of the pizza you realize that it will not be enough to satisfy your hunger. So, to get your fill you decide to reach over and take another slice from one of your elevatormates. As your eyes lock on to your target and you reach over to grab that extra slice your outreached hand feels a sharp pain. What happened? Well, since you were sharing space in a small elevator with fellow pizza lovers it is not surprising that your actions were noticed and the owner of the targeted pizza took action to protect his share (i.e., he slapped your hand before you grabbed his slice of pizza).

    This situation is like what firms face in oligopolistic industries. When one firm tries to grab more market share other firms will react. The reaction of your competitor will, in part, determine the outcome from your action.

    Think about our elevator example. If your elevatormate does not notice your grab for more pizza, then your action will lead to success. However, if your hungry neighbor does notice and slaps your hand, then your action results in failure. The outcome of your action will depend on the response from your competitor. This interdependency between competitors also exists in the oligopoly market structure.


    This page titled 8.4: Interdependency is shared under a not declared license and was authored, remixed, and/or curated by Martin Medeiros.

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