Modeling strategic complexity in a collusive multi-market duopoly game
The neoclassical theory of the firm treats the firm as a black box. No consideration is given to the effort required to plan, organizing, or execute the firm's activity. However, the decision making process in an organization is complex and costly. This essay examines how the collusive behavior of Cournot duopolists is affected when the complexity of executing a repeated game strategy matters. I model complexity by the size of the smallest automaton required to execute the firm's strategy. Collusion is a complex endeavor since firms must devote computational resources to punishing cheaters. It is assumed that firms occasionally cheat. Consequently, the punishment mechanism affects the payoffs. It is shown that strategies using harsh unrelenting punishments are generally simpler but earn lower payoffs than strategies whose punishment duration is finite. In the first part of the essay, complexity is exogenously constrained. It is shown that the collusive profit is positively correlated with the complexity constraint. If firms compete in two markets and complexity in the first market rises substantially slower then the second market, firms will strategically sacrifice profits in the second market and will concentrate its computational resources on the first market. Finally, if duopolists are unable to collude in a single market, entry into a second market may facilitates collusion in the original market by providing another venue for punishment. In the later part of the essay firms endogenously select the optimal level of complexity. It is shown that if the per unit cost of complexity rises, collusion falls. However, if the per unit cost differs between firms the low cost firm may surrender market share to induce the high cost firm to choose a higher level of complexity. If firms compete in multiple markets, it is shown that under certain conditions a firm may strategically, choose not to enter a profitable market in order to focus on collusion in a single market. Finally, I examine the optimal organizational structure of the firm when a firm can process information with a team of automata.
|Year of publication:||
|Authors:||Humphreys, Ronald Scott|
Wayne State University
|Type of publication:||Other|
ETD Collection for Wayne State University
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