a greater or lesser degree. In the preceding chapter, we considered
quantity and price competition between duopolists. In Chapter 15, we
will examine two-party negotiations: between buyer and seller,
management and labor, plaintiff and defendant. Frequently, one can
analyze multicompetitor settings as if they involved only two parties:
the firm in question and all other competitors. This is true in the
battle for air passengers. One airline’s market share depends on its
own number of departures and on the totaldepartures by its
competitors (not the particular breakdown). Thus, an airline need
only anticipate the average decisions of its competitors to determine
its own best response.
When there are more than two interested parties, new analytical
considerations enter. First, one has to distinguish the differing interests
of the multiple parties. For instance, when a mediator or arbitrator
intervenes in two-party disputes, this third party’s actions and
preferences influence the final outcome. Second, with multiple
parties, there is the possibility (even the likelihood) that some of the
competitors will form coalitions to deal more effectively with the
others. Cartels form to attempt to exercise market power as a group;
companies form trade associations to lobby for common interests;
workers join unions; and nations sign mutual aid treaties. When
coalitions are present, an important issue is their stability. How likely is
it that members of one coalition will break with their original partners
to join others, form new coalitions, or strike out on their own?
2.Degree of Mutual Interest. In some situations, the interests of the
competitors are strictly opposed; one side’s gain is the other side’s
loss. At the end of a poker game, for example, there is simply an
exchange of dollars. Since winnings are balanced by losses, the total
net gain of the players together is equal to zero. In the terminology of
game theory, this type of competitive situation is called a zero-sum
game. The zero-sum game may be thought of as one extreme—that of
pure conflict. At the other extreme are situations of pure common
interest—situations in which “competitors” win or lose together, and
both prefer the same outcome. Real-world examples of either pure
cooperation or pure conflict, however, are the exception. In most
settings, players exhibit varying degrees of common interest and
competition. Because different outcomes can lead to very different
(and nonoffsetting) gains and losses for the competitors, these
situations are designated non-zero-sum games.
The battle for air passengers is a non–zero-sum competition.
Certainly, airlines are competing for passengers and are out to gain
them, possibly at their rivals’ expense. But they also recognize that
flooding the market with flights can be suicidal for all. (After all, total400 Chapter 10 Game Theory and Competitive Strategyc10GameTheoryandCompetitiveStrategy.qxd 9/29/11 1:33 PM Page 400