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Modeling Evolutionarily Stable Strategy for Firms Social Preferences under Cournot Competition ITER 2014 Vitaliy Kobets. 3 rd International Workshop ITER 2014 Vitaliy Kobets, Maksim Poltoratskiy Kherson State University, June, 10, 2014

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Vitaliy Kobets, Maksim Poltoratskiy

Modeling Evolutionarily Stable Strategy for Firms’ Social Preferences under Cournot Competition

3rd International Workshop ITER 2014

Kherson State University, June, 10, 2014

ITER 2014 –Vitaliy Kobets.

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Outlines

  • Motivation
  • Literature review
  • Research question
  • Types of firms’ behavior
  • Competition model: assumptions
  • Competition model: preferences
  • Strategies’ selection: ESS vs non-ESS
  • Conclusions

ITER 2014 –Vitaliy Kobets.

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Motivation

  • Traditional economics can explain:
  • Why firms’ selfish behavior is best strategy for

supporting and increasing of his own profit;

  • Why cartel can increase profits of participants;
  • Competitive equilibrium as result of ‘invisible hand’

BUT can not explain:

  • Altruist and punisher can also earn profits;
  • Firms which follow such model of behavior can gain

more profit than selfish firm

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ITER 2014 –Vitaliy Kobets.

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Literature review

Pro egoist behavior

  • Individual is egoist: the

more good he receives, the more he benefits [Myerson, 1982]

  • The benefits of one agent

do not mean anything to the other [Filatov, 1998]

  • Positive effect of

‘Invisible hand’ [A.Smith] Contra egoist behavior

  • Behavior stays rational,

when firm combines selfishness and social norms [McFadden, 2009]

  • Mutual gains from

cooperation generate altruism [Bowles, 2003]

  • Punish behavior is more

effective than egoism under strong social rules [Tanaka, 2000]

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ITER 2014 –Vitaliy Kobets.

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Interaction of people and institutions

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ITER 2014 –Vitaliy Kobets.

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Research question

  • Question is why some attitude of firm to his rivals

is unchangeable (constant), but others attitudes can change? More accurate:

  • Paper goal is to investigate which social

preferences of firms are evolutionarily stable strategy (do not change under impact of their rivals) under quantity competition on homogeneous product market

ITER 2014 –Vitaliy Kobets.

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Types of firms’ behavior

Selfish persons (Egoists) Punishers Outsider costs Co-operators (Cartel) Altruists Outsider benefits Private benefits Private costs Cost/Benefit

ITER 2014 –Vitaliy Kobets.

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Types of firms’ behavior

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;

selfish (α=0): altruistic (α>0): punishing (α<0):

max

i

q i i i i

P q v q π

≥

= ⋅ − ⋅  → max

i

q i i i i i j j i

P q v q π α π

≥ ≠

= ⋅ − ⋅ + ⋅  →

∑

max

i

q i i i i i j j i

P q v q π α π

≥ ≠

= ⋅ − ⋅ + ⋅  →

∑

ITER 2014 –Vitaliy Kobets.

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Competition model 1: assumptions

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  • n firms compete in quantity;
  • Linear market demand and the cost of competitors is

common knowledge;

  • Each firm knows his own attitude and attitudes of others to

himself;

  • Firm selects an attitude giving for his profit more than

average in industry;

  • Firm saves successful model of behavior as norms, rules or

institutes.

ITER 2014 –Vitaliy Kobets.

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Competition model 1: data

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Competition model 1: egoists’ attitudes

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Competition model 1: egoists’ profits

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Competition model 1: egoists’ quantities

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Competition model 2: altruists’ attitudes

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Competition model 2: altruists’ profits

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Competition model 2: egoists’ quantities

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Competition model 3: altruists’ attitudes

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Competition model 3: altruists’ profits

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Competition model 3: egoists’ quantities

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Competition model 3: price

Economics 20 - Prof. Anderson

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Competition model 3: quantity

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Conclusions

  • “Selfishness" attitude is not an evolutionarily stable

strategy (ESS)

  • The attitude of "altruism" is ESS if altruist have higher

productive efficiency (e.g., lower average costs) under competition with selfish firm. But if a firm with lower average cost is less altruistic, then the two are eventually transformed into punishers and "altruism" is not ESS in such case.

  • The attitude of "punisher" is also ESS if punisher has

higher productive efficiency (e.g., lower average costs) under competition with altruist. But if a firm with smaller average cost is lower punisher, the two firms become altruists and "punisher" is not ESS in this case.

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ITER 2014 –Vitaliy Kobets.

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