Forthcoming, Production and Operations Management
36 Pages Posted: 12 Jul 2019 Last revised: 30 Apr 2021
Date Written: July 8, 2019
Organizations routinely introduce hitherto-unexplored interventions to improve their supply chains. Consider a principal (e.g., a firm) that implements a “seemingly-helpful” intervention: For any fixed actions of the principal and the agents (e.g., consumers), the principal’s payoff is higher in the presence of the intervention than in its absence. While one would expect such well-intentioned interventions to benefit the principal, several papers within the OM literature show that the principal's equilibrium payoff can be hurt, even ignoring the intervention’s implementation cost. While this conclusion is often based on analyzing a single-shot, simultaneous-move game, repeated-interactions can also serve as an appropriate environment in many cases. A fundamental question arises: Does this conclusion hold even under repeated interactions?
We study this question using the framework of infinitely-repeated games and the notion of a precommitment equilibrium from the literature on reputation in repeated games. We identify two key characteristics that determine whether a seemingly-beneficial intervention helps, or can possibly hurt the firm: (a) nature of the intervention (ceteris paribus, does it induce agents to react in a manner favorable to the principal?), and (b) extent of interaction (single-shot at one extreme and infinitely-repeated at the other). Interestingly, we demonstrate the following two possibilities using settings analyzed in the recent OM literature: seemingly-beneficial interventions can (a) hurt the firm in a single-shot analysis but benefit under repeated interactions, and (b) continue to hurt the firm under repeated interactions. We also obtain easy-to-interpret conditions under which the benefit of such interventions is guaranteed under repeated interactions.
Keywords: Seemingly-Beneficial Interventions, Repeated Games, Precommitment Equilibrium
JEL Classification: L21, D11
Suggested Citation: Suggested Citation