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1. Reputation

1. Reputation. In a repeated game, establish a reputation for taking a particular action (cooperate, keep prices high, start price wars with entrants)

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1. Reputation

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  1. 1. Reputation • In a repeated game, establish a reputation for taking a particular action (cooperate, keep prices high, start price wars with entrants) • If the game is not repeated: do things to demonstrate that your payoffs are such that you will cooperate, keep prices high, start prices wars, etc.

  2. Hijackers • A reputation for never negotiating with hijackers • A reputation for never keeping agreements with hijackers • Business analogies?

  3. Tax Amnesty • Barro and Stockman in the WSJ: the double-cross tax amnesty • What drawbacks does this plan have?

  4. The Mayflower No-Sale Policy • Mayflower furniture committed to never having a sale • Why? • Why do other companies have sales?

  5. Nixon’s Madman Theory • People in the U.S. were tired of the Vietnam War by 1972. US troops were mostly out by then. • President Nixon told his aide Haldeman about his “madman theory” of dealing with North Vietnam. • He bombed Hanoi, and send raids into Cambodia and Laos. • North Vietnam did soften its stance.

  6. 2. Contracts • Contracts use a third party-- the courts-- for credibility. • Sales contracts • Partnerships • Marriage • Renegotiation problem

  7. 2. Contracts • Contracts use a third party-- the courts-- for credibility. • Sales contracts • Partnerships • Marriage • Renegotiation problem

  8. 3. Cutting off Communication • Mailing a letter without a stamp, so the recipient would have to pay the postage. • In labor negotiations, federal law requires “good faith bargaining”: you cannot simply lay an offer on the table and disappear

  9. 4. Burning Your Bridges • Polaroid did not diversify, and so managers had strong incentive to fight for its core instant photography. • Maintain a low cash reserve, so the company will work hard to maintain profitability (get rid of the manager’s “cushion”) • These are risky policies. Chance events can happen, as well as strategic choices.

  10. 5. Leaving the Decision to Chance • Doomsday Device in Dr. Strangelove • Promotion example-- Smith does something that might hurt the chances of both himself and his rival Jones if Jones stays in competition for the promotion, e.g. giving their boss data on a failed project.

  11. 6. Move in Small Steps • Split a cocaine deal for $1 million into 1000 deals of $1000 each. • House completion contracts--- pay the contractor in stages.

  12. 7. Make use of teamwork (ethics!) • Have an honor code in which team members who do not turn in violators are themselves punished. • Use social pressure. Change payoffs so people do not WANT to violate their commitments. • Conscience!

  13. 8. Use Agents • Labor union leaders are delegated to negotiate for their members • By choosing a tough agent, the principal can make it harder for himself to give in • Lawyers often serve this role for clients • Shareholders can choose tough managers to carry out threats that actually hurt the company.

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