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firm 1 doesn’t enter, the payoff is (4,10). However, if firm 1 does enter, firm 2 has the choice to either attack or not attack. If firm 2 attacks, the payoff is (3,3) whereas if firm 2 doesn’t attack, the payoff is (6,6). Given that firm 2’s optimum payoff is firm 1 not entering, it can issue a threat that they will attack if firm 1 enters, to discourage firm 1 from entering the market. However, this is a non-credible threat. If firm 1 does decide to enter the market, the action that is in the best interest for firm 2 is to not attack as this leads to a payoff of 6 for the firm, as opposed to the payoff of 3 from attacking.
62:, who stated that: "A announces that B's behaviour will lead to a response from A. If this response is a reward, then the announcement is a commitment; if this response is a penalty, then the announcement is a threat." While a player might make a threat, it is only deemed credible if it serves the best interest of the player. In other words, the player would be willing to carry through with the action that is being threatened regardless of the choice of the other player. This is based on the assumption that the player is rational.
28:
159:"subjects are not willing to rely on others’ self-interested maximization, and self-interested maximization is not ubiquitous." A key component of the utility maximising strategy in the game was the elimination of non-credible threats, however, the study found that suboptimal payoffs were a direct result of players following through on these non-credible threats. In real world applications, non-credible threats must be considered as there is a high possibility players will not act rationally.
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The notion of credibility is contingent on the principle of rationality. A rational player always make decisions that maximise their own utility, however, players are not always rational. Therefore, in real world applications, the assumption that all players will be rational and act to maximise their
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An example of a non-credible threat is demonstrated by
Shaorong Sun & Na Sun in their book Management Game Theory. The example game, the market entry game, describes a situation in which an existing firm, firm 2, has a strong hold on the market and a new firm, firm 1, is considering entering. If
158:
Nicolas
Jacquemet and Adam Zylbersztejn conducted experiments based on the Beard and Beil Game to investigate whether people act to maximise their payoffs. From the study Jacquemet and Zylbersztejn found that failure to maximise utility stemmed from two observations:
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with a payoff of (0,0) to entice player 1 to choose L with a payoff of (2,2), as this is the highest payoff for player 2. However, this is a non-credible threat as, if player 1 does decide to choose R, player 2 will choose
97:
Player 2 threatening action A if Player 1 chooses action B is a non-credible threat. This is because if Player 1 chooses action B, Player 2 will choose action B, as this results in a higher payoff than action A for Player
116:
Eric van Damme's
Extensive Form Game demonstrates another example of a non-credible threat. In this game, player 1 has the choice of L or R, and if player 1 chooses R, then player 2 has the choice of
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A non-credible threat is made on the hope that it will be believed, and therefore the threatening undesirable action will not need to be carried out. For a threat to be credible within an
31:
Illustration that shows the difference between a SPNE and another NE. The blue equilibrium is not subgame perfect because player two makes a non-credible threat at 2(2) to be unkind (U).
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Heifetz, A., & Yalon-Fortus, J. (2012). Game Theory: Interactive
Strategies in Economics and Management. Cambridge University Press. ProQuest Ebook Central
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A threat, and its counterpart – a commitment, are both defined by
American economist and Nobel prize winner,
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Harrington, J. E. (1989). "Noncooperative Games". In
Eatwell, John; Milgate, Murray; Newman, Peter (eds.).
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van Damme, Eric (1989). "Extensive Form Games". In
Eatwell, J.; Milgate, M.; Newman, P. (eds.).
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is not in player 2’s best interest, their threat to play that is non-credible.
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How
Behavioral Economics Influences Management Decision-Making: A New Paradigm
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utility is not practical, thus non-credible threats cannot be ignored.
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that rely on non-credible threats can be eliminated through
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which has a payoff of 0 for player 2. Given that action
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Jacquemet, Nicolas; Zylbersztejn, Adam (June 2014).
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303:. Palgrave Macmillan. pp. 178–184.
278:. Palgrave Macmillan. pp. 139–144.
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520:The theory and practice of blackmail.
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124:. Player 2 can threaten choosing
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711:Coalition-proof Nash equilibrium
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184:Sun, Shaorong; Sun, Na (2018).
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240:Schelling, Thomas C. (1956).
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246:The American Economic Review
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374:Journal of Economic Issues
47:to describe a threat in a
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368:Khalil, Elias L. (2011).
309:10.1007/978-1-349-20181-5
194:10.1007/978-981-13-1062-1
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242:"An Essay on Bargaining"
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332:Monahan, K. (2018).
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1236:Folk theorem
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1359:John Conway
1339:Eric Maskin
1135:Blotto game
1120:Pirate game
929:Global game
899:Tit for tat
834:Bid shading
824:Appeasement
674:Equilibrium
654:Solved game
589:Determinacy
572:Definitions
565:game theory
301:Game Theory
276:Game Theory
145:Rationality
67:equilibrium
41:game theory
1668:Categories
1205:Trust game
1190:Kuhn poker
859:Escalation
854:Deterrence
844:Cheap talk
816:Strategies
634:Preference
563:Topics of
1389:John Nash
1095:Stag hunt
839:Collusion
428:219374150
394:143987777
212:169075970
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1530:Lazy SMP
1224:Theorems
1175:Deadlock
1030:Checkers
911:of games
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468:See also
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1065:Chicken
919:Auction
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424:S2CID
390:S2CID
254:JSTOR
208:S2CID
166:Notes
1625:stub
701:Core
457:help
432:SSRN
346:ISBN
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