mutual interdependence

mutual interdependence

a form of INTERFIRM CONDUCT pattern in which some or all of the firms in a market formulate their COMPETITIVE STRATEGY in the light of anticipated reactions and countermoves of rival firms. The actions of firms both affect and are affected by each other - the situation is circular. A price cut, for example, may appear to be advantageous to one firm considered in isolation, but if this results in other firms cutting their prices also in order to protect their sales, then all firms may suffer reduced profits. Accordingly, firms may seek to avoid price competition, employing such mechanisms as PRICE LEADERSHIP to coordinate their prices. The same mutual interdependence considerations may apply to other areas of competition; for example, if one firm increases its advertising expenditures, other firms may follow suit to protect their market shares.

Such interdependence exists in market situations, typically in an oligopolistic market (see OLIGOPOLY), where the leading firms each supply a significant proportion of total market supply. See also CARTEL, PRICE WAR, DUOPOLY, PRODUCT DIFFERENTIATION, GAME THEORY, KINKED DEMAND CURVE, LIMIT PRICING.

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