1、Chapter 14CoordinationGeorge HendrikseEconomics and Management of Organisations:Co-ordination,Motivation and Strategy PositioningBehavioural HypothesisDegree of rationalityOpportunistic Self interestedUtopianCoordination ProblemsCompleteBoundedProceduralFundamental welfare theoremAll coordination pr
2、oblems will be resolved perfectly by the price mechanism in a market system,under certain circumstances.There is a unique equilibrium.Coordination problemA situation with more than one equilibrium.Example:Norwegian DreamTwo Nash equilibria Containership:Go Norwegian Dream:Stopand Containership:Stop
3、Norwegian Dream:GoReduce the number of equilibria to 1.Solution for the coordination problem:Four types of solutions1.Generate extra information2.Change payoffs3.Eliminate a player4.Change the choice possibilities1.Generate extra information Common background Coordination device/mechanismExampleGene
4、rate extra information by introducing traffic rules on the sea,like right has priority.One equilibrium emerges-Containership:Go-Norwegian Dream:Stop2.Change the payoffsExampleThe captain of the Norwegian Dream pays the captain of the Panamese containership an amount 5 when he stops.-Containership:St
5、op-Norwegian Dream:GoOne equilibrium emerges3.Change the playersExampleEliminate one player,e.g.by forbiddingcruise ships on the North Sea.PanamesecontainershipPayoffStop-2Go2One equilibrium emergesContainership:Go4.Change the choice possibilitiesExampleReduce the number of choices,e.g.installequipm
6、ent which automatically stops theengine of the cruiseship when a ship isspotted on the right.Norwegian DreamPanamesecontainershipStopStop(-1,-1)Go(2,-1)One equilibrium emerges-Containership:Go-Norwegian Dream:StopGenerate additional information by using a coordination device.There are many coordinat
7、ion mechanisms/devices which might resolve the coordination problem.Criteria for evaluating coordination devices/mechanisms1.(Efficiency)Does mechanism achieve efficient decision when all information is available?2.(Complexity)Is the coordination device simple(not complex)?3.(Robustness)How brittle
8、is the coordination mechanism regarding bad information?Example:Symphony orchestraTwo coordination devices:1.Prices2.ConductorCoordination device prices1.Yes2.No3.No1.Yes2.Yes,everybody is told at the same time,directly,the(same)value of the design variable.3.Yes,conductor is very flexibleCoordinati
9、on device conductorConductorSurplus maximising choiceApplication:prices vs quantitiesDivisions(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
10、.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
11、 account of choice headquarters.A P-instrument as well as a Q-instrument results in the efficient outcome.Criterion 1A P-instrument as well as a Q-instrument entails just one number.Both controls are equally simple(complex).Criterion 2Evaluate each coordination device on its robustness.Criterion 3It
12、 can be shown thatLoss of price controlSlope MRLoss of quantity controlSlope MCwhen there is MC uncertainty.=2Homework exerciseIllustrate with a figure(or show mathematically)thatloss p-controlslope MCloss q-controlslope MRwhen there is uncertainty regarding MR.2Notice 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
