Facoltà di Economia U niversità degli Studi di Parma Cooperation and Competition Among Firms

1. Facoltà di EconomiaUniversità degli Studi di ParmaCooperation and Competition Among Firms • Ch. 2 • Provisional Version (1) • 2013-14 1

2. Check List

3. Check List Expected Gross Benefitsof ……………………………

4. Check List Expected Gross Benefitsof ……………………………

5. Check List Expected Gross Benefitsof ……………………………

6. Check ListGross Expected Benefits • Individual Firm • Interfirm Cooperation • Acquisition&Merger

7. Costs of Cooperation

8. Inequality (1) • Collective action is chosen by rational agents when collective benefit (Bc) for each agent (Bc/n=Bca) is higher than benefit from individual action (Bia): Bca>Bia (1)

9. Cost of individual action(single agent/firm) • Interdendence : No • Coordination by : Price/Contract/Market • Costs: Transaction Costs

10. Costs of cooperation • Interdependence: High • Coordination by : Administrative structure / Information exchange/ Planning and monitoring/ Incentive and sactioning mechanisms/Enforcing the rules/ Checking opportunist behaviour • Costs: Regulation cost /Coordination costs

11. Costs of cooperation Interdependence: High Coordination by : Administrative structure / Information exchange/ Planning and monitoring/ Incentive and sactioning mechanisms/Enforcing the rules/ Checking opportunist behaviour Costs: Regulation cost /Coordination costs 11

12. Costs of cooperation Interdependence: High Coordination by : Administrativestructure / Information exchange/ Planning and monitoring/ Incentive and sactioningmechanisms/Enforcing the rules/ Checkingopportunistbehaviour Costs: Regulationcost /Coordinationcosts 12

13. Inequality (2) (Bca-(Cc+Cr))>(Bia-Ct) with Cc, Cr>0 ; Ct0 where Cc= Coordinationcosts Cr= Regulationcosts Ct= Transactioncosts

14. RegulationCosts Set up of incentive and sactioningmechanisms Checkingopportunistbehaviour Enforcingthe rules

15. InvisibleHand • Rational (self-interested, opportunisticor not ) individuals, who maximize their utility, increase the collective aggregate welfare of the group • A. Smith (WoN): “…. he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible handto promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. “

16. Social dilemmas Rational individuals, who maximize their utility, may decrease not only the collective welfare, but also their own individual utility. .

17. The Tragedy of the Commons Hardin (1968) “ The Tragedy of the Commons”: “The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.

18. The Tragedy of the Commons As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, "What is the utility to me of adding one more animal to my herd?" This utility has one negative and one positive component. 1. The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly + 1. 2. The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen,the negative utility for any particular decisionmaking herdsman is only a fraction of – 1

19. The Tragedy of the Commons Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another.... But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit -- in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all”

20. Hardin: • http://www.youtube.com/watch?v=L8gAMFTAt2M • Glass: • http://www.youtube.com/watch?v=lwaNZgY9PCQ&feature=related • Ostrom: • http://www.youtube.com/watch?v=D1xwV2UDPAg

21. Social dilemmas Rational individuals, who maximize their utility, may decrease not only the collective welfare, but also their own individual utility. (The source of social dilemmas is self-regarding rationality as well as opportunism) .

22. Social dilemmas “Social dilemmas are situations in which individual rationality leads to collective irrationality. That is, individually reasonable behavior leads to a situation in which everyone is worse off than they might have been otherwise. Many of the most challenging problems we face, from the interpersonal to the international, are at their core social dilemmas” (Kollock 1998).

23. Social dilemmas • Social dilemma is “a situation in which: (1) two or more individuals can behave so as to maximize personal interests or maximize collective interests, but (2) if all be- have so as to maximize personal interests all are worse off than if all behave so as to maximize collective interests (Komorita & Parks 1994)

24. Social dilemmas Social dilemmas are situations in which each member of a group has a clear and unambiguous incentive to make a choice that - when made by all members - provides poorer outcomes for all than they would have received if none had made the choice. Thus, by doing what seems individually reasonable and rational, people end up doing less well than they would have done if they had acted unreasonably or irrationally (Dawes & Messick 2000)

25. Social dilemmas • “As individuals we are each better off when we make use of a public resource, such as public television, without making any contribution, but if everyone acted on this conclusion, the public resource would not be provided and we would all be hurt. Each farmer does best by taking as much irrigation water as possible, and each fisher benefits from catching as many fish as possible, but the aggregate outcome of these individually reasonable decisions can be disaster (groundwater exhausted and fish species depleted to the point of extinction) (Kollock 1998).

26. Examples of social dilemmas • Supply of public goods • Exploitation of technological externalities • Collusion • Exploitation common pooled resources, • ecc.

27. Typologies of social dilemmas • Social Traps • Public Goods

28. Social traps Maximizing short term benefit leads to a reduced long term benefit

29. Social traps On the other hand, adopting a course of action that reduces short term benefit (without canceling it) can prevent the initial benefit from being replaced by a later disadvantage (eg, common pooled resources)

30. Public Goods • Supporting a cost in the short term produces a benefit in the long term.

31. Public Goods • Supporting a cost in the short term produces a benefit in the long term.Refusing to bear the cost in the short term results in a more than proportional loss in the long run (eg. Environment safeguard).

32. The structure of social dilemmas: the prisoner’s dilemma

33. The cartel Firm F1 and F2 are part of a cartel of producers. Payoff of different course of action are perfectly known by the parties

34. Fearing the intervention of the antitrust authoritiy, they give up to the mechanism of exchange of information that until then had ensured the coordination of their choices in terms of output (or price) supplied on the market.

35. Alternatives:cooperate (continuing with the cartel, share the monopoly profits);defect (exiting the cartel, lower prices, increase their market share and enhance profits at the expense of the other firm).

36. Outcome 1 Both companies cooperate, and their profits are equal to 4 (upper left quadrant)

37. Cooperation F2 D C 4,4 C F1 D

38. Cooperation F2 D C 4,4 C F1 D

39. Outcome 2 Firm F1 defects, while F2 cooperates. F1 obtains profits equal to 8 and F2 equal to 0 (lower left quadrant)

40. Defection of F1 F2 D C C F1 D 8,0

41. Defection of F1 F2 D C C F1 D 8,0

42. Outcome 3 Firm F2 defects, while F1 cooperates. F2 obtains profits equal to 8 and F1 equal to 0 (upper right quadrant)

43. Defection of F2 F2 D C C 0.8 F1 D

44. Outcome 4 Both firms defect and get profits equal to 2 (lower right quadrant)

45. Defection of F1 and F2 F2 D C C F1 D 2.2

46. Prisoner’s dilemma F2 D C 0,8 4,4 C F1 D 8,0 2.2

47. Comparison between payoffs F1 compares his own payoff to F2’s choices.

48. Prisoner’s dilemma F2 D C 0,8 4,4 C F1 D 8,0 2.2

49. If F2 cooperates, the rational choice for F1 will be: F2 D C 0,8 4,4 C F1 D 8,0 2.2

50. If F2 defects, the rational choice for F1 will be F2 D C 0,8 4,4 C F1 D 8,0 2,2