in jail, each with the choice of squealing on each other or maintaining
silence. If neither prisoner squeals, both go free. If they both
squeal, both get hanged. If one prisoner talks and the other does not,
however, the squealer not only gets off scot-free but also collects a
bounty for his trouble. Both prisoners taken together are better off if
they can avoid squealing at all. But acting in his own self-interest,
each prisoner has an even greater incentive to squeal provided the
other does not have the same idea. Translating this problem into the
setting of oligopoly, if firms are cooperative they all can make a reasonable
profit. However, if one firm makes a self-interested strategic
move to which others do not retaliate effectively, it can earn even
higher profits. If its competitors retaliate vigorously against the
move, though, everybody can be worse off than if they were all cooperative.
This chapter presents some principles for making competitive
moves in such a setting. It considers both offensive moves to improve
position and defensive moves to deter competitors from taking
undesirable actions. First, this chapter draws on Chapter 1 to explore
the general likelihood of competitive outbreaks in an industry,
which sets the context in which any offensive or defensive move must
be made. Next, some important considerations in making various
kinds of competitive moves are examined, including nonthreatening
or cooperative moves, threatening moves, and moves designed for
deterrence. This discussion will illustrate the crucial role of established
commitment in making moves, and approaches to doing so
will be examined in detail. Finally, some approaches that firms take
to promote industry cooperation will be discussed briefly.
In addition to drawing on Chapter 1, this chapter will necessarily
draw on the basic principles of competitor analysis described in
Chapter 3 and the discussion of market signals in Chapter 4. Competitor
analysis is obviously a prerequisite to considering any offensive
or defensive move, and market signals are tools both for understanding
competitors and for use in actually implementing competitive
moves.
in jail, each with the choice of squealing on each other or maintainingsilence. If neither prisoner squeals, both go free. If they bothsqueal, both get hanged. If one prisoner talks and the other does not,however, the squealer not only gets off scot-free but also collects abounty for his trouble. Both prisoners taken together are better off ifthey can avoid squealing at all. But acting in his own self-interest,each prisoner has an even greater incentive to squeal provided theother does not have the same idea. Translating this problem into thesetting of oligopoly, if firms are cooperative they all can make a reasonableprofit. However, if one firm makes a self-interested strategicmove to which others do not retaliate effectively, it can earn evenhigher profits. If its competitors retaliate vigorously against themove, though, everybody can be worse off than if they were all cooperative.This chapter presents some principles for making competitivemoves in such a setting. It considers both offensive moves to improveposition and defensive moves to deter competitors from takingundesirable actions. First, this chapter draws on Chapter 1 to explorethe general likelihood of competitive outbreaks in an industry,which sets the context in which any offensive or defensive move mustbe made. Next, some important considerations in making variouskinds of competitive moves are examined, including nonthreateningor cooperative moves, threatening moves, and moves designed for
deterrence. This discussion will illustrate the crucial role of established
commitment in making moves, and approaches to doing so
will be examined in detail. Finally, some approaches that firms take
to promote industry cooperation will be discussed briefly.
In addition to drawing on Chapter 1, this chapter will necessarily
draw on the basic principles of competitor analysis described in
Chapter 3 and the discussion of market signals in Chapter 4. Competitor
analysis is obviously a prerequisite to considering any offensive
or defensive move, and market signals are tools both for understanding
competitors and for use in actually implementing competitive
moves.
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