When the number of firms competing in a market is small, any decision one firm makes about pricing, output, expansion, advertising, and so forth will affect the demand, marginal revenue, and profit conditions of every other firm in the market. Consequently, the profits of oligopoly firms are interdependent, and managers must engage in strategic decision making in order to make the most profitable decisions. Strategic decision making means that managers must get into the heads of their rivals to make predictions about how rivals will react to any decision they make. The resulting interdependence and strategic behavior make decisions much more complicated and uncertain. The consequent uncertainty about marginal revenue makes it difficult for managers in oligopoly markets to make profit-maximizing decisions by equating marginal revenue and marginal cost, even though MR = MC is the profit-maximizing rule for oligopoly firms (as it is for firms operating in any market structure).

This chapter introduced you to game theory, an indispensable tool for thinking about strategic decision making. We focused on three types of strategic decision situations: (1) simultaneous decisions, in which managers make their individual decisions without knowing the decisions of their rivals; (2) sequential decisions, in which one manager makes a decision before the other; and (3) repeated decisions, in which strategic decisions are made repeatedly over time by the same firms. We covered a huge amount of territory in this chapter, and yet, you may have noticed, we were not able to provide you with a simple profit-maximizing rule of the type described in Chapters 11 and 12. Our purpose in this chapter was to provide a framework for strategic analysis of how oligopolists have tried to cope with the problem of interdependence and why they have succeeded or why they have failed. We believe game theory offers a promising guide for decision making when interdependence makes it impossible to ignore rivals' reactions to managerial decisions. However, even several courses in game theory cannot teach you how to make such decisions; this type of decision making is best learned from experience. But a good economics foundation will make it easier for you to learn from experience.