11-3 Lecture - 11/3/09 PAM 2000 Lecture Threats To produce...

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11/3/09 PAM 2000 Lecture Threats To produce Large Output is a non-credible threat Making Threats Credible Firms may find a way to advertise their commitment to their threats Mike Tyson – terrifying boxer because he convinced people that he wasn’t completely rational Investing large amount of money in equipment Writing contracts for future sales Such actions may make threats more credible Agent could also build reputation as irrational: may not always do what is in own best interest Ex. Richard Branson, chairman of Virgin Atlantic: Competing with British Airways was “like getting into a bleeding competition with a blood bank.” British Airway made it clear to him that they wanted Virgin Atlantic out and was willing to earn lower profits to harm him Anthony Wayne – British believed he was irrational in Revolutionary War Video Clip: Dr. Kellogg – first person to argue for health foods. Trouble he has with one of his adopted kids Credible Threats and Rationality During Cold War, US did not have troops to defend Western Europe from USSR US threatened to nuke USSR if it invaded Western Europe Not a credible threat because of mutually assured destruction But USSR could fear an irrational response by the US o Nixon cultivated “madman” image in foreign affairs
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11-3 Lecture - 11/3/09 PAM 2000 Lecture Threats To produce...

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