A scenario with three fast-food providers in a single shopping mall serves as a clear example of strategic interdependence. Each vendor understands that their own pricing will directly affect the business of the other two. Consequently, pricing decisions are not made in isolation but are influenced by the anticipated actions and reactions of the competitors.

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In markets with a small number of firms selling differentiated products, the 'fixed demand curve' assumption becomes unrealistic. Instead, firms exhibit strategic interdependence. This means a firm's demand curve is not fixed; it shifts in response to the pricing decisions of its competitors. Consequently, each firm must think strategically, anticipating competitors' actions and recognizing that their own pricing choices will influence those of their rivals.

Strategic Interdependence in Pricing with Few Competitors

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

Strategic Interdependence Among Fast Food Providers in a Mall

This example presents a strategic price-setting game between two firms, Wanda (windsurfing) and Kit (kitesurfing), which functions as a coordination game. Both have identical costs of €10 per board and can set a high price (€36) or a low price (€20). The market has 60 potential customers. The key strategic element is that each firm's best response is to match the other's price. If Kit chooses a high price, Wanda maximizes her profit by also choosing a high price, and the same logic applies if he chooses a low price. This interaction results in two Nash equilibria: one where both price high and another where both price low.

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