Ch13_Pindyck

7/28/2019 Ch13_Pindyck

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Chapter 13

Game Theory and CompetitiveStrategy


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2005 Pearson Education, Inc. Chapter 13 2

Topics to be Discussed

Gaming and Strategic Decisions

Dominant Strategies

The Nash Equilibrium Revisited

Repeated Games


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Topics to be Discussed

Sequential Games

Threats, Commitments, and Credibility

Entry Deterrence

Bargaining Strategy

Auctions


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Game is any situation in whichplayers(the participants) make strategicdecisions

Ex: firms competing with each other bysetting prices, group of consumers biddingagainst each other in an auction

Strategic decisions result in payoffs tothe players: outcomes that generaterewards or benefits


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Game theory tries to determine optimalstrategy for each player

Strategy is a rule or plan of action forplaying the game

Optimal strategy for a player is one thatmaximizes the expected payoff

We consider players who are rationalthey think through their actions


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If I believe that my competitors arerational and act to maximize their ownprofits, how should I take their behaviorinto account when making my own profit-maximizing decisions?(Text, p. 474)


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Noncooperative vs. Cooperative

Games

Cooperative Game

Players negotiate binding contracts that allowthem to plan joint strategies

Example: Buyer and seller negotiating the priceof a good or service or a joint venture by twofirms (i.e., Microsoft and Apple)

Binding contracts are possible


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Games

Noncooperative Game

Negotiation and enforcement of bindingcontracts between players is not possible

Example: Two competing firms, assuming theothers behavior, independently determinepricing and advertising strategy to gain marketshare

Binding contracts are not possible


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Games

The strategy design is based onunderstanding your opponents point ofview, and (assuming your opponent isrational) deducing how he or she is likelyto respond to your actions. (Text, p. 475)


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An Example: How to buy a dollar bill1. Auction a dollar bill

2. Highest bidder receives the dollar in return for the

amount bid3. Second highest bidder must pay the amount he or

she bid but gets nothing in return

4. How much would you bid for a dollar?

Typically bid more for the dollar when facedwith loss as second highest bidder


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Acquiring a Company

Scenario

Company A: The Acquirer

Company T: The Target

A will offer cash for all of Ts shares

The value and viability of T depends onthe outcome of a current oil exploration

project


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Acquiring a Company

Project failure: Ts value = $0

Project success: Ts value = $100/share

All outcomes in between equally likely Ts value will be 50% greater with As

management


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Acquiring a Company

Scenario

A must submit the proposal before theexploration outcome is known

T will not choose to accept or reject untilafter the outcome is known only to T

Company T will accept any offer that isgreater than the per share value of thecompany under current management

How much should A offer?


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Dominant Strategies

Dominant Strategy is one that is optimalno matter what an opponent does

An Example

A and B sell competing products

They are deciding whether to undertakeadvertising campaigns


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Payoff Matrix for Advertising

Game

Advertise

Dont

Advertise

Advertise

DontAdvertise

Firm B

10, 5 15, 0

10, 26, 8


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Game

Observations

A: regardless of B,advertising is the best

B: regardless of A,advertising is best

Firm A

Advertise

Dont

Advertise

Advertise

Dont

Advertise

Firm B

10, 5 15, 0

10, 26, 8


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Game

Observations

Dominant strategy forA and B is to

advertiseDo not worry about

the other player

Equilibrium indominant strategy

Firm A

Advertise DontAdvertise

Advertise

Dont

Advertise

Firm B

10, 5 15, 0

10, 26, 8


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Dominant Strategies

Equilibrium in dominant strategies

Outcome of a game in which each firm isdoing the best it can regardless of what its

competitors are doing

Optimal strategy is determined withoutworrying about the actions of other players

However, not every game has adominant strategy for each player


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Dominant Strategies

Game Without Dominant Strategy

The optimal decision of a player without adominant strategy will depend on what the

other player does

Revising the payoff matrix, we can see asituation where no dominant strategy exists


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10, 5 15, 0

20, 26, 8

Advertise

Dont

Advertise

Advertise

DontAdvertise

Firm B

Modified Advertising Game


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10, 5 15, 0

20, 26, 8

Firm A

Advertise

Dont

Advertise

Advertise

Dont

Advertise

Firm B

Modified Advertising Game

Observations

A: No dominantstrategy; depends on

Bs actions

B: Dominant strategyis to advertise

Firm A determines Bs

dominant strategy andmakes its decisionaccordingly


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A dominant strategy is stable, but inmany games one or more party does nothave a dominant strategy

A more general equilibrium concept is theNash Equilibrium introduced in Chapter12

A set of strategies (or actions) such thateach player is doing the best it can given theactions of its opponents


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None of the players have incentive todeviate from its Nash strategy, thereforeit is stable

In the Cournot model, each firm sets its ownprice assuming the other firms outputs arefixed. Cournot equilibrium is a NashEquilibrium.


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Dominant StrategyIm doing the best I can no matter what you

do. Youre doing the best you can no matter

what I do.Nash EquilibriumIm doing the best I can given what you are

doing. Youre doing the best you can given

what I am doing.Dominant strategy is a special case of

Nash equilibrium


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Two cereal companies face a market in whichtwo new types of cereal can be successfullyintroduced, provided each type is introduced by

only one firm Product Choice Problem

Market for one producer of crispy cereal

Market for one producer of sweet cereal

Each firm only has the resources to introduce onecereal

Noncooperative


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Product Choice Problem

Crispy Sweet

Crispy

Sweet

Firm 2

-5, -5 10, 10

-5, -510, 10


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Product Choice Problem

Firm 1

Crispy Sweet

Crispy

Sweet

Firm 2

-5, -5 10, 10

-5, -510, 10

If Firm 1 hears Firm2 is introducing a

new sweet cereal, itsbest action is tomake crispy

Bottom left corner isNash equilibrium

What is other NashEquilibrium?


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Beach Location Game

Scenario

Two competitors, Y and C, selling soft drinks

Beach is 200 yards long

Sunbathers are spread evenly along thebeach

Price Y = Price C

Customer will buy from the closest vendor


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Beach Location Game

Where will the competitors locate (i.e.,where is the Nash equilibrium)?

Will want to all locate in center of beach

Similar to groups of gas stations, cardealerships, etc.

Ocean

0 B Beach A 200 yards

C


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Maximin Strategies - ScenarioTwo firms compete selling file encryption

software

They both use the same encryption standard(files encrypted by one software can be readby the other - advantage to consumers)

Firm 1 has a much larger market share than

Firm 2Both are considering investing in a new

encryption standard


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Maximin Strategy

Firm1

Dont invest Invest

Firm 2

0, 0 -10, 10

20, 10-100, 0

Dontinvest

Invest


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Maximin Strategy

Firm 1

Dont invest InvestFirm 2

0, 0 -10, 10

20, 10-100, 0

Dont invest

Invest

ObservationsDominant strategy

Firm 2: Invest

Firm 1 shouldexpect Firm 2 toinvest

Nash equilibrium

Firm 1: invest

Firm 2: Invest

This assumes Firm2 understands thegame and isrational


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Maximin Strategy

Firm 1

Dont invest InvestFirm 2

0, 0 -10, 10

20, 10-100, 0

Dont invest

Invest

Observations IfFirm 2 does not

invest, Firm 1

incurs significantlosses

Firm 1 might playdont invest

Minimize losses

to 10 maximinstrategy


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Maximin Strategy

If both are rational and informedBoth firms invest

Nash equilibrium

If Player 2 is not rational or completelyinformedFirm 1s maximin strategy is to not invest

Firm 2s maximin strategy is to invest

If 1 knows 2 is using a maximin strategy, 1would invest


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Maximin Strategy

If Firm 1 is unsure about what Firm 2 willdo, it can assign probabilities to eachpossible action

Could use a strategy that maximizes itsexpected payoff

Firm 1s strategy depends critically on itsassessment of probabilities for Firm 2


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Prisoners Dilemma

Confess Dont Confess

Confess

Dont

Confess

Prisoner B

-5, -5 -1, -10

-2, -2-10, -1


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Prisoners Dilemma

Prisoner A

Confess Dont Confess

Confess

Dont

Confess

Prisoner B

-5, -5 -1, -10

-2, -2-10, -1

What is the: Dominant strategy

Nash equilibrium

Maximin solution

Dominant strategiesare also maximinstrategies

Both confess is bothNash equilibrium and

maximin solution


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Mixed Strategy

Pure Strategy

Player makes a specific choice or takes aspecific action

Mixed Strategy

Player makes a random choice among twoor more possible actions, based on a set of

chosen probabilities


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Matching Pennies

Heads Tails

Heads

Tails

Player B

1, -1 -1, 1

1, -1-1, 1


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Matching Pennies

Pure strategy: NoNash equilibrium

No combination of

head and tailsleaves both playersbetter off

Mixed strategy:

Random choice is aNash equilibrium

Player A

Heads Tails

Heads

Tails

Player B

1, -1 -1, 1

1, -1-1, 1


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Matching Pennies

Player A might flip coin playing headswith probability and tails with probability

If both players follow this strategy, thereis a Nash equilibrium both players willbe doing the best they can given whattheir opponent is doing

Although the outcome is random, theexpected payoff is 0 for each player


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Mixed Strategy

One reason to consider mixed strategiesis when there is a game that does nothave any Nash equilibriums in pure

strategyWhen allowing for mixed strategies,

every game has a Nash equilibrium

Mixed strategies are popular for gameslike poker

A firm might not find it reasonable


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The Battle of the Sexes

J im

Wrestling Opera

Wrestling

Opera

Joan

2,1 0,0

1,20,0


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The Battle of the Sexes

Pure Strategy

Both watch wrestling

Both watch opera

Mixed StrategyJim chooses

wrestling

Joan chooses

wrestling

J im

Wrestling Opera

Wrestling

Opera

Joan

2,1 0,0

1,20,0


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Repeated Games

Game in which actions are taken andpayoffs are received over and over again

Oligopolistic firms play a repeated game

With each repetition of the PrisonersDilemma, firms can develop reputationsabout their behavior and study the

behavior of their competitors


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Pricing Problem

Firm 1

Low Price High Price

Low Price

High Price

Firm 2

10, 10 100, -50

50, 50-50, 100


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Pricing Problem

How does a firm find a strategy thatwould work best on average against all oralmost all other strategies?

Tit-for-tat strategy

Repeated game strategy in which a playerresponds in kind to an opponents previous

play, cooperating with cooperative opponentsand retaliating against uncooperative ones


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Tit-for-Tat Strategy

What if the game is infinitely repeated?

Competitors repeatedly set price everymonth, forever

Tit-for-tat strategy is rational

If competitor charges low price and undercutsfirm

Will get high profits that month but know I will

lower price next month Both of us will get lower profits if keep

undercutting, so not rational to undercut


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What if repeated a finite number of times?

If both firms are rational, they will charge high pricesuntil the last month

After the last month, there is no retaliation possibleBut in the month before last month, knowing that will

charge low price in last month, will charge low price inmonth before

Keep going and see that only rational outcome is for

both firms to charge low price every month


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If firms dont believe their competitors arerational or think perhaps they arent,cooperative behavior is a good strategy

Most managers dont know how long theywill be competing with their rivals

In a repeated game, prisoners dilemma

can have cooperative outcome


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Repeated Games

Conclusion

Cooperation is difficult at best since thesefactors may change in the long run

Need a small number of firms

Need stable demand and cost conditions

This could lead to price wars if dont have them

Oli li ti C ti


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Oligopolistic Cooperation

in the Water Meter Industry

Characteristics of the Market

Four producers of water meters

Rockwell International

Badger Meter

Neptune Water Meter Company

Hersey Products

Rockwell has about 35% of market share

Badger, Neptune, and Hersey combined haveabout a 50 to 55% share

Oli li ti C ti


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Most buyers are municipal water utilities

Very inelastic demandNot a significant part of the budget for

providing waterDemand is stableDemand grows steadily with population

Utilities have long-standing relationshipswith suppliersReluctant to switch

Oli li ti C ti


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Significant economies of scale

Both long term relationship andeconomies of scale represent barriers to

entryHard for new firms to enter market

If firms were to cooperate, could earnsignificant monopoly profits

If compete aggressively to gain marketshare, profits will fall to competitive levels

Oli li ti C ti


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This is a Prisoners Dilemma whatshould the firms do?

Lower price to a competitive level

Cooperate

Companies have been playing repeatedgame for decades

Cooperation has prevailed given marketcharacteristics


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Sequential Games

Players move in turn, responding to eachothers actions and reactions

Ex: Stackelberg model (ch. 12)

Responding to a competitors ad campaign

Entry decisions

Responding to regulatory policy


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Sequential Games

Going back to the product choiceproblem

Two new (sweet, crispy) cereals

Successful only if each firm produces onecereal

Sweet will sell better

Both still profitable with only one producer

M difi d P d t Ch i


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Modified Product Choice

Problem

If firms both announce their decisionsindependently and simultaneously, theywill both pick sweet cereal and both will

lose money

What if Firm 1 sped up production andintroduced new cereal first?

Now there is a sequential gameFirm 1 will think about what Firm 2 will do

M difi d P d t Ch i


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Modified Product Choice

Problem

Crispy Sweet

Crispy

Sweet

Firm 2

-5, -5 10, 20

-5, -520, 10


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Extensive Form of a Game

Extensive Form of a Game

Representation of possible moves in agame in the form of a decision tree

Allows one to work backward from the bestoutcome for Firm 1

Prod ct Choice Game in


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Product Choice Game in

Extensive Form

Crispy

Sweet

Crispy

Sweet

-5, -5

10, 20

20, 10

-5, -5

Firm 1

Crispy

Sweet

Firm 2

Firm 2


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Sequential Games

The Advantage of Moving First

In this product-choice game, there is a clearadvantage to moving first

The first firm can choose a large level ofoutput, thereby forcing second firm to choosea small level

Can show the firms mover advantage by

revising the Stackelberg model andcomparing to Cournot


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First Mover Advantage

Assume: Duopoly

Firmand

ProductionTotal

/1001010:

0

30

21

21

PQQCournot

MC

QQQ

QP


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First Mover Advantage

Duopoly

25.5650.112

50.7and5.715

rg)(StackelbeFirstMovesFirm

Firm/50.11215and5.7

CollusionWith

21

21

21

PQQ

PQQ


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Choosing Output

Firm1

7.5

Firm 2

112.50, 112.50 56.25, 112.50

0, 0112.50, 56.25

125, 93.75 50, 75

93.75, 125

75, 50

100, 100

10 15

7.5

10

15


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Choosing Output

This payoff matrixillustrates variousoutcomes

Move together, bothproduce 10

If Firm 1 moves first(Q=15), best Firm 2

can do is 7.5

Firm 1

7.5

Firm 2

112.50, 112.50 56.25, 112.50

0, 0112.50, 56.25

125, 93.75 50, 75

93.75, 125

75, 50

100, 100

10 15

7.5

10

15

Threats Commitments and


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Threats, Commitments, and

Credibility

Strategic Moves

What actions can a firm take to gainadvantage in the marketplace?

Deter entry Induce competitors to reduce output, leave,

raise price

Implicit agreements that benefit one firm



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Credibility

Strategic Move

Action that gives a player an advantage byconstraining his behavior

Firm 1 must constrain his behavior to theextent Firm 2 is convinced that he iscommitted



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Credibility

How to Make the First MoveDemonstrate Commitment

Firm 1 must do more than announce they will

produce sweet cereal Invest in expensive advertising campaign

Buy large order of sugar and send invoice toFirm 2

Commitment must be enough to induce Firm2 to make the decision Firm 1 wants it tomake



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Credibility

Empty Threats

If a firm will be worse off if it charges a lowprice, the threat of a low price is not credible

in the eyes of the competitorsWhen firms know the payoffs of each others

actions, firms cannot make threats the otherfirm knows they will not follow

In our example, Firm 1 will always chargehigh price and Firm 2 knows it

Pricing of Computers and Word


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Pricing of Computers and Word

Processors

Firm 1

High Price Low Price

High Price

Low Price

Firm 2

100, 80 80, 100

10, 2020, 0



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Credibility

Sometimes firms can make crediblethreats

Scenario

Race Car Motors, Inc. (RCM) produces cars

Far Out Engines (FOE) produces specialtycar engines and sells most of them to RCM

Sequential game with RCM as the leaderFOE has no power to threaten to build big

engines since RCM controls output


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Production Choice Problem

Far Out Engines

Small cars Big cars

Small

engines

Bigengines

Race Car Moto rs

3, 6 3, 0

8, 31, 1



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Credibility

RCM does best by producing small cars

Knows that Far Out will then producesmall engines

Far Out prefers to make big engines

Can Far Out induce Race Car to producebig cars instead?



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Credibility

Suppose Far Out threatens to producebig engines no matter what RCM does?

Not credible since once RCM announces

they are producing small cars, FOE will nothave incentive to carry out threat

Can make threat credible by altering pay offmatrix by constraining its own choices

Shutting down or destroying some small engineproduction capacity

Modified Production Choice


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Problem

0, 6 0, 0

8, 31, 1

Far Ou t Engin es

Small cars Big cars

Small

engines

Big

engines

Race Car Motor s



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Problem

Strategic commitments can be effectivebut not without risk

Rely heavily on accurate knowledge of payoff

matrix and industryMay have competitors out there that they

dont know about and lose sales


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Role of Reputation

If Far Out gets the reputation of beingirrationalThey threaten to produce large engines no

matter what Race Car does Threat might be credible because

irrational people dont always make profitmaximizing decisions

A party thought to be crazy can lead to asignificant advantage


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Bargaining Strategy

Bargaining situation can depend onability to affect relative bargainingposition

Consider two firms introducing one of twocomplementary goods:

Firm 1 has cost advantage in Good A

Firm 2 has cost advantage in Good B


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Bargaining Strategy

Firm 1

Produce A Produce B

Produce A

Produce B

Firm 2

40, 5 50, 50

5, 4560, 40


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Bargaining Strategy

With collusion:

Firm 1 Produces Aand Firm 2 producesB (50,50)

Without collusion:

Firm 1 produces Aand Firm 2 producesB (50,50)

Nash equilibrium

Firm 1

Produce A Produce B

Produce A

Produce B

Firm 2

40, 5 50, 50

5, 4560, 40


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Bargaining Strategy

Suppose each firm is also bargaining onthe decision to join in a researchconsortium with a third firm

Dominant strategy is for both firms toenter consortium


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Bargaining Strategy

Firm 1

Work alone Enter consortium

Work alone

Enterconsortium

Firm 2

10, 10 10, 20

40, 4020, 10


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Bargaining Strategy

Linking the Bargaining Problem

Firm 1 announces it will join the consortiumonly if Firm 2 agrees to produce A and Firm 1

will produce BFirm 2s best interest is to produce A with

Firm 1 producing B

Firm 1s profit increases from 50 to 60


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Bargaining Strategy

Strategic moves can be used inbargaining

Combining issues in bargaining can

benefit one side at others expense

Wal-Mart Stores Preemptive


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Wal Mart Stores Preemptive

Investment Strategy

How did Wal-Mart become the largestretailer in the U.S. when manyestablished retail chains were closing

their doors?Gained monopoly power by opening in small

towns with no threat of other discountcompetition

Preemptive game with Nash equilibrium

The Discount Store Preemption


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Game

Wal-Mart

Enter Dont enter

Enter

Dont enter

Company X

-10, -10 20, 0

0, 00, 20



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Game

Two Nash equilibrium

Low left

Upper right

Must be preemptiveto win

Wal-Mart

Enter Dont enter

Enter

Dont enter

Company X

-10, -10 20, 0

0, 00, 20


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Entry Deterrence

Barriers to entry important for monopolypower

Economies of scale, patents and licenses,

access to critical inputsFirms can also deter entry

To deter entry, the incumbent firm must

convince any potential competitor thatentry will be unprofitable


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Entry Possibilities

Incum bent (I)

Enter Stay out

High price(accommodation)

Low Price(warfare)

Potent ial Ent rant (X)($80 fixed cos ts)

100, 20 200, 0

130, 070, -10


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Entry Deterrence

Scenario

If X does not enter, I makes a profit of $200million

If X enters and charges a high price, I earnsa profit of $100 million and X earns $20million

If X enters and charges a low price, I earns a

profit of $70 million and X earns $-10 million


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Entry Deterrence

Could threaten X with warfare if entersmarket

Not credible because once X has entered, it

is in your best interest to accommodate andmaintain high price


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Entry Deterrence

What if firm I makes an investment beforeentry to increase capacity?

Irrevocable commitment

Gives new payoff matrix since profits willbe reduced by investment

Threat is completely credible

Rational for Firm X to stay out of market


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Entry Deterrence

Inc umbent (I)

Enter Stay out

High price(accommodation)

Low price(warfare)

Potent ial Entr ant (X)

50, 20 150, 0

130, 070, -10


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Entry Deterrence

If incumbent has reputation of pricecutting competitors even at loss, thenthreat will be credible

Short run losses may be offset by longrun gains as monopolist


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Entry Deterrence

Production of commercial airlines exhibitsignificant economies of scale

Airbus and Boeing considering new

aircraft

Suppose it is not economical for bothfirms to produce the new aircraft


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Development of a New Aircraft

Boeing

Produce Dont produceAirbus

-10, -10 100, 0

0, 00, 120

Produce

Dont produce


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Boeing has headstart

Boeing will produce

Airbus will notproduce

Boeing

Produce Dont produce

Airbus

-10, -10 100, 0

0, 00, 120

Produce

Dont produce


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Governments can change outcome ofgame

European government agrees to

subsidize Airbus before Boeing decidesto produce

With Airbus being subsidized, the payoff

matrix for the two firms would differsignificantly

Development of an Aircraft


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After European Subsidy

Boeing

Produce Dont produceAirbus

-10, 10 100, 0

0, 00, 120

Produce

Dont produce

Development of an Aircraft


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Boeing

Produce Dont produce

Airbus

-10, 10 100, 0

0, 00, 120

Produce

Dont produce

After European Subsidy

Airbus will produce

Boeing will notproduce


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Diaper Wars

Even though there are only two majorfirms, competition is intense

The competition occurs mostly in the

form of cost-reducing innovation

Small cost savings can lead to capturingof market share

Both firms spend significantly on R&D


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Competing Through R & D

P&G

R&D No R&D

R&D

No R&D

Kimberly-Clark

40, 20 80, -20

60, 40-20, 60


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Competing Through R & D

Both spend on R&D

Dominant strategy

Why not cooperate?

StrengtheningBargaining Power

Credibility

Reducing flexibilityP&G

R&D No R&D

R&D

No R&D

Kimberly-Clark

40, 20 80, -20

60, 40-20, 60


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Auctions

Markets in which products are bought andsold through formal bidding processes

Encourages competition that increases

sellers revenueLow cost of transactions

Useful for unique items or those withfluctuating value

Tokyo fish market


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Auction Formats

1. Traditional English (oral)

Seller actively solicits progressively higherbids from a group of potential buyers

Buyers are always aware of highest bid Stops when no one passes highest bid


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Auction Formats

2. Dutch auction

Seller begins by offering item at relativelyhigh price, then reduces it by fixed amounts

until item is sold First buyer accepting offered price can buy

item at that price


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Auction Formats

3. Sealed-bid

All bids are made simultaneously in sealedenvelopes, where winning bid is the one

who submitted highest bidA. First price

Sales price equals highest bid

B. Second price

Sales price equals second highest bid


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Valuation and Information

How to choose an auction format

1. Private-value auction bidder knowsindividual valuations of object, but

valuations differ from bidder to bidder Signed baseball

2. Common-value auction: bidders uncertainwhat the value is

Offshore oil reserve


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Price-Value Auctions

Each bidder must choose biddingstrategy

Payoff for winning is reservation price

minus price paid

Payoff for losing is zero


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Private Value Auction

English oral auction and secondpricesealed bid auctions

Bidding truthfully is dominant strategy

Pay based on value of second highest bidderso no incentive not to bid reservation price

Risk to bidding higher than reservation price


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Private Value Auctions

English auction

Continue bidding until second person isunwilling to make bid

Sealed-bid auctionWinning bid approximately equal to the

second highest bidders reservation price

Both yield the same revenue


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Common Value Auctions

Winners Curse

The winner is worse off because theyoverestimated the value of the item and

thereby overbidMust reduce bid by amount equal to the

expected error of the winning bidder

If a lot of variation in other bidders, then

estimates are fairly imprecise


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Maximizing Auction Revenue

1. Private Value Auction

Encourages many bidders to increaseexpected bid of winner

2. Common Value Auction Uses open rather than sealed bid

Generates greater revenue

Reveals information about true value,reducing concern of winners curse

M i i i A ti R


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Maximizing Auction Revenue

3. Private value auction

Sets min bid equal to or higher than valueto you of keeping good for future sale

Protects against loss if bidders are unawareof value

Increases size of bids by letting biddersthink item is valuable

No sale could make bidders think item islow quality

Biddi d C ll i


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Bidding and Collusion

Buyers can allow benefit from collusion

Can be done legally through buying groups

Can be done illegally through collusive

agreements that violate antitrust lawsCollusion is not easy because of large

incentive to cheat

Repeated auctions allow for penalizing

participants that break agreement

Biddi d C ll i


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Bidding and Collusion

Examples

1. Collusion among baseball owners tolimit their bidding for free agent players

in the 1980s2. Two of the worlds most successful

auction houses were found guilty of

agreeing to fix prices of commissions Sothebys and Christies

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Internet Auctions

Popularity of auctions has skyrocketedwith growth of internet

Most popular site is eBay

Dominates online person-person auctionindustry

Subject to large network externalities

Choose auction site with largest number ofpotential bidders

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Internet Auctions

eBay auctions are somewhat differentfrom types discussed

A few caveats:

No quality control function

Poor seller feedback

Bid manipulation may occur

Documents

Ch13_Pindyck