Nash-2 Equilibrium: Selective Farsightedness Under Uncertain Response
This paper provides an extended analysis of an equilibrium concept for non-cooperative games with boundedly rational players: Nash-2 equilibrium. Players think one step ahead and account for all profitable responses of player-specific subsets of opponents because of both the cognitive limitations on predicting everyone’s reaction and the inability to make deeper and certain predictions. They cautiously reject improvements that might lead to worse profits after some reasonable response. For n-person games we introduce the notion of a reflection network consisting of direct competitors to express the idea of selective farsightedness. For almost every 2-person game with a complete reflection network, we prove the existence of a Nash-2 equilibrium. Nash-2 equilibrium sets are obtained in models of price and quantity competition, and in Tullock’s rent-seeking model with two players. It is shown that such farsighted behavior may provide strategic support for tacit collusion. The analyses of n-person Prisoner’s dilemma and oligopoly models with a star reflection structure demonstrate some possibilities of strategic collusion and a large variety of potentially stable outcomes.
A judicial review of the infringement decisions of the competition authority substantially affects the standard of evidence in competition enforcement as well as the structure of cases that the competition authority takes. Enforcement against concerted practice in Russia represents a case-study of interaction between commercial courts of first instance, the Highest Court, the competition authority as enforcer, market participants and the legislator to influence the standards of liability under investigation of concerted practice. We examine the judicial review of infringement decisions on concerted practice and track the evolution of legal definition and sufficiency of evidence in such cases. We show, first, that in Russian enforcement, the ability of the Highest Court to influence the criteria of first instance courts is limited (in contrast to the ability of the first instance court to influence the strategy of enforcement by the competition authority). Second, the increase in the burden of proof motivates the competition authority to refrain from an investigation of concerted practice, in accordance with the prediction of the model of the selection of enforcement target by reputation-maximizing authority.
Advance price announcements in the form of general rate increase (GRIs) by liner shipping companies have recently become the subject of investigations by competition authorities in different jurisdictions, including the European Union and Russia. The main goal of this paper is to answer the question whether GRIs predict price changes of competitors. Comparison of GRIs with actual price changes in particular routes, defined as antitrust markets in competition investigations in Russia, shows a limited anti-competitive effect of advance price announcements, albeit under specific market conditions. Regression analysis, undertaken in the context of the Russian investigation, rejects the hypothesis that the GRI of a particular company would be followed by price increases of its competitors. Moreover, the frequent changes in the market shares of liner companies support the hypothesis of competition vis à vis collusion. Remedies applied by competition authorities address content and timing of GRIs. The theory of tacit collusion suggests that remedies, which further specify the content of price announcements, may paradoxically enhance non-cooperative pricing, in contrast to remedies that restrict audience of GRIs by customers.
We examine an equilibrium concept for 2-person non-cooperative games with boundedly rational agents which we call Nash-2 equilibrium. It is weaker than Nash equilibrium and equilibrium in secure strategies: a player takes into account not only current strategies but also all profitable next-stage responses of the partners to her deviation from the current profile that reduces her relevant choice set. We provide a condition for Nash-2 existence in finite games and complete characterization of Nash-2 equilibrium in strictly competitive games. Nash-2 equilibria in Hotelling price-setting game are found and interpreted in terms of tacit collusion.
The paper examines the structure, governance, and balance sheets of state-controlled banks in Russia, which accounted for over 55 percent of the total assets in the country's banking system in early 2012. The author offers a credible estimate of the size of the country's state banking sector by including banks that are indirectly owned by public organizations. Contrary to some predictions based on the theoretical literature on economic transition, he explains the relatively high profitability and efficiency of Russian state-controlled banks by pointing to their competitive position in such functions as acquisition and disposal of assets on behalf of the government. Also suggested in the paper is a different way of looking at market concentration in Russia (by consolidating the market shares of core state-controlled banks), which produces a picture of a more concentrated market than officially reported. Lastly, one of the author's interesting conclusions is that China provides a better benchmark than the formerly centrally planned economies of Central and Eastern Europe by which to assess the viability of state ownership of banks in Russia and to evaluate the country's banking sector.
The paper examines the principles for the supervision of financial conglomerates proposed by BCBS in the consultative document published in December 2011. Moreover, the article proposes a number of suggestions worked out by the authors within the HSE research team.