Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Chapter 14,Coordination,George,Hendrikse,Economics and Management of Organisations:,Co-ordination,Motivation and Strategy,Positioning,Behavioural,Hypothesis,Degree,of,rationality,Opportunistic,Self interested,Utopian,Coordination Problems,Complete,Bounded,Procedural,Fundamental,welfare,theorem,All coordination problems will be resolved perfectly by,the,price mechanism,in a,market system,under certain circumstances,.,There is a unique equilibrium.,Coordination problem,A situation with more than one equilibrium.,Example:Norwegian Dream,Two Nash,equilibria,Containership:Go,Norwegian Dream,:Stop,and,Containership:Stop,Norwegian Dream,:Go,Reduce,the,number,of,equilibria to,1.,Solution for the coordination problem:,Four,types of,solutions,Generate,extra,information,Change,payoffs,Eliminate,a,player,Change,the,choice,possibilities,1.Generate extra information,Common background,Coordination device/mechanism,Example,Generate,extra,information by,introducing traffic,rules on,the,sea,like,right,has priority,.,One equilibrium,emerges,-,Containership:Go,-,Norwegian Dream,:Stop,2.Change the payoffs,Example,The captain,of the,Norwegian Dream pays,the captain of the Panamese containership,an amount,5,when he,stops.,-,Containership:Stop,-,Norwegian Dream,:Go,One equilibrium emerges,3.Change the players,Example,Eliminate one player,e.g.,by forbidding,cruise,ships on,the,North,Sea.,One equilibrium,emerges,Containership:Go,4.Change the choice possibilities,Example,Reduce,the,number,of,choices,e.g.,install,equipment which automatically,stops the,engine,of the,cruiseship when,a,ship,is,spotted on,the,right,.,One equilibrium,emerges,-Containership:Go,-,Norwegian Dream,:Stop,Generate additional information by using a coordination device.There are many coordination mechanisms/devices which might resolve the coordination problem.,Criteria,for evaluating coordination devices,/,mechanisms,(,Efficiency)Does,mechanism achieve efficient decision when all information,is,available,?,(,Complexity,)Is the,coordination device simple,(,not,complex)?,(,Robustness,),How brittle,is the,coordination mechanism regarding,bad,information,?,Example,:,Symphony,orchestra,Two,coordination,devices:,Prices,Conductor,Coordination device,prices,Yes,No,No,Yes,Yes,everybody,is,told,at the,same,time,directly,the(,same,),value,of the design,variable,.,Yes,conductor is,very,flexible,Coordination device conductor,Conductor,Surplus,maximising,choice,Application:prices,vs,quantities,Divisions(of a company)do not always have all relevant,company-wide information.,Headquarters therefore has to coordinate decisions of divisions.,Assume headquarters may use either,the,price or quantity,instrument,i.e.,it,has to tell divisions either the price they will receive for products produced or the quantity they have to produce.,Should you use,prices or quantities,as the,coordination mechanism,?,Decision 1:,Headquarters chooses a price or a quantity.,Decision 2:,Division decides how much to produce,while taking account of choice headquarters.,A P-instrument,as,well,as,a,Q-instrument,results,in the,efficient,outcome,.,Criterion 1,A P-instrument,as,well,as a,Q-instrument,entails just one number,.,Both controls,are,equally simple,(complex).,Criterion 2,Evaluate each coordination device on its robustness,.,Criterion 3,It can be shown that,Loss of price controlSlope MR,Loss of quantity controlSlope MC,when there is MC uncertainty.,=,2,Homework,exercise,Illustrate with,a,figure,(,or,show,mathematically,),that,loss,p-,controlslope,MC,loss,q-,controlslope,MR,when there,is,uncertainty regarding,MR.,2,Notice,that,the,price system,is,an optimal coordination device,in the(,Arrow,-,Debreux,)model,which generated,the,fundamental,welfare,theorem,given that there,is,uncertainty regarding,MC.,Observation,