Digressions 15 Flashcards
What is the Stackelberg Model?
A model of oligopolistic decision-making where two firms set their quantities sequentially, giving the first-moving firm (the “leader”) an advantage over the other firm (the “follower”).
What is a commitment device?
A mechanism or tool that locks one into a course of action, ensuring adherence to a plan even when tempted to deviate.
Why is the idea of commitment important in the Stackelberg Model?
It allows the leader firm to secure its position by making its strategy credible, gaining an advantage over the follower firm.
What is an example of a commitment device in literature?
In The Odyssey, Ulysses used wax in his crew’s ears and had himself tied to the mast to avoid the Sirens’ song.
How do emotions function as commitment devices?
Emotions like shame and embarrassment deter individuals from breaking publicly announced goals, making deviations costly in psychological terms.
How do commitment problems manifest in the Prisoner’s Dilemma?
Both players would benefit from a commitment device ensuring cooperation, as mutual trust leads to better outcomes than mutual betrayal.
How can governments address commitment problems in monetary policy?
By creating independent central banks focused on low inflation, removing the temptation for politicians to increase inflation for short-term gains.
Why might firms hesitate to invest in countries with uncertain tax policies?
They anticipate the government might increase taxes once investments are sunk, deterring initial investment.
What is the lock-in effect in business?
When customers make upfront investments (e.g., learning software), switching becomes costly, allowing firms to exploit this dependence.
What is a potential downside of commitment devices?
They reduce flexibility, which can be risky if future circumstances change unpredictably.
How do evolutionary biologists explain moral sentiments using commitment problems?
They argue emotions that foster cooperation improve group survival by making cooperative behavior psychologically rational.
What can result from the time inconsistency of decision-making?
Policies like inflation promises or tax incentives may fail if future actions deviate from initial commitments.
Give an example of how culture can act as a commitment device.
Cultural norms and feelings like guilt enforce cooperation and adherence to societal rules.
What lesson does the story of Ulysses teach about commitment devices?
While they can prevent failure from temptation, they also carry risks if unforeseen events occur.
How do Cournot and Bertrand equilibria resemble the Prisoner’s Dilemma for competing firms?
Both firms could achieve better outcomes by cooperating on the monopoly solution, but individual rationality drives them to less optimal outcomes.
Why is the outcome of the firms’ inability to cooperate not a dilemma from society’s perspective?
Society benefits because the result of oligopolistic competition is closer to the Pareto Optimum compared to a monopolistic outcome.
What determines whether a cooperation problem is seen as a problem or an advantage?
The frame of reference—firms view it as a problem, but society may see it as a benefit for market efficiency.
How does the Prisoner’s Dilemma illustrate the importance of frames of reference?
It shows that what is seen as a problem (cooperation failure) for one party (firms) can be advantageous for another (society).
Why might society not intervene in a cooperation problem between firms?
Because the problem can increase market efficiency, making the dilemma a virtue from society’s normative perspective.
What is the societal benefit of oligopolistic competition resembling the Prisoner’s Dilemma?
It prevents monopolistic outcomes, leading to more efficient and consumer-friendly markets.
What are the three Cs of economics?
Cooperation, coordination, and commitment problems define the structural landscape of economics.
How does commitment relate to cooperation problems like the Prisoner’s Dilemma?
Commitment devices help make cooperation credible, overcoming individual rationality that prevents mutual cooperation.
How does commitment play a role in solving coordination problems?
Commitment mechanisms allow players to publicly commit to strategies, resolving equilibrium-selection issues.
What are the two main advantages of the three Cs approach?
- Interpretation and understanding of societal problems: Helps identify problems as coordination or cooperation issues and consider suitable commitment mechanisms.
- Tool for studying economic theories: Frames theories as variations of the three Cs and helps scrutinize their foundational ideas.
How can externalities be interpreted using the three Cs approach?
As unresolved cooperation problems that require commitment mechanisms to internalize them.
What commitment device underpins the efficiency of competitive markets?
A system of perfectly enforced property rights.
What questions arise when exploring commitment mechanisms behind property rights enforcement?
Who enforces the rights, is it in their interest to enforce them, and what mechanisms ensure the enforcer’s credibility?
How does the three Cs approach help in studying advanced economic theories?
It simplifies understanding by framing theories as variations of coordination, cooperation, and commitment problems, and scrutinizes the adequacy of institutional mechanisms.
Why is it important to identify commitment mechanisms in economic problems?
To understand what stabilizes efficient outcomes or to design mechanisms that overcome inefficiencies.
