Few Competitors

In the market of few competitors, it is sometimes better for the firms to coordinate their activities rather than compete toughly, because sometimes the firms could achieve an optimal outcome only by coordination, taking the same action. Coordinating activities in this essay mainly refers to the coordination game in which the players have some identical interests over strategy combinations with two or more Nash Equilibriums (Dixit, 2004 and Capra and Holtt, 1999). Capra and Holtt (1999) also indicate that each player’s choice in the coordination game is the best reply if the other correctly anticipates. However, the coordination which needs to achieve the jointly preferred outcome always fails because each player acts independently (Dixit, 2004). For example, the problem of strategy uncertainty and prediction mistakes confronts all of the firms in the market (Stennek, 1997). Strategy uncertainty means the conflict between the Nash Equilibrium with the best payoff and other equilibriums caused by uncertainty of the other’s response (Crawford and Broseta, 1998). In the theory of coordination game, focal point is an important device, which can be defined as a convergence of expectations about what should be chosen in certain circumstances (Dixit, 2004). For instance, you will meet your friend in a café near the university and there are two cafes Starbucks and Costa, you know it is obvious that the Starbucks is more popular than Costa and it should be also obvious to you that your friend also knows. In the real business world, firms should choose the right situation when it is better to compete toughly or coordinate some activities. This essay aims to analyze under which circumstances the firms could benefit from coordinating their activities and how coordination can be achieved in practice, using different coordination game models including pure coordination game, battle of sexes, assurance game, entry game, and chicken games, realistic examples, and mathematic