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Cooperative Decision-Making

Key Economic Skill. Consider other players and put yourself in their shoes

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Cooperative Decision-Making

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    1. Cooperative Decision-Making How to identify opportunities for value creation and exploit them

    2. Key Economic Skill Consider other players and put yourself in their shoes Two questions: Do your actions affect their payoff? Do their actions affect your payoff? If the answer to either question is yes there is an opportunity to create value by cooperating

    3. Neighbourhood Blues Todd values a quiet neighbourhood Lisa enjoys playing the saxophone They live next to one another Do Lisas actions affect Todds payoff? Is there a gain from cooperation (if Lisa has the legal right to play the saxophone)?

    4. Answer: Depends on Value Suppose that Lisa values playing the saxophone at $100 while Todd values a quiet neighbourhood at $150. Then if Todd were to pay Lisa $100 or more, then Lisa would choose not to play. What if Todd were legally entitled to silence? When would the outcome change?

    5. The Coase Theorem The assignment of legal rights does not matter for the outcome. The efficient outcome will always be negotiated. However, rights do matter for the distribution of value. But what would happen if Lisa and Todd could not write an enforceable contract?

    6. Pizza Videos A pizza store and video store are located next to one another. The pizza store owner notes that many customers order a pizza then go next door to pick up a video before returning to pick up their order. They wonder if many consumers are looking upon pizzas and videos as a joint product.

    7. Pricing Game The current price of a pizza is $10 and the current price of a video is $6. There are currently 100 customers who purchase both. The pizza store owner reckons that by reducing the pizza price by $2, an additional 20 customers might be attracted. Is this worth doing?

    8. Yes and No Current profits are $600 for the video store and $1,000 for the pizza place. After the price reduction, the video stores profits become $720 while the pizza places profits fall to $960. So for the pizza store, the discount is not worthwhile? But what if they could coordinate their pricing?

    9. Coordinating Pricing What mechanisms could they use to coordinate pricing? What impediments do they face to reaching an outcome?

    10. Strategies for Complements Provide the complements individually Too few units being produced Subsidise the provision of complements by others Be subsidised to produce complements Form a jointly funded complement provider

    11. Identifying Players Players differ in their roles in value creation

    12. The Value Net

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