MGEC40H3 : Summary of Lectures (Part 2)

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Aim: firms undertake commitment in order to alter the behaviour of their rivals so that they can improve their level of profit. 3 necessary conditions for commitment to work: visible, understandable, credibility - irreversible, contracts, reputation. Firm 1: passive & firm 2: aggressive. If firm 1: plays aggressive firm 2: plays passive. First mover advantage earned a larger payoff by moving 1st. A nash equilibrium is a pair of strategies (one for each player) such that each strategy is a best response to the other www. notesolution. com. Outline: strategic substitutes & complements, tough and soft commitment, direct & strategic (indirect) effects (of commitment) some famous strategies. Strategic substitutes - cournot model q2: refers to situations where the more (less) aggressively a player acts then the less (more) aggressively all the other players act, q picking, downward sloping reaction functions.

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