(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 526
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CHAPTER 13 • Game Theory and Competitive Strategy 501
EX AMPLE 13. 2 OLIGOPOLISTIC COOPERATION IN THE WATER
METER INDUSTRY
For some four decades, almost all
the water meters sold in the United
States have been produced by four
American companies: Rockwell
International, Badger Meter,
Neptune Water Meter Company,
and Hersey Products.10 Most buyers of water meters are municipal water utilities, who install the
meters in residential and commercial establishments
in order to measure water consumption and bill consumers accordingly. Because the cost of meters is a
small part of the total cost of providing water, utilities
are concerned mainly that the meters be accurate
and reliable. Price is not a primary issue, and demand
is very inelastic. Demand is also very stable; because
every residence or business must have a water meter,
demand grows slowly along with the population.
In addition, utilities tend to have long-standing
relationships with suppliers and are reluctant to
shift from one to another. Because any new entrant
will find it difficult to lure customers from existing
firms, this creates a barrier to entry. Substantial
economies of scale create a second barrier to entry:
To capture a significant share of the market, a new
entrant must invest in a large factory. This requirement virtually precludes entry by new firms.
With inelastic and stable
demand and little threat of entry
by new firms, the existing four
firms could earn substantial
monopoly profits if they set prices
cooperatively. If, on the other
hand, they compete aggressively, with each firm cutting price
to increase its own share of the
market, profits would fall to nearly competitive levels. The firms thus face a prisoners’ dilemma. Can
cooperation prevail?
It can and has prevailed. Remember that the same
four firms have been playing a repeated game for
decades. Demand has been stable and predictable,
and over the years, the firms have been able to assess
their own and each other’s costs. In this situation, titfor-tat strategies work well: It pays each firm to cooperate as long as its competitors are cooperating.
As a result, the four firms operate as though they
were members of a country club. There is rarely an
attempt to undercut price, and each firm appears
satisfied with its share of the market. While the business may appear dull, it is certainly profitable. All
four firms have been earning returns on their investments that far exceed those in more competitive
industries.
EX AMPLE 13. 3 COMPETITION AND COLLUSION IN THE AIRLINE
INDUSTRY
In March 1983, American Airlines
proposed that all airlines adopt
a uniform fare schedule based
on mileage. The rate per mile
would depend on the length of
the trip, with the lowest rate of
15 cents per mile for trips over
10
2500 miles, higher rates for shorter
trips, and the highest rate, 53 cents
per mile, for trips under 250 miles.
For example, a one-way coach
ticket from Boston to Chicago, a
distance of 932 miles, would cost
This example is based in part on Nancy Taubenslag, “Rockwell International,” Harvard Business
School Case No. 9-383-019, July 1983. In the late 1980s, Rockwell split up and sold its water meter
division to British Tyre & Rubber, which later became part of Invensys, a multinational company
that markets water meters in the United States under the Foxboro brand. Hersey became a subsidiary of Mueller Products in 1999, but still sells meters under the Hersey name. Badger and Neptune
continue to operate as stand-alone companies.
