History has seen many examples of the lone man — like Christ, Luther, Gandhi, or Hitler — who without initial wealth or position, succeeds in changing the behavior of an entire society, for good or for ill. Whence comes this power. No doubt such leaders have possessed extraordinary ability, and have formulated original ideas with great appeal which others could readily follow. But there is another striking similarity among these leaders; namely their single-minded devotion to their, ideals, and their uncompromising attitude toward those who opposed them, no matter what the personal cost. There is hardly any need to document this facet of their personalities, so widely is it known. But we cannot help recalling Gandhi’s threat to starve himself to death if the fighting between Hindus and Muslims did not stop. Indeed the whole-hearted commitment of these leaders to their ideals was often reflected in their followers’ commitment to them. The purpose of this paper is to show how significant is the power to make commitments, perhaps in the name of some ideal.
JEL Classification: 026
Keywords: Commitment credible threat, Repeated games, Game theory
We study the “generalized correlated equilibria” of a game when players make information processing errors. It is shown that the assumption of information processing errors is equivalent to that of “subjectivity” (i.e., differences between the players’ priors). Hence a bounded rationality justification of subjective priors is provided. We also describe the set of distributions on actions induced by generalized correlated equilibria with common priors.
We extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default. Default can be either strategic, or due to ill-fortune. Agents who default are penalized to a degree proportional to the size of their default and to penalty parameters lambda. We find that under conditions similar to those necessary to guarantee the existence of GEI equilibrium, we get the existence of GEIλ equilibrium, for any λ > 0. We argue that default is thus reasonably modeled as an equilibrium phenomenon. Moreover, we show that more lenient lambda which encourage default may be Pareto improving because they allow for better risk spreading. When default occurs, the Modigliani-Miller theorem typically fails to hold in our framework.
Consider a group of people who are asked to offer their opinions on some issue. “Business confidence” surveys are an example: groups of businessmen are often asked for their predictions of economic indicators such as growth or inflation rates. Each member of the group makes a prediction based on his or her private information, and the average prediction is then publicly announced. If the members of the group are then allowed to revise their opinions, based on whatever information they glean from the public announcement, is there any tendency for the opinions in the group to converge on a common, consensus opinion? In this note we show that under certain conditions the answer to this question is yes.
JEL Classification: 213, 025
Keywords: Common knowledge, Public opinion, Group behavior
In this paper we propose a pseudo-Nash equilibrium for N-person games in which very simply we allow play in the last period to be arbitrary, but otherwise it must conform to the (perfect) Nash optimality criterion.
JEL Classification: 026
Keywords: Pseudo-Nash equilibrium, Arbitrary last period play, Overlapping generations economies, Radner’s definition, “Crazy equilibrium”
Actions a firm takes in one market may affect its profitability in other markets, beyond any joint economies or diseconomies in production. The reason is that an action in one market, by changing marginal costs in a second market, may change competitors’ strategies in that second market. We show how to calculate the strategic consequences in market 2, of a change in conditions in market 1 or of a firm’s action in market 1. Qualitatively, the same results hold for both simultaneous markets and sequential markets: whether a more aggressive (i.e., lower price or higher quantity) strategy in the first market provides strategic costs or benefits depends on (a) whether competitors’ products are strategic substitutes or strategic complements. The latter distinction is determined by whether more aggressive play by one firm in a market raises or lowers competing firms’ marginal profitabilities in that market. We discuss applications to how firms select “portfolios” of businesses in which to compete, to rational retaliation as a barrier to entry, to international trade, and to the learning curve.
Both strategic substitutes competition and strategic complements competition are compatible with either quantity competition or price competition. For example, strategic complements competition arises from price competition with linear demand and from quantity competition with constant elasticity demand.
The distinction between strategic substitutes and strategic complements is also important in other areas of industrial organization. For example, we show that with strategic complements competition firms will strategically underinvest in fixed costs. This contrasts with earlier studies which, focusing on the total profits of potential entrants rather than the marginal profits of established competitors, invariably emphasized the use of excess capacity.