Summary of Lectures (Part 2)

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ECMC40 Lecture Notes II
Strategic Commitment
AIM: firms undertake commitment in order to alter the behaviour of their rivals so that they can
improve their level of profit
Ex: invest in additional capacity
- Can block entrants
- Increasing price cutting
3 Necessary Conditions for commitment to work
1) Visible
2) Understandable
3) Credibility - Irreversible, contracts, reputation
Firm 2
Firm 1
Aggressive
Passive
Aggressive
12.5, 4.5
16.5, 5
Passive
15, 6.5
18, 6
Simultaneous: Nash Equil BR1 = BR2
- Firm 1: Passive & Firm 2: Aggressive
- :LWKHPSD\RIIV
Sequential: Requires creditability, understandable and visible
- If Firm 1: plays aggressive ± Firm 2: plays passive
- First mover advantage ± earned a larger payoff by moving 1st
Nash Equilibirum
- A Nash Equilibrium is a pair of strategies (one for each player) such that each
strategy is a best response to the other
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