The Fragility of Commitment

Abstract

We show that the value of commitment in many standard games is fragile. Specifically, when the second mover faces a small cost to observe the …first mover's action, equilibrium payoffs are identical to the case where observation is in…finitely costly or the first mover's actions are completely unobservable. Applications of our result include standard Stackelberg-Cournot and differentiated product Bertrand games, as well as forms of commitment highlighted in Bolton and Scharfstein (1990) and Bulow, Geanakoplos, and Klemperer (1985).

Keywords: Cournot, Bertrand, Stackelberg, Observation Cost, Value of Commitment, First-Mover Advantage, Second-Mover Advantage, Costly Leader Game

JEL Classification: C72, D83, L13