The payoff matrix
CANDIDATE A
CANDIDATE B
The payoffs: if A chooses Delhi –marketing then his payoff for Delhi- marketing would be 100 and be chooses this as his second option then the associated payoff for B will be 88. Similarly if B chooses Pune –finance as his first option and A chooses this as his second option then the associated payoffs for both will be 100 and 88. the negative payoff for both of them is that they are unable to go together and this way their payoff is equivalent to nullity.
In the above matrix we see that in the first row that the candidate A has given his first preference as Delhi and marketing and the candidate B has his choice as Pune and finance. Thus they have highest IPM in the given preferences. Also till this time they had no idea of the type of projects that had come. The preferences were now displayed and the projects were also disclosed. Now to get the desired projects they will give their first preference for that projects, which is their first choice and will give them the highest IPM ranking.
Now they both score the highest in their IPM thus they stand a chance to go to either of the projects. This seems very simple on the face that the candidates get what they want but there may also be other candidates who have the same score in their IPM with the same preferences areas. This will get them all a tie thus forcing them to negotiate with one another. Now as they have highest score in two projects thus they stand a better chance of getting at least one of them.
Election in the campus
The example is that of the election that that took in the campus for the selection of the Class Representative. First all those interested were asked to file nominations for the post. In total there were four people who filed their nominations, all hoping that they have considerable chances of winning. Let these four candidates be named A, B, C and D. As the campaigning started to take place the scenario started becoming clear and which candidate had the chance to win was also becoming clear. In the end it was clear to all that there is a clear race between two candidates A and B. As the people were divided between the two candidates candidate C thought that he may be able to break some of the votes from either side and with some of his core supporters he will be able to come out as the winner. The last candidate, candidate D saw that his chances of winning were very bleak but he did not withdraw from the race. It was because he could see that the end result of the elections was dependent upon him and by withdrawing or staying in the race the winner would change. Now his only satisfaction in the whole process was that he makes that person win whom he even wishes to win if he does not win. Now he wanted candidate A to win but still had this in mind that if he can form some understanding with candidate A then he may be able to win by acting that he wants candidate A to win but internally he would try and maximize his gains by acting modest. So his staying in the game could make candidate A win or else he would loose. This situation was also very clear to candidate A. Now what candidate A had in his mind is that it is either he himself should win or if he loses then candidate D should win. So they went on to have an understanding amongst themselves.
The understanding was that they should tell people that they should vote either for him. They could tell this to the students (of course only those who were close enough and some who could be relied upon and those relied upon had no influence from the other group) as candidate B did not have the support of students from all over the states but he had with him a major portion of students from his state and they wanted that a candidate of their state to win. He had enough members from his state to make him win and many students thought that if candidate C wins then it will not serve the purpose because as he will not be selected because he is not favored by all but because all from his state were with him. This was the point the candidates A and D realized and they thought that only way to achieve their objective was to form a cartel. Now it did not matter to them who would win but they did not want the candidate B to win. Now they both would be satisfied if either of them would win. This was the understanding they had amongst them. The problem could have had a very simple solution by making candidate D withdraw from the race and he asking all his supporters vote for candidate A. This was also thought of but then candidate D had some supporters who did not want candidate A to win, had they been told to vote for candidate A they would have accepted this on the face but would have voted for candidate C. This could have made the candidate C the winner and he would have been successful in what he had thought when he took the decision to be in the race. To satisfy them candidate D stood all the time saying that it did not matter whosoever wins as long as either A or D wins. This was also serving the interest of candidate D as he had in his mind that he may win if only by chance but that would only be if at all by chance. He had to act in this manner and tell his core supporters that cooperation is symbiotic only on the face value but in reality he would win and the other candidate would suffer. Both the candidates told this to their core supporters but they had this in their minds and were true to it that if either of them wins the purpose is served.
Election process with respect to the coordination games
Assumptions for the payoff matrix
- Payoffs are in terms of utility maximization; here the satisfaction will be maximized if B does not win which is the overriding consideration for A and D to collude.
- No interpersonal comparisons of utility are permitted that is both A and D are indifferent to the fact that which of them wins as long as B loses
- No side payments are allowed that is there are no external incentives so that either of them defects.
The payoff matrix between candidate A and candidate D
Rules for the election
- Each student will only have one vote
- The vote stands cancelled if it is not marked at the right place
The payoff matrix
The above matrix shows the payoffs associated with the election process in the event of either A or D winning. The first column and row give the possibility of either A or D winning based on the presumption that both cannot win and both don’t have to lose. The payoffs reflect the effect of collusion on the utility of the players. If they do not collude then the chances of B winning increase thus the penalty being unbearable to both of them.
The payoffs: the payoffs is a win for either of them that they want, the other one is the negative payoffs that the third person will win which is B and this neither of them wants.
Explanation with reference to the battle of the sexes
In the game above we have a game with multiple game equilibria. The game had two players; each of who have the same two possible actions that is each of them can fight the elections individually. The also game has two possible pure strategy Nash- equilibria one of which is strictly preferred by each player that is they both win. The players have some common interest though in that they would prefer to choose the same strategy rather than doing different things as in the case above both of them want either of them to win and for this they have formed a collusion and they are canvassing for each other. Again the need for coordination arises. The payoffs for both of the candidates are less when they cooperate than they do not. In that case the penalty would be very high, here it would mean losing the election.
Fertilizer cartel between India and China:
In response to short food supplies, many nations that are the "export source nations" from which the cartel food companies obtain commodities for world trade, have announced cutbacks and restrictions. India and China were some of the biggest importers of fertilizers from the west. This was due to their being primarily agriculture dependent economies and countries with the largest population in the world. India and China both purchased fertilizer in huge quantities from US firms and had to be subjected to their whims in terms of price changes. This was due to their poor bargaining power in the international market, as they did not have many other alternatives to purchase from. The fertilizer industry in the US was organized and the prices raised by them used to be in collusion as per the demand from importing nations. Due to this factor the Indians and the Chinese could not even purchase from the competitors, as the prices remained the same from whomsoever you purchased. This, was however becoming a big problem on the demand side for the parties concerned as their need for the inputs rose without a corresponding proportionate rise in the domestic production capabilities. The fertilizer companies used to raise the prices arbitrarily without any warnings and since the amounts involved were so huge the rise in price meant millions more in foreign exchange outflows. Also, the purchase being of essential agro-inputs these could not even be evaded or postponed till the prices were brought down.
On assessing the situation, the agro-trade ministers of both the countries who were in US to finalize the purchase transaction on behalf of their respective nations decided to temporarily form collusion. This collusion was to serve the purpose of attaining sufficient clout on the demand side to bring the price down sufficiently as the combined demand of fertilizer from India and China accounted for more than 50% of the cartel’s total sale. If these two did not buy the cartel would have huge surplus and the prices would crash. This would result in the satisfaction of the collusion’s objective of being able to purchase at lowest possible prices. Now, India and China amongst themselves are indifferent to the issue of either of them getting more benefit out of the transaction, which they would because China has a higher demand, and consequently purchases more than India does. Thus, the objective is to satisfy the collective goal and bring the prices of fertilizers down rather than compete with each other for a better deal, as both would lose in the bargain. The collusion actually made a pact not to make any purchases for as many days as they could hold out for and survive by fall back on their buffer stocks, which were in reserve in their respective countries.
Assumptions:
Assuming that the buffer stocks with both the countries are around 50,00,000 tonnes and their daily requirements are of around 10,000 tonnes the buffer stocks would last them for around 50 days. Now, if India wants to purchase 15 million tones and China wants to purchase 20 million tones from the US the price they would have to pay would be 250 US$ per tonne which was the new raised price quoted by the fertilizer cartel, the old price being US $ 200.
CHINA
INDIA
The payoff matrix between India and China
Payoffs:
Now, India and China would have to pay excess of (250-200) 15,000,000 US$ and (250-200) 20,000,000 US$ i.e. 750 and 1000 million US$ above the original price of 3000 and 4000 million US$ respectively. India and China now decide to collude amongst themselves to ensure that the price goes down. Their combined bargaining power would result in pile up of stocks, which would be impossible for the firms to off load in the market if they decided not to purchase. On the basis of their buffer reserves they decided to hold out on purchases as long as they buffer reached a critical minimum because by then the prices would crash. This way they did not have to succumb to arm twisting by the fertilizer cartel. They did not purchase for 3 weeks at a stretch and at the end of the period prices crashed to 150 US$ per tonne which was even before the initial level. Thus their payoffs after collusion came to around 2250 for India and 3000 for China which was 750 and 1000 million US$ below the initial price they would have to pay. This way the collusion resulted in maximization of benefit for both as their overriding objective of standing up to the cartel was met. The different payoff accruing to both i.e. more benefit to China and less to India was of no importance to either.
Payoff Matrix:
The matrix gives the payoffs of India and China in case of collusion and non-collusion.
Application in terms of Battle of Sexes
The outcome of the game is thus the distribution of the total available payoff amongst the two coalition members, which arose as a result of agreements between the players rather than as a predetermined consequence of their strategic choices. Both the players have perfect information about each other’s strategies making the game a success. perfect information about each other’s strategies. Since, the payoffs are assumed to be in monetary terms the coalitions acted by and large to maximize their joint payoff by coordinating strategies. It reflects the fact that in a hostile universe ‘unity is strength’.