Week 2: Why companies cooperate

Why companies cooperate with each other ?

1. The cooperation might better both off than competition.

2. Sometimes, companies need each other (for example, to settle an industry standard)

How to achieve cooperation between (individual) profit maximizes ?

- Repeated games

-Commitment

3. Endgame effect

The outcome is triggered by the fact that in the last stage of the game there is no further threat of retaliation.

And this holds for any prisoners' dilemma with finite repetitions

4. finite repetition and infinite repetition

Factors influencing Cooperation

1. Interest rate: if interest rate is very high, current profit will be very important thus it may affect the cooperation

Total profit / n (players)*{1-1/[1-p*(1/(1+i))]}  VS non-cooperation individual profit

2. The punishment from disagreement

If the punishment gets softer, let's say, we can return for cooperation within 5 years. Then, the profit after 5 years will be :

p^5/(1-p)*Total Profit/n , what we need to do is to consider the possibility of cooperation after 5 years.

Commitment

1. Aggressive commitment:  通过自身釜底抽薪的方式，告诉对方，自己一定会选择某种选项，从而先发制人，把同步博弈变成序列博弈。

2. Cooperative commitment: also called "soft commitment": 告诉对方自己比较倾向于合作，且是个比较靠谱的合作方