General Electric Case
CHAPTER 20 (formerly 19) – Reciprocity and Collusion
Review of General Electric vs Westinghouse in Large Turbine Generators
In the sense of Porters 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 wont 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 players 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