In most industries a central characteristic of competition is that firms are mutually dependent: firms feel the effects of each others' moves and are prone to react to them. In this situation, which econo- mists call an oligopoly, the outcome of a competitive move by one firm depends at least to some extent on the reactions of its rivals.' " Bad" or " irrational" reactions by competitors (even weaker com- petitors) can often make " good" strategic moves unsuccessful. Thus success can be assured only if the competitors choose to or are influ- enced to respond in a non-destructive way.
In an oligopoly the firm often faces a dilemma. It can pursue the interests (profitability) of the industry as a whole (or of some subgroup of firms), and thereby not incite competitive reaction, or it can behave in its own narrow self-interest at the risk of touching off retaliation and escalating industry competition to a battle. The di- lemma arises because choosing strategies or responses that avoid the risk of warfare and make the industry as a whole better off (strate- gies that can be called cooperative) may mean that the firm gives up potential profits and market share.
The situation is analogous to the classis Prisoners' Dilemma in game theory, one version of which goes as folIows. Two prisoners sit