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The Fragility of Commitment

John Morgan and Felix Vardy ()

Management Science, 2013, vol. 59, issue 6, 1344-1353

Abstract: We show that the value of commitment is fragile in many standard games. When the follower faces a small cost to observe the leader's action, equilibrium payoffs are identical to the case where the leader's actions are unobservable. Applications of our result include standard Stackelberg--Cournot and differentiated product Bertrand games, as well as forms of indirect commitment, highlighted in Bulow et al. [Bulow J, Geanakoplos J, Klemperer P (1985) Multimarket oligopoly: Strategic substitutes and strategic complements. J. Political Econom. 93:488--511]. Weakening full rationality in favor of boundedly rational solution concepts such as quantal-response equilibrium restores the value of commitment. This paper was accepted by Peter Wakker, decision analysis.

Keywords: Cournot; Bertrand; Stackelberg; observation cost; value of commitment; first-mover advantage; second-mover advantage; costly leader game (search for similar items in EconPapers)
Date: 2013
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