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The Fragility of Commitment

Author

Listed:
  • John Morgan

    () (Haas School of Business and Department of Economics, University of California, Berkeley, Berkeley, California 94720)

  • Felix Várdy

    () (Haas School of Business, University of California, Berkeley, Berkeley, California 94720; and International Monetary Fund, Washington, DC 20431)

Abstract

We show that the value of commitment is fragile in many standard games. When the follower faces a small cost to observe the leader's action, equilibrium payoffs are identical to the case where the leader's actions are unobservable. Applications of our result include standard Stackelberg--Cournot and differentiated product Bertrand games, as well as forms of indirect commitment, highlighted in Bulow et al. [Bulow J, Geanakoplos J, Klemperer P (1985) Multimarket oligopoly: Strategic substitutes and strategic complements. J. Political Econom. 93:488--511]. Weakening full rationality in favor of boundedly rational solution concepts such as quantal-response equilibrium restores the value of commitment. This paper was accepted by Peter Wakker, decision analysis.

Suggested Citation

  • John Morgan & Felix Várdy, 2013. "The Fragility of Commitment," Management Science, INFORMS, vol. 59(6), pages 1344-1353, June.
  • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1344-1353
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    File URL: http://dx.doi.org/10.1287/mnsc.1120.1639
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