General Electric Case

CHAPTER 20 (formerly 19) – Reciprocity and Collusion

Review of General Electric vs Westinghouse in Large Turbine Generators

• In the sense of Porter's Five Forces, the suppliers and customers were rel. weak, few substitute products existed, and barriers to entry were large.

• It is strictly illegal for competitors in an industry to conspire together to fix high prices

• To conspire effective each of the 3 utilities had to have a scheme for recognizing to whom each proposal to bid belonged. Then the manufacturer whose proposal it was could make a high and profitable bid, and the other two would make even higher bids.

• This chapter delves into why each of the 3 agreed to keep the deal….reciprocity in repeated situations – or how do you get cooperation in noncooperative games?

• In this chapter, cooperation as it emerges is based entirely on self-interested calculation

19.1 A Game Theoretic Analysis of Reciprocity and Cooperation: The Folk Theorem

• Prisoners' dilemma – how can the 2 prisoners attain a cooperative outcome, when the selfish interests of each lead one to fink?

• It is sometimes the case that 2 individuals are in that sort of competitive situation on a one-time basis, however, it is often the case that the situation will recur. If it does, the dilemma may be avoided.

• Then players would seek to maximize the expected value or probability weighted average of their payoff sums. You develop a strategy for the repeated interaction rather than on a one off basis.

• Because of the repeated nature of the interaction each side can threaten the other that any breach of cooperation will be met with reciprocal noncooperative behavior.

• You won't take short-term advantage of someone with whom you have ongoing relations because you feared the other would punish you to the extent that he or she could.

• We have an Nash Equilibrium whenever neither side has an incentive to change what it is doing unilaterally. – it is important to the cooperative equilibrium that there is a significant probability that the 2 will continue to play, and that the stakes are balanced from one round to the next.

• The Folk Theorem of Noncooperative Game Theory- take any outcome of the game that fives each player a payoff that exceeds the player's maximum-minimal payoff. Then if the discount factor is close enough to one, there is a Nash equilibrium of the repeated interaction game that gives the same outcome round after round.

• In simpler words: if the future matters enough, and if the chosen outcome gives each player more than she gets if she is punished by others; it is better for the player to go along with the