Tough bargains: When cooperation is more competitive than competition — Joachim Henkel

Sprecher

Joachim Henkel  (Technical University of Munich)

Abstract

Economic agents frequently take long-term actions, regarding for instance investments in cost reduction or R&D, before engaging in more short-term interactions, e.g. through price setting. Those short-term interactions may be noncooperative as for example competition on a consumer market, or cooperative and based on negotiations. With cooperation, agents generally achieve the collectively optimal outcome, conditional on the long-term actions taken earlier, since they can agree on and contractually fix their actions. The preceding long-term decisions, however, are typically not subject to joint optimization. This raises the question of how they differ if players anticipate cooperation compared to the case that they anticipate competition. Can it happen that agents prepare more aggressively for cooperation than for competition, and thus destroy some of the value they create through cooperation? And if so, under what conditions? To address these questions, I analyze two-stage duopoly games in which agents move noncooperatively in Stage 1, followed by either noncooperative or cooperative moves in Stage 2. In the latter case, a biform game, agents bargain in Stage 2 over how to divide the joint payoff. I show that Stage-1 actions can be more competitive in preparation of cooperation than in preparation of noncooperative interaction, in the sense of deviating more from the benchmark of full collusion in both stages, and derive conditions for this to be the case. For instance, duopolists selling substitutive goods in price competition invest more in cost reduction when preparing for cooperation than when preparing for price competition. Such increased investments can be wasteful for the duopolists and for society. My results also suggest that economic actors should pay attention to the pre-negotiation phase when arranging cooperation talks.

Autoren

Joachim Henkel  (Technical University of Munich)

Raum

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