0:04
So welcome back from the in-video quiz.
And we just looked at aggressive commitment as one enabler of cooperation.
Lets now have a look at another type of commitment we call cooperative or soft
commitment, and see how that can help cooporation.
0:21
So, how does cooperative commitment work? Well, one way to build a cooperation or
to enable cooperation by being soft or being cooperative is through
building a reputation. Simply building a reputation of being a reliable
competitor or a cooperator and making it known that you treat others fairly can be
one way of building a reputation, therefore, enabling cooperation one way
or another. So that sends two signals.
First of all, you're making your type of behavior more predictable to your
competitors, which is one issue. The other issue is if you've built up a
reputation it's going to mean that it's going to be
more expensive or it's going to be costly for you to behave in an uncooperative way
because you're losing that reputation very quickly.
And, in one way or another, this is a similar mechanism to what's called a
self-binding commitment. A self-binding commitment is basically
about making an investment that convinces potential partners or competitors, that
one is committed to act cooperatively. So in other words, you are eliminating
the moves which would lead to competitive equilibria.
1:35
And so one way for example would be that if you know that a certain type of
behavior would trigger a response by your competitor, you can commit not to engage
in that kind of behavior. Right, so if that means that you cannot
choose that kind of behavior, it also means that there cannot be a response or
will not be a response by your competitor and, therefore, the market will be less
competitive overall. Now, another interesting aspect or
another interesting mechanism that works as a soft commitment is the so-called
most favoured customer clause.
It's a provision in sales contracts that you can write, which basically promises
the customer that he will get refunded if another customer is charged a
lower price sometime in the future. Most of the time these most favoured
customer clauses will have some time limit to it, usually six months or one
year. And that means that if within that time
period the price of a particular product ever goes down, you're going to be
refunded the difference between the price you paid and the price that someone else
pays at a later point. Now, again it sends two signals.
The first one is to the consumer. There's no point in waiting until the
prices go down because if you buy now then even if half a year
later the prices go down, you're going to pay the lower price.
That's the issue, that's the point of the most favorite customer clause.
3:02
But on the other hand, you're also sending a signal to your competitors.
You're sending the signal that it will be costly for you to compete for certain
customers because lowering prices will not just lower your margin for future
customers, but you're also going to have to reimburse all the previous customers
that you sold to add a higher price. So that means that relatively speaking,
it's going to be more costly for you to lower your price, which is exactly the
kind of cooperative commitment or soft commitment that we often think about.
3:37
So, to sum up from the last two videos, we found that commitment can help firms
to coordinate their behavior. There are two types of commitment with
quite different underlying mechanisms. We have aggressive commitments that are
all about moving first, eliminating those moves that can lead to unattractive
equilibria. On the other hand, cooperative commitment
is all about signaling to other players that you're a friendly, nice guy and
you're committed to behaving cooperatively.
4:06
So for now, thanks very much for staying on throughout the whole lecture.
We're almost done for today. But before we go on, let's finally
wrap up what we've learned today, in the next video.
So I'll see you, in a second, in the wrap up.
Tobias KretschmerProfessor
