Following Competitors
Following Competitors
Within oligopoly industries (those with few sellers), several investors often establish facilities in a given country within a fairly short time period. Much of this concentration may be explained by internal or external changes, which
would affect most oligopolists within an industry at approximately the same
time. For example, in many industries, capacity-expansion cycles are similar for most firms. Thus the firms would logically consider a foreign investment at approximately the same time because their domestic capacity would be approached at approximately the same time. Externally, they might all be faced with changes in import restrictions or market conditions that indicate a move to direct investment in order to serve consumers in a given country. In spite of the prevalence of these motivators, much of the movement by oligopolists seems better explained by defensive motives.
Much of the research done in game theory shows that people often make decisions based on the "least-damaging alternative." The question for many firms is, "Do I lose less by moving abroad or by staying at home?" Let's say that some foreign market may be served effectively only by an investment in the market, but the market is large enough to support only one producer. One way of facing this problem would be for competitors to set up one joint operation and divide profit among them; however, antitrust laws might discourage or prevent this. If only one firm decides to establish facilities, it will have an advantage over its competitors by garnering a larger market, spreading its R&D costs, and making a profit that can be reinvested in other areas of the world. Once one firm decides to produce in the market, competitors are prone to follow quickly rather than let the firm gain advantages. Thus the decision is based not so much on the benefits to be gained, but rather on the greater losses sustained by not entering the field. In most oligopoly industries (e.g., automobiles, tires, petroleum), this pattern emerges and helps to explain the large number of producers relative to the size of the market in some countries.
Closely related to this is the decision to invest in a foreign competitor's home market to prevent that competitor from using high profits obtained therein to invest and compete in other parts of the world.
Within oligopoly industries (those with few sellers), several investors often establish facilities in a given country within a fairly short time period. Much of this concentration may be explained by internal or external changes, which
would affect most oligopolists within an industry at approximately the same
time. For example, in many industries, capacity-expansion cycles are similar for most firms. Thus the firms would logically consider a foreign investment at approximately the same time because their domestic capacity would be approached at approximately the same time. Externally, they might all be faced with changes in import restrictions or market conditions that indicate a move to direct investment in order to serve consumers in a given country. In spite of the prevalence of these motivators, much of the movement by oligopolists seems better explained by defensive motives.
Much of the research done in game theory shows that people often make decisions based on the "least-damaging alternative." The question for many firms is, "Do I lose less by moving abroad or by staying at home?" Let's say that some foreign market may be served effectively only by an investment in the market, but the market is large enough to support only one producer. One way of facing this problem would be for competitors to set up one joint operation and divide profit among them; however, antitrust laws might discourage or prevent this. If only one firm decides to establish facilities, it will have an advantage over its competitors by garnering a larger market, spreading its R&D costs, and making a profit that can be reinvested in other areas of the world. Once one firm decides to produce in the market, competitors are prone to follow quickly rather than let the firm gain advantages. Thus the decision is based not so much on the benefits to be gained, but rather on the greater losses sustained by not entering the field. In most oligopoly industries (e.g., automobiles, tires, petroleum), this pattern emerges and helps to explain the large number of producers relative to the size of the market in some countries.
Closely related to this is the decision to invest in a foreign competitor's home market to prevent that competitor from using high profits obtained therein to invest and compete in other parts of the world.
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