Cooperation, commitment, and other-regarding behavior in duopoly games

Aalto University, P.O. Box 11000, FI-00076 Aalto www.aalto. fi Author Ilkka Leppänen Name of the doctoral dissertation Cooperation, commitment, and other-regarding behavior in duopoly games Publisher School of Science Unit Mathematics and Systems Analysis Series Aalto University publication series DOCTORAL DISSERTATIONS 131/2016 Field of research Systems and Operations Research F017Z Manuscript submitted 19 April 2016 Date of the defence 18 August 2016 Permission to publish granted (date) 9 June 2016 Language English Monograph Article dissertation Essay dissertation Abstract Firms and other economic actors often forgo own advantage and instead display otherregarding preferences. This Dissertation studies the reasons for this behavior in the context of duopoly games using laboratory experiments and analytical models. We develop new results concerning behavior in duopoly games under imperfect commitment and incomplete information and when interactions are repeated. We also show that the interplay of conjectural variations and other-regarding preferences has novel implications for behavior in strategic interactions. The behavioral methods used in the Dissertation include standard laboratory experiments as well as psychophysiological methods that allow correlating laboratory behavior to activation of the autonomic nervous and skeletomuscular systems. The analytical methods include evolutionary game theoretic models where evolutionarily stable strategies are sought in finite and infinite size populations and standard game theoretic equilibrium analysis where conditions for uniqueness of subgame-perfect equilibria are sought in extensive form games of incomplete information. The objectives of the Dissertation are to provide experimental evidence on the role of costless commitment via cheap talk, private information, and emotions in cooperation in duopoly games. The objectives are also to provide new analytical results on the interplay of otherregarding behavior and conjectural variations and to examine how asymmetric and stochastic private information affects commitment. The overall theme of the Dissertation is to study how variations on the assumption of own payoff maximization affect players' behavior in duopoly games. The results suggest that imperfect commitments, such as cheap talk announcements and partial commitments, have value in strategic interactions. However, the effects of costless or partial commitments depend on available information about payoffs or marginal costs. We also find that cooperative behavior in repeated duopoly games has an emotional foundation. This is shown e.g. by emotional expressions when observing decision outcomes and by autonomic activity during decision making. Our studies on other-regarding preferences in conjectural variations models suggest that taking these both into account and allowing evolutionary selection leads to novel results. These include the explicit dependence of the evolutionarily stable conjecture on the other-regarding preference parameter and the evolutionary stability of self-regarding behavior with consistent conjectures. We suggest several avenues for future experimental and analytical research.Firms and other economic actors often forgo own advantage and instead display otherregarding preferences. This Dissertation studies the reasons for this behavior in the context of duopoly games using laboratory experiments and analytical models. We develop new results concerning behavior in duopoly games under imperfect commitment and incomplete information and when interactions are repeated. We also show that the interplay of conjectural variations and other-regarding preferences has novel implications for behavior in strategic interactions. The behavioral methods used in the Dissertation include standard laboratory experiments as well as psychophysiological methods that allow correlating laboratory behavior to activation of the autonomic nervous and skeletomuscular systems. The analytical methods include evolutionary game theoretic models where evolutionarily stable strategies are sought in finite and infinite size populations and standard game theoretic equilibrium analysis where conditions for uniqueness of subgame-perfect equilibria are sought in extensive form games of incomplete information. The objectives of the Dissertation are to provide experimental evidence on the role of costless commitment via cheap talk, private information, and emotions in cooperation in duopoly games. The objectives are also to provide new analytical results on the interplay of otherregarding behavior and conjectural variations and to examine how asymmetric and stochastic private information affects commitment. The overall theme of the Dissertation is to study how variations on the assumption of own payoff maximization affect players' behavior in duopoly games. The results suggest that imperfect commitments, such as cheap talk announcements and partial commitments, have value in strategic interactions. However, the effects of costless or partial commitments depend on available information about payoffs or marginal costs. We also find that cooperative behavior in repeated duopoly games has an emotional foundation. This is shown e.g. by emotional expressions when observing decision outcomes and by autonomic activity during decision making. Our studies on other-regarding preferences in conjectural variations models suggest that taking these both into account and allowing evolutionary selection leads to novel results. These include the explicit dependence of the evolutionarily stable conjecture on the other-regarding preference parameter and the evolutionary stability of self-regarding behavior with consistent conjectures. We suggest several avenues for future experimental and analytical research.