Game Theory - Application to Banking and Finance

- the number of players is high

- the deviations are difficult to observe

- the last period of interaction is known

a price war following an entry is not credible

--> backward induction prooves that the punishment is not credible at any period.

- detecting any deviation

- if possible, limiting the gain of cheating

- guarantee the punishment

Scorched earth policy refers to the practice of destroying anything that might be useful to the enemy:

food, shelter, industrial resources,... etc. 

--> such strategy offers some advantages when the enemy is far from home; but it has to be used as a last resort!!

1.) modifying the payoffs of the game 

--> to change payoffs so that it is in your own interest to behave as it has been announced

2.) modifying the actions or outcomes of the game, in order to restrict the possibilities for not honoring one's commitment

3.) using the other players to help oneself to honour our commitment

1.) Building your own reputation

2.) Signing a contract (1+2 --> 1. principle)

3.) Cutting any communication

4.) Burning the bridges behind

5.) Leaving the outcome beyond your control (3,4+5--> 2.principle)

6.) moving by small steps

7.) Working inteam

8.) Giving a mandate to a third party

No, because a firm may be in a competitive position with itself. A new computer, for example, may compete with an old one.

High-tech items are subject for very high research & development costs. However the marginal costs are quite low.

Yes, because once the demand is served according to the original price, IBM has an incentive to decrease the price to serve customers with a lower reservation price.

Then repeating the decrease again & again until the prize equalizes the marginal cost.

Yes, some customers with a reservation price above the original may still prefer to wait a price decrease. (because they know it will decrease)

When the computers are rented, any price decrease cost a higher amount because the decrease applies to all computers, not only the ones in the IBM stocks.

Renting rather than selling allows IBM to credibly commit to not decrease the price. Customers have no more incentive to wait any price decrease.