Uncertainty, Spatial Proximity, and the Stability of Oligopoly Pricing

One of the most pervasive characteristics of mature oligopolistic industries is their reluctance to engage in price competition, and their channeling of competitive efforts into rivalry using advertising and other marketing costs as well as product differentiation. This leads to questions concerning the nature of the economic and social matrix within which such firms operate, and these questions in turn motivate the theorist to construct frameworks that yield such results. Spatial proximity has generally been accepted as an intensifier of price competition, but in many local oligopolistic markets it seems to act as an inhibitor of price competition. In this paper I attempt to study the role of uncertainty in explaining the ‘rivalrous consonance of interests’ which tends to keep prices above the competitive level in spatially concentrated markets. By using Weibull density functions to approximate subjective expectations of firms, I seek to cast light upon some of the factors that play a role in explaining this apparent paradox.