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Theory Of Strategic Behavior

  Theory of Strategic Behavior

Strategic Moves

  1. In the earlier segments it has been highlighted that oligopolists must realise that their own profits is based on their own decision and behaviour but also on the decision and behaviour of their competitors.
  1. This presents the significant of strategic moves by the oligopolists to enhance their profits. By making definite strategic moves an oligopolist can earn competitive advantage in the market.
  1. Thomas Schelling of Harvard University has made a significance involvement to the thesis of strategic decision making explains the aspect of strategic move in the following words: “A strategic move is one that affects the other individual’s choice in a way favourable to one’s self, by influencing the other individual’s anticipations on how one’s self will perform.”
  1. For strategic move of giving threat to be victorious there must be assurance that the firm making a threat will certainly execute it.
  1. Only when there is commitment to carry out a threat it becomes convincing. If there is no commitment to carry out the threat it will be an empty threat and will thus not have the desired effect on the behaviour of the competitors.
  1. If a firm can convince its competition that it is dedicated to a definite move that it is making then the competitors may coordinate devoid retaliating for the reason that they may believe that they would be beaten more than they would achieve from a long period of disagreement with the firm making a move.
  1. When a threat is convincing in the payoff matrix of firms X and Y provided where the profits of the two industries making different brands of vehicles are presented when they charge low price or high price for their cars.
  1. This payoff matrix shows that charging a high price is a dominant strategy for firm X, that is whatever strategy the competition firm Y pursues, the strategy of charging a high price is optimal for firm X.
  1. Therefore if firm Y charges the low price the low firm X will earn profits of $10 millions if it charges a low price and $15 millions of it charges a high price.
  1. Alternatively if the firm Y charges a high price, the firm X will earn $10 millions if it charges a low price and $25 millions if it charges a high price.
  1. Therefore, whilst the firm Y plays a low price strategy or a high price strategy, for firm X, high price strategy is the maximum strategy to follow.
  1. It will be observed further from the payoff table matrix that the firm X will charge the high price the firm Y will choose for charging a low price and in this method will gain $20 in its place of $15 if it charges the high price.
  1. Under these situations if firm X threatens firm Y that it will charge a low price, this threat will be inconvincing or empty for the reason that the firm Y know that by charging a low price, the firm X will cause its profits to drop to $10 millions.
  1. Being an unbelievable threat the firm Y will not take it critically. As described above one way to make the threat convincing is to make it binding and irrevocable.
  1. Therefore, if a firm threatens to enter a definite market, it can make its threat convincing if the potential firm purchases a plant quite than leave it or enters into a long term contract for purchasing inputs.
  1. This depicts that the firm which provides a threat to enter has made an irrevocable commitment and will thus enter the market, come what may and this makes the threat convincing.
  1. Let us consider another instance if a firm commits to a price decrease if its competitors lessens its price, then to make it commitment convincing it can make verbal or written agreement with the customers that it will match any price cut by its competitors.
  1. Alternatively, if a definite firm has the picture that it can effortlessly avoid its definite commitment that it makes then commitment is not convincing and it will not pay much notice to the commitment made.
  1. Another method for a firm to make the threat convincing is to construct a goodwill of irrationality for carrying out its threat even if it has to be beaten some profits or even incur losses.
  1. This irrational reputation is developed when a firm has actually carried out its threat various times in the precedent.
  1. Therefore, the threat of a firm with reputation of irrationality is a convincing threat and its competitors will consider serious memo of it.
  1. On considering the payoff matrix once again. If the firm X is charging a high price and the firm Y is charging the low price they are earning gains of $15 and $20 millions correspondingly.
  2.    

    Firm Y

    Firm X

    Low Price

    High Price

    Low Price

    10, 10

    10, 5

    High Price

    15, 20

    25, 15

  1. Now, if the firm X lowers its price to carry out its threat, then Y will be persuaded to charge high price and as a consequent both firms will be charging high price and firm X’s profit will hike to $25 millions, but profits of the firm Y will drop.
  1. This is for the reason that in case of firm X lowering price and with firm Y also charging a low price each will be making lower profits of $10 millions.
  1. It is due to drop in profits as an outcome of firm X it has decided to cooperate it is still greater than profits of $10 millions that it would earn if firm X had in-fact carried out its threat and both charged the low price.
  1. Further, in case of convincing commitment it may be noted that for a threat to be credible the firm’s commitment must be backed up with assets, skills and proficiency, financial and technological powers to carry out the commitment.
  1. Apart a firm’s commitments are more convincing if it has goodwill and a long history of hold on to its commitments.
  1. Nevertheless, for tit for tat strategy to be successful definite situations must be fulfilled. First, a reasonably steady group of players for the successful working of its tit for tat policy.
  1. If the players vary somewhat often cooperative behaviour to be accomplished there must be a small volume of players.
  1. In crate of a large number of rivalled firms, it is problem to know every firm is performing.
  1. Consequently cooperation cannot be enforced and usually breaks down when there are many firms tackling every other.
  1. Next for the success of tit for tat strategy to persuade cooperative performance it is presumed that each firm can quickly notice fixing by others and is capable and enthusiastic to even the score if the competitors do fixing.
  1. Last, the demand and cost conditions should stay steady for victorious of tit for tat strategy.
  1. Next failure to cooperate is somewhat frequent the outcome of charging demand or cost situations.
  1. Ambiguity about demand or costs make it complex for the firms to accomplish at an understood of what cooperative performance needed.
  1. Finally, as described above, tit for tat strategy to persuade cooperative behaviour the game is to be played either indefinitely or for a long ambiguity volume of times. The goodwill of unreasonability of the persisting firm creates a credible threat of price warfare if the potential firms penetrates the enterprise.

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