Wars of Attrition in Experimental Duopoly Markets
journal contributionposted on 01.01.1997, 00:00 by Owen R. Phillips, Charles F. Mason
Oligopolists often bear large fixed costs. These fixed costs can change, for example through rising property rents, increased taxes, and renegotiated labor contracts. In this paper, we imagine oligopoly market structures that are identical except for the level of fixed costs. Does this level influence the strategic behavior of firms? Since marginal profits are unaffected by fixed costs, one answer is that there should be no change in behavior. Alternatively, firms may seek more cooperative outputs in order to maintain profits. Enough cooperation can even generate bigger profits. But if fixed costs rise to level where there are too many firms in the market for any seller to earn an adequate profit, a price war could result. Attrition leaves more profits for the survivors and the higher fixed costs are an increased barrier to later entry. Thus, it also can be argued that greater fixed costs are an increased barrier to later entry. Thus, it also can be argued that greater fixed costs engender less cooperation among rivals because agents are fighting over a smaller profit pie.