A problem leading to instability in oligopoly is in coordinating the expectations of competitors about what the eventual market out-come will be. To the extent that competitors have divergent expecta-tions, jockeying will continue to occur and the prospect of outbreaks of warfare is likely. Thomas Schelling’s work on game theory” sug-gests that an important part of reaching an outcome in such a setting is the discovery of a focal point, or some prominent resting place on which the competitive process can converge its expectations. The power of focal points resides in the need and desire of competitors to mutually achieve some stable outcome to avoid difficult and unset–tling moves and countermoves. Focal points can take the form of logical price points, percentage markup pricing rules, round-number divisions of market shares, informal Sharings of the market on some geographic or customer basis, and so on. The theory of focal points is that competitive adjustments will finally settle on such a point, which then serves as a natural sticking place.
The concept of focal points raises three implications for com-petitive rivalry. First, firms should seek to identify a desirable focal point as early as possible. The faster the focal point can be reached, the less the costs of jockeying around searching for it are likely to be. Second, industry prices or other decision variables may be simplified so that a focal point can be identified. This may involve, for exam-ple, establishing standard grades or products to replace a complex array of items in the line. Third, it is in the firm’s interest to try to set up the game to make the focal point that is best for it seem to emerge. This may mean introducing a terminology in the industry that leads to a desirable focal point, such as talking in terms of prices per square foot rather than in terms of absolute prices. It can also take the form of structuring the sequence of strategic moves in such a way as to make a satisfactory focal point (from the firm’s prospec-tive) appear to emerge naturally.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.