Multiple Market Contact between Savings and Loans: Note

When firms diversify into new product or geographic markets (via entry or merger) they may encounter firms with whom they are already competing. An important question for study is whether multiple market contact between firms affects their behavior. Although most traditional theory assumes that behavior of firms in a market is determined by factors in that market alone, Edwards (1955) advanced the mutual forbearance or linked oligopoly hypothesis. Starting from the premise that dominant firms in a market are likely to meet one another in other markets, Edwards hypothesized that a multimarket firm may not take aggressive actions against a competitor in one market if it fears retaliatory actions by that competitor in another market. The crux of the hypothesis is that as the number of contact points between dominant firms of a given market increases, the less competitive that market will be, regardless of the market's level of concentration. Although Edwards suggested that multimarket contact might reduce competition, others, including Solomon ( 1970) who studied geographic banking markets, and Scott ( 1982) who investigated the diversification of manufacturing firms across different lines of business, recognized that contact might increase competition. Neither Edwards, Solomon, nor Scott presented a formal model. However, game theoretic models have been constructed that can be used to study the effects of diversification. Investigators of the chain store paradox (e.g., Kreps and Wilson 1982) have shown that in a very simple environment rational strategies in one market cannot be influenced by behavior in a second indepen-