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1 Facolt di Economia Universit degli Studi di Parma Cooperation and Competition Among Firms Ch. 3 Provisional Version (1) 2013-14 1

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Factors (strategies) facilitating cooperation between individuals and firms Factors (strategies) facilitating cooperation between individuals and firms 2

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Factors and mechanisms of type: endogenous exogenous Factors and mechanisms of type: endogenous exogenous 3

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Endogenous Strategies The initial structure of payoffs is unaffected. The likelihood of cooperation depends on variables that: qualify subjectively the participants; qualify subjectively the participants; define the attributes of the group; define the attributes of the group; reflect the characteristics or the content of collective action. reflect the characteristics or the content of collective action. 4

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Exogenous Strategies Preferences and characteristics of the participants are taken as given. The likelihood of cooperation depends on: changes in the structure of payoffs; changes in the structure of payoffs; sanctions mechanisms and incentives entered; sanctions mechanisms and incentives entered; involvement of agents outside the group involvement of agents outside the group differentiation of agents in decision-making roles differentiation of agents in decision-making roles 5

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Endogenous Strategies 6

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The shadow of the future One-shot Prisoners dilemma One-shot Prisoners dilemma Iterated prisoners dilemma (IPD) Iterated prisoners dilemma (IPD) 7

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8 Prisoners dilemma C D C D 0,0 1, 1-1, 2 2, -1

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9 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1

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10 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1 D,D=0 C,C=1

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11 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1 D,D=0+0 C,C=1+1

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12 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1 D,D=0+0+0+0 C,C=1+1+1+1

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13 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1 D,D=0+0+0+0+0 C,C=1+1+1+1+1

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14 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1 D,D=0+0+0+0+0+0 C,C=1+1+1+1+1+1

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15 Prisoners dilemma C D C D Dana Andrea 0,0 1, 1-1, 2 2, -1 D,D=0+0+0+0+0+0+0. C,C=1+1+1+1+1+1+1.

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The shadow of the future One-shot Prisoners dilemma One-shot Prisoners dilemma Iterated prisoners dilemma (IPD) Iterated prisoners dilemma (IPD) Indefinite Iteration: Indefinite Iteration: The value of cooperation at a given stage in an IPD clearly depends on the odds of meeting one's opponent in later rounds. The value of cooperation at a given stage in an IPD clearly depends on the odds of meeting one's opponent in later rounds. As p (likelihood to meet ones opponent in the following rounds) approaches 0, the IPD becomes a one-shot PD, and the value of defection increases. As p (likelihood to meet ones opponent in the following rounds) approaches 0, the IPD becomes a one-shot PD, and the value of defection increases. As p approaches 1 the IPD becomes an infinite IPD, and the value of defection decreases As p approaches 1 the IPD becomes an infinite IPD, and the value of defection decreases 16

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1.1 Self-enforcing agreements Incomplete exchange scheme involving two or more imperfectly informed agents. The parties endorse mutual commitments to the continuation of the exchange even if they do not adopt legally binding contracts. The advantage of exchange is evaluated with regard to the difference between the accumulated payoffs of joint cooperation and the payoffs of defection. Incomplete exchange scheme involving two or more imperfectly informed agents. The parties endorse mutual commitments to the continuation of the exchange even if they do not adopt legally binding contracts. The advantage of exchange is evaluated with regard to the difference between the accumulated payoffs of joint cooperation and the payoffs of defection. (example: Buyer-supplier relationships) (example: Buyer-supplier relationships) 19

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Self-enforcing agreements can not be applied to transactions involving relationships that develop in a short term horizon. Self-enforcing agreements can not be applied to transactions involving relationships that develop in a short term horizon. But they are an appropriate solution when the time horizon of the report is expected long-term (indefinite iterated game). But they are an appropriate solution when the time horizon of the report is expected long-term (indefinite iterated game). The sanction linked to failure to cooperate is not imposed by a third party but consists of the loss of profits of the entire exchange relationship. The sanction linked to failure to cooperate is not imposed by a third party but consists of the loss of profits of the entire exchange relationship. Sd=Defection payoff Sd=Defection payoff Ss=Cooperation payoff Ss=Cooperation payoff P=Accumulated payoff P=Accumulated payoff 20

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21 Even if T>R

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