Commitment

In game theory, a credible commitment in sequential games is a strategy where a player influences another's decision by making a believable and enforceable promise or threat. Sequential games differ from simultaneous games as players act after observing the decision of another player, allowing the first player to shape the expectations and actions of the second. For such a commitment to be credible, it must be realistic and enforceable, ensuring both sides see cooperation as the most beneficial option.

Consider two supermarket chains, FreshMart and Greengrocer, operating in the same region. FreshMart aims to deter GreenGrocer from launching a discount campaign, which could trigger a price war and reduce profits for both. To prevent this, FreshMart proposes a partnership with shared suppliers and joint advertising. This partnership reduces costs by allowing savings from bulk purchases from suppliers and joint marketing efforts. Such a partnership would boost profitability for both firms. This offer is a credible commitment as it aligns incentives and shows that cooperation is beneficial.

If Greengrocer declines and continues with discounts, FreshMart commits to aggressive promotions and expanding its store locations and committing long-term leases on new retail spaces, increasing the costs for both firms and reducing overall profits. This setup ensures that cooperation, where both avoid aggressive competition, becomes the more attractive option. Given the other's strategy, this creates a Nash equilibrium, a stable outcome where neither supermarket has an incentive to deviate.

Similar strategies are used in industries like airlines and automakers, where alliances allow companies to share routes or technology, reducing competition and costs while maximizing stability. These examples illustrate how credible commitments create conditions where cooperation is mutually beneficial, ensuring long-term profitability and minimizing competition risks.