(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 533

508 PART • Market Structure and Competitive Strategy does (refer to Table 13.12a) Now the threat might be credible without any further action; after all, you can’t be sure that an irrational manager will always make a profit-maximizing decision In gaming situations, the party that is known (or thought) to be a little crazy can have a significant advantage Developing a reputation can be an especially important strategy in a repeated game A firm might find it advantageous to behave irrationally for several plays of the game This might give it a reputation that will allow it to increase its longrun profits substantially Bargaining Strategy Our discussion of commitment and credibility also applies to bargaining problems The outcome of a bargaining situation can depend on the ability of either side to take an action that alters its relative bargaining position For example, consider two firms that are each planning to introduce one of two products which are complementary goods As the payoff matrix in Table 13.13 shows, Firm has a cost advantage over Firm in producing A Therefore, if both firms produce A, Firm can maintain a lower price and earn a higher profit Similarly, Firm has a cost advantage over Firm in producing product B If the two firms could agree about who will produce what, the rational outcome would be the one in the upper right-hand corner: Firm produces A, Firm produces B, and both firms make profits of 50 Indeed, even without cooperation, this outcome will result whether Firm or Firm moves first or both firms move simultaneously Why? Because producing B is a dominant strategy for Firm 2, so (A, B) is the only Nash equilibrium Firm 1, of course, would prefer the outcome in the lower left-hand corner of the payoff matrix But in the context of this limited set of decisions, it cannot achieve that outcome Suppose, however, that Firms and are also bargaining over a second issue—whether to join a research consortium that a third firm is trying to form Table 13.14 shows the payoff matrix for this decision problem Clearly, the dominant strategy is for both firms to enter the consortium, thereby increasing profits to 40 Now suppose that Firm links the two bargaining problems by announcing that it will join the consortium only if Firm agrees to produce product A In this case, it is indeed in Firm 2’s interest to produce A (with Firm producing B) in return for Firm 1’s participation in the consortium This example illustrates how combining issues in a bargaining agenda can sometimes benefit one side at the other’s expense As another example, consider bargaining over the price of a house Suppose I, as a potential buyer, not want to pay more than $200,000 for a house that is actually worth $250,000 to me The seller is willing to part with the house at any price above $180,000 but would like to receive the highest price she can If I am the only bidder for the house, how can I make the seller think that I will walk away rather than pay more than $200,000? TABLE 13.13 PRODUCTION DECISION Firm Firm Produce A Produce B Produce A 40, 50, 50 Produce B 60, 40 5, 45