2Credible CommitmentsIn the chicken game, P1’s commitment to go straight is credible because the move is incentive compatibleWhat if she actually does not have an incentive to follow through on the commitment when called upon to move?Example: Tiger by the tailIf the tiger cannot commit in advance not to bite the boy, then the boy will hold on forever making both the boy and the tiger worse offBut the tiger’s promise not to bite is not credible because when called upon to move, the tiger has an incentive to bite.
3Tiger by the tail extensive form (1,4)BiteTigerLet go~Bite(4,2)BoyHold(2,1)
4Tiger by the tail extensive form (1,4)BiteTigerLet go~Bite(4,2)BoyHold(2,1)
5How can tiger make a credible commitment? First let us ask what the different types of commitments areThen let us ask what makes these commitments credible
6Strategic MovesStrategic moves are designed to alter the beliefs and actions of others in a direction favorable to yourselfWarnings and assurances are non-strategicThreats and Promises are strategic
7Warnings and Assurances Opening move that informs target what you will do when it is your turn to moveWhen you are called upon to move, there is no temptation to renegeTherefore, warnings and assurances merely play an informational role and don’t change others’ expectations and don’t influence target’s behaviorObjective is persuasionDon’t require commitment; credibility not an issue
8Threats and PromisesStrategic Moves: objective is to influence behavior of targetFirst mover often has the advantage (unconditional move)Second mover can gain first-mover advantage by pre-committing to a response rule (conditional move: if you do x, then I will/will not do y)
9Threats A response rule that punishes target who fails to cooperate Compellent threats induce action (Ransom)Deterrent threats deter action (deterrence)*BOTH sides will suffer if the threat has to be carried out (otherwise pre-commitment not necessary)Therefore, there is an incentive to renege
10Promise A response rule that rewards others who cooperate with you Compellent promises (If you eat your broccoli, you can have dessert)Deterrent promises (Don’t hit your brother, and I will )Will have to pay a cost to make good on the promiseTherefore, incentive to renegePromises as veiled implicit threats: Lend me $20, and I promise I won’t hurt you.
11How to commit credibly?If you don’t have first-mover advantage, how do you gain it through commitment?Reduce payoffs from those strategies that may tempt youRemove strategies from those that my tempt you in the futureTransform simultaneous move game into sequential game.Tie hands using third parties.Become irrational by eliminating strategic control
12Change Payoffs Sunk Costs Establish and Use Reputation Write Contracts Reputation for unexpected value on payoffsWrite ContractsInternational Politics?Prisoner’s Dilemma example
13Change payoffs example: Enter or Not? Two firms consider market entryMarket potential is $10 millionEntry costs $7 millionIt is in our interest to stay out if we think the other firm will enterThemInOutUs-2 , -23 , 00 , 30 , 0
14What if we make initial investment of $1 million Still in our interest to stay out if we think the other firm will enterThemInOutUs-2 , -23 , 0-1 , 3-1 , 0
15How much to deter? Initial investment of $3 mil? It is our dominant strategy to enter regardless of what the other firm will do.InOutUs-2 , -23 , 0-3 , 3-3 , 0
16Commitment phase in Tiger by the Tail Show on white board
17Change Moves Eliminate Options Threat that leaves something to chance Cut of CommunicationBattle of the SexesBurn BridgesSuntzuTrip wires (massive retaliation)Threat that leaves something to chanceNixon madman theoryKennedy Cuban missile crisis brinkmanshipSalami Tactics
21DeterrenceDeterrence aims to persuade the opponent not to initiate action. We make the demand, explain the consequences of acting, and then wait (success is measured by whether something happens); if the opponent crosses the line we’ve drawn we take punitive action. One role for jails (punishment) is to deter potential criminals. The success of prisons is thus measured by how empty they are. It is hard to judge whether an event fails to occur because of successful deterrence or for other reasons. Deterrence is conservative: it seeks to protect the status quo. It is also, like defense, essentially a waiting game: the opponent has to move before a reaction is triggered.
22CompellenceCompellence aims to persuade the opponent to change his behavior. We make a demand of action, then initiate our own, and continue doing it until the opponent ceases. We can distinguish three categories of compellence. We persuade opponent (i) to stop short of goal; (ii) to undo the action (i.e. withdraw from land); or (iii) change his policy by changing government. Success of compellence is easy to see because it entails the reversal or halt of ongoing behavior. Again, this may happen for other reasons but it is hard to avoid the impression of doing it under duress. Compellence is active: it seeks to change the status quo. Also, like offense, it takes the initiative and engages the opponent until the latter relents.