coordination+games

by Aaron Ford
 * Coordination Games**

A coordination game occurs when two firms within an oligopoly are better off when both firms make the same decision regarding a business strategy. Having said that, there are two Nash Equilibria; for either equilibrium, the firms have the potential to be equally profitable. The benefits of this situation in gaming theory is only suitable when both firms can agree to cooperate. In other words, what the first deciding company chooses, the second should choose the same (Wikipedia.org).

A coordination game functions like so:

a>b; d>c w>x; z>y
 * ||  || **FIRM 1** ||   ||
 * || **Strategy** || **Make** || **Buy** ||
 * **FIRM 2** || **Make** || a,w || c,x ||
 * || **Buy** || b,y || d,z ||

In this example,the outcome "a" is more profitable to FIRM 1 than "b", and the outcome "d" is more profitable than "c". Also, outcome "w" is more profitable to FIRM 2 than "x", and the outcome "z" is more profitable than "y" (gametheory.net). Thus, depending on the first moving firm which either chooses to make or buy, the following firm should choose the same strategy.



Do firms always agree? The answer to this, as history would tell us, is "no". In 1976 Sony fought against JVC for the standard format pitting betamax against VHS, respectively. There were technical differences in both companies, and eventually there was a winner, however the competition lead to both companies losing sales during the battle. Technical differences aside, an agreement or coming to terms between the two companies would have pleased the customers more whose dollar was really the most important. Competition for the sake of competition is not necessarily more beneficial for businesses. While competition is generally good for technology, the higher tech format did not win this war. Ultimately the customers had to decide the winner (MediaCollege.com). In this case the winner happened to be JVC, but it was only through cheaper prices and advertising, which are not analogous to the game theory of coordination decisions. If the government would have intervened a set a format standard, the whole format debacle could have been avoided. With a standard being set, neither party would have incentive to cheat the other party. (Baye)

In the absence of government intervention forcing parties to commit to the same strategy, what other problems can prevent a cooperative game? If parties are unable to communicate their intent in acting, both parties may have the same intentions yet still fail to cooperate. (Baye)

Questions: 1- A couple are making Friday night plans. The gentlemen would prefer to go to the movies rather than dinner. The lady would prefer to go to dinner than to to the movies. Neither find pleasure in being alone. How should their cooperative game play? A) Yes, both go to the movies B) Yes, both go to dinner C) Yes, the gentlemen goes to the movies, the lady goes to dinner D) Yes, either A or B

2- How many equilibria can a cooperation game between two individuals have? A) 1 B) 2 C) 3 D) 4

3- Do all equilibria have to be the same? A) Depends B) Yes C) No, they do not have to be the same D) No, there is only one equilbria

4- Can both parties have separate stratagies in a cooperative game? A) No B) Yes, As long as they are agreed upon C) Yes, agreement is not necessary D) Yes, but parties must alternate strategies

5- Can government intervention help in standstills between competing parties in a cooperative game? A) Yes, only after researching the best decision B) Yes, even without researching the two decisions C) No, it interupts with free markets

Answers: 1- D - because we know that both would like to be together rather than separated and we have no values assigned to which is more valuable, either strategy is acceptable so long as they are together 2- B - A cooperative game can have two equilibria, 1 per option available. 3- C - All equilibria do not have to be the same, only the equilibria must be both parties acting in cooperation with the same strategy. 4- A - because both parties are worse off by not selecting the same strategy 5- B - Government intervention can be beneficial in the application of mandatory standards that both parties must commit to, thus forcing the same strategy.

__Works Cited__ Baye, Michael. "Coordination Decision" //Managerial Economics and Business Strategy// 5th Ed, McGraw-Hill Irwin, Burr Ridge, IL

Unknown Author. "Coordination Game" //Wikipedia.org// Accessed on 11/21/07 http://en.wikipedia.org/wiki/Coordination_game

Unknown Author. "Pure Coordination Game" //Game Theory.net// Accessed on 11/21/07 http://www.gametheory.net/dictionary/Games/PureCoordination.html

Unknown Author. "The Betamax vs VHS Format War" //MediaCollege.com// Accessed on 11/21/07 http://www.mediacollege.com/video/format/compare/betamax-vhs.html