So welcome back. In our first lecture we've learned how to find optimal decisions in a strategic game. These decisions often maximize our own profits but they harm the competitor at the same time. So in this video, I will introduce you to situations in which companies are actually better off by cooperating with each other. And why would firms want to cooperate in the first place. Sometimes, quite simply, competition is not in the company's best interest. Remember the last session. We had Sensodyne and Colgate deciding to advertise or not to advertise. We found that the Nash Equilibrium in such a game is for both firms to advertise, even though both knew that they could be better off if they agreed not to advertise. But each of the players, Sensodyne and Colgate, has an individual incentive to actually not stick to that agreement and advertise anyway. So the Nash Equilibrium here is an outcome that's not efficient and it doesn't maximize both players profits. So that's one situation in which cooperation can actually be a good thing. Another situation is that, sometimes companies simply need each other. And we recall the example that we discussed the last time, where Sony and Philips had to agree on a standard for the compact disc. And there were two standards available. There was the Sony standard and the Philips standard, and both of them wanted to coordinate on one of those two. But it wasn't clear if they were going to settle on this one, or on that one. And they needed the cooperative behavior or the coordination between these two players to settle on one of those. So, in these situations cooperation can help avoid inefficient solutions. So in this session, we're going to deal with a question or the problem of how to achieve cooperation between individual profit maximizers. The mechanisms we're going to take a closer look at are, repeated games. So we play a prisoner's dilemma not just a single time, but a repeated number of times. And we'll look at commitment, where we can settle on a course of action before the other firm has done it. We've just learned that companies that face a prisoner's dilemma or play a coordination game, are often better off if they cooperate with each other or, somehow, can coordinate their behavior. Now, this sounds simple in theory, but it's hard to sustain given that our firms are selfish, individual, profit maximizers. So if games are played repeatedly or players commit to certain strategies, this can help enabling cooperation. So in the following videos, we'll have a closer look at these mechanisms. So stay tuned and see you in a second.
