1. Reputation

•In a repeated game, establish a reputation for taking a particular action (cooperate, keep prices high, start price wars with entrants)

•If the game is not repeated: do things to demonstrate that your payoffs are such that you will cooperate, keep prices high, start prices wars, etc.

Hijackers

• A reputation for never negotiating with hijackers

•A reputation for never keeping agreements with hijackers

•Business analogies?

Tax Amnesty

• Barro and Stockman in the WSJ: the double-cross tax amnesty

• What drawbacks does this plan have?

The Mayflower No-Sale Policy

• Mayflower furniture committed to never having a sale

• Why?

•Why do other companies have sales?

Nixon’s Madman Theory

• People in the U.S. were tired of the Vietnam War by 1972. US troops were mostly out by then.

•President Nixon told his aide Haldeman about his “madman theory” of dealing with North Vietnam.

• He bombed Hanoi, and send raids into Cambodia and Laos.

•North Vietnam did soften its stance.

2. Contracts

• Contracts use a third party-- the courts-- for credibility.

•Sales contracts

•Partnerships

•Marriage

•Renegotiation problem

2. Contracts

• Contracts use a third party-- the courts-- for credibility.

•Sales contracts

•Partnerships

•Marriage

•Renegotiation problem

3. Cutting off Communication

• Mailing a letter without a stamp, so the recipient would have to pay the postage.

•In labor negotiations, federal law requires “good faith bargaining”: you cannot simply lay an offer on the table and disappear

4. Burning Your Bridges

•Polaroid did not diversify, and so managers had strong incentive to fight for its core instant photography.

•Maintain a low cash reserve, so the company will work hard to maintain profitability (get rid of the manager’s “cushion”)

•These are risky policies. Chance events can happen, as well as strategic choices.

5. Leaving the Decision to Chance

•Doomsday Device in Dr. Strangelove

•Promotion example-- Smith does something that might hurt the chances of both himself and his rival Jones if Jones stays in competition for the promotion, e.g. giving their boss data on a failed project.

6. Move in Small Steps

• Split a cocaine deal for $1 million into 1000 deals of $1000 each.

•House completion contracts--- pay the contractor in stages.

7. Make use of teamwork (ethics!)

• Have an honor code in which team members who do not turn in violators are themselves punished.

• Use social pressure. Change payoffs so people do not WANT to violate their commitments.

•Conscience!

8. Use Agents

•Labor union leaders are delegated to negotiate for their members

•By choosing a tough agent, the principal can make it harder for himself to give in

• Lawyers often serve this role for clients

•Shareholders can choose tough managers to carry out threats that actually hurt the company.