Description
In an Oligopoly market structure, what is meant by the term "interdependance"? Please provide a current example from the market place.
Explanation & Answer
Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer like Texaco wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may reduce their price in retaliation. An understanding of game theory and the Prisoner’s Dilemma helps appreciate the concept of interdependence.
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