A Noncooperative View of Oligopoly

THERE ARE TWO BASIC APPROACHES to the theory of oligopoly which may be called the cooperative and the noncooperative. Typically a cooperative approach will utilize a bargaining model under which the several firms in the oligopoly are supposed to bargain among themselves in order to agree on some joint decision (say, a set of prices to be charged-one per firm) which yields to the industry one of the outcomes which is Pareto optimal for them. A noncooperative approach will, by contrast, involve each firm in isolated decision making. This is not to imply that each firm ignores the effects of its rivals' decisions on its own profit or of its own decisions on its rivals' behavior (and hence its own profits). Noncooperative formulations will generally assume the firms not to make decisions jointly. An equilibrium of a noncooperative nature typically features a set of strategies (say a strategy is a rule for choosing one's price), one for each firm, having the following property: For each firm, its equilibrium strategy gives at least as much profit as any other strategy it might choose, given the strategy choices of its rivals. One possible method of finding a cooperative solution is to define a bargaining process, or a set of axioms which the solution must obey, which turns the process of determining a solution into a noncooperative game. The Nash cooperative solution [6] is a case in point. Here, each firm may be regarded as (a) agreeing to abide by the Nash axioms to find the solution which results from the point and (b) choosing a strategy. The several threat strategies determine a threat point, which determines a solution; while the choice of a threat strategy is dictated by the wish to arrive at the threat whose associated solution yields maximum profit to the firm. In the literature some discussion may be found of the relative merits of cooperative and noncooperative theories. The former have appeal because it seems so obviously sensible and in the interest of all oligopolists to jointly exploit their market to the full. On the other hand, making joint agreements is difficult. The more firms there are, the more interests to reconcile; hence, the harder it is to come to agreement. In addition, where each firm has knowledge not shared by others (say knowledge of one's own profit function), it becomes even harder to bargain because no one knows the full alternatives open to the group and it may be in a firm's own interest to misrepresent