So, what's going to happen in each of these instances?
So, if the contractor delivers high quality, and the organizing committee
pays the price of 30,000. Delivering high quality, means, it's
worth 45,000, so if the organizing committee pays 30,000, then what's left
for the organizing committee is a value of 15,000.
If the cost for the contractor are 15,000 and he is paid 30,000 then that's going
to leave him with a surplus of 15,000. Okay, and by the same token if the
contractor delivers high quality, and the organizing committee simply pays a lower
price then the payoff for the contractor is
going to be 5,000, the payoff for the organizing committee
is going to be 25, because they negotiated the price down to 20,000,
which leaves them with 25,000. Contractor delivering low quality and the
organizing committee paying full price means that there's no surplus left for
the organizing committee and the contractor gets 18,000.
And if the contractor delivers low quality and the organizing committee
renegotiates the price. Then, profits are going to be
8,000 for the contractor and surplus is going to be 10,000 for the organizing
committee. So, as you can imagine the fairest or
the most sensible outcome for this game would be if the organizing committee
paid the full price, and the contractor delivered high quality.
But you can also see that there's an incentive for both of them to actually
not stick to that agreement. So keep in mind that we play this game 5
times. So one thing that might help is the
threat of doing something in the future if the
other party does not behave according to the rules.
So the contractor, for example, could threaten the organizing committee and
say, well, if you ever renegotiate the price in a given month, then we will
continue delivering low quality from there onwards.
