3 - The pricing decision
Published online by Cambridge University Press: 07 October 2011
Summary
For an understanding of how prices are determined under oligopoly it is necessary to examine, not the conditions affecting the individual firm in the short run but rather, the conditions affecting the industry as a whole over the long run. This extenstion of the analysis to multiple periods not only introduces time as a factor, it also means that the pricing decision cannot be divorced from the industry's investment planning.
To speak of the industry in this connection is, of course, to speak of the megacorp-price leader. Its practice of acting as the surrogate for its fellow oligopolists arises out of a real necessity – the need of an industry to avoid price competition that will be destructive to all its members. Still, the question remains of how one firm can decide upon a price that will be acceptable to other firms within the same industry despite the inevitable divergence of interests.
The megacorp-price leader's task in this regard is greatly facilitated by two conditions inherent in the very situation in which it finds itself. The first is the fact, already noted in chapter 2 (pp. 47–8), that when it acts on behalf of the entire industry the megacorp-price leader's own cost and revenue curves can be treated as the marginal portions of the industry supply and demand curves respectively.
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- The Megacorp and OligopolyMicro Foundations of Macro Dynamics, pp. 55 - 107Publisher: Cambridge University PressPrint publication year: 1976