Industry Structure Oligoploy and Cooperation

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Industry Structure Oligoploy and Cooperation

• Mgt 455 Summer, 09 Dr. Galbraith

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Non zero-sum games and oligopoly structure
A Beautiful Mind
http//www.youtube.com/watch?vl0ywiYboCLkfeatur
ePlayListp54473E481D8A31C1playnext1playnext_
fromPLindex53
John Nash, Nobel Prize winner, 1994
President Carter, Dayton Peace Prize Speech
http//www.youtube.com/watch?vDnLosZVG54k
Robert Wright (Author)
http//youtube.com/watch?vwcZFIy2mfyE
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Classic Prisoners Dilemma GameUnder profit
maximization and not knowing other persons
strategy
Prisoner 2
Not Cooperate
Cooperate
Cooperate
Prisoner 1
Not Cooperate
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Classic Prisoners Dilemma Game
Prisoner 2
Not Cooperate
Cooperate
Cooperate
Prisoner 1
Not Cooperate
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Prisoner Dilemma and Adam Smiths response to A
beautiful mind

• Adam Smith was only half wrong, it really
  depends on whether cooperation or competition
  results in a social benefit
• Examples?

• Adam Smith (1723-1790)

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Iterative Strategic Decision Making Series of
Games

• Most economic decisions (and many social and
  political situations) are iterative in nature.
  Most of the times we do not know when the
  iterations end (or some situations may actually
  be infinite-like).
• Example Pricing in the market place

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Iterative Prisoners Dilemma
A fixed, finite number of repetitions is
logically inadequate to yield cooperation. Both
or all players know that cheating is the dominant
strategy in the last play. Given this, the same
goes for the second-last play, then the
third-last, and so on. But in practice we see
some cooperation in the early rounds of a fixed
set of repetitions. The reason may be either that
players don't know the number of rounds for sure,
or that they can exploit the possibility of
"irrational niceness" to their mutual advantage.
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Iterative Prisoners Dilemma
The cheater's reward comes at once, while the
loss from punishment lies in the future. If
players heavily discount future payoffs, then the
loss may be insufficient to deter cheating. Thus,
cooperation is harder to sustain among very
impatient players (governments or corporations)
or dumb players (bullies).
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Iterative Prisoners Dilemma
Punishment won't work unless cheating can be
detected and punished. Therefore, companies
cooperate more when their actions are more easily
detected (setting prices, for example) and less
when actions are less easily detected (deciding
on nonprice attributes of goods, such as repair
warranties). Punishment is usually easier to
arrange in smaller and closed groups. Thus,
industries with few firms and less threat of new
entry are more likely to be collusive.
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Iterative Prisoners Dilemma
Historically most effective strategy is the "tit
for tat, (Anatol Rapoport, RAND). Here, you
cheat or retaliate if and only if your rival
cheated in the previous round. 1) Unless
provoked, you will always cooperate 2) If
provoked, you will retaliate (even harder if
possible) 3) You are quick to forgive 4) You
compete against the opponent more than once
(iterative game). 5) Dont know the ending
iteration (people will often cheat knowing the
last play) But if rivals' innocent actions can
be misinterpreted as cheating, then tit for tat
runs the risk of setting off successive rounds of
unwarranted retaliation (each person thinks
he/she is retaliating, rather than the cause).
Examples? -- tit for two tats is solution?
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Iterative Prisoners Dilemma
Cooperation can also arise if the group has a
large leader, who personally stands to lose a lot
from outright competition and therefore exercises
restraint, even though he knows that other small
players will cheat. Saudi Arabia's role of "swing
producer" in the OPEC cartel is an instance of
this. But larger leader who will not lose a lot
can also enforce cooperation by retaliation in
tit for tat
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Real Life

• 2 player prisoner dilemma is a good starting
  point to understand actual behaviors, and
  possible effective strategies
• Real life may be much more complicated
• Multi-player
• Changing payoffs
• Uncertain environment
• Exit and entry
• Multiple strategies and different resources