Microeconomics · free preview
Commitment and Credibility
A strategic move changes the game itself, and it works only when it visibly removes the mover's own options, turning yesterday's empty threat into today's arithmetic.
1. Changing the game
Changing the game
2. Devices that bind
Devices that bind
3. Threats and promises
Threats and promises
4. Credibility in the wild
Credibility in the wild
5. What makes a threat credible
When is a threat to punish a rival's action credible in a sequential game?
6. Schelling's paradox
Why can burning your own bridges increase your payoff?
7. The contract's price
An incumbent can sign a supply contract paying 15 million in penalties if its output ever falls below the war level. Without it, fighting after entry costs the incumbent 10 million in lost profit relative to accommodating. Compute the net payoff change from accommodating instead of fighting once the contract is signed, and write the number in millions.
8. Credibility's test
When is a threat to punish a rival's action credible in a sequential game?
9. Bridges, burned
Why can burning your own bridges increase your payoff in a strategic setting?
10. The contract's bite
An incumbent signs a supply contract paying 15 million in penalties if its output ever falls below a threshold, raising its fighting payoff by that amount. If fighting previously fell short of accommodating by 11 million, compute the post-contract surplus from fighting, and write the number.
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