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 control Slope MR Loss of quantity control Slope MC when there is MC uncertainty.,=,2,Homework exercise,Illustrate with a figure (or show mathematically) that loss p-control slope MC loss q-control slope 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,