CONCLUSION

This chapter analyzed the decision making pro­cesses of:

• The banks which lend to businesses; and

• The business community which demands funds. In the process, this chapter demon­strated that game theory provides insight into the strategies of the lending banks and their corporate borrowers.

In this chapter:

1. The contract curve of the possible points of agreement between a lending bank and a borrower in the bargaining process under the bilateral monopoly frame has been derived;

2. It is observed that

a. The base rate stipulated by the Reserve Bank of India works as a constraint on the bargaining process between the lender and the borrower by imposing a downward restriction on loan-pricing, and

b. the Indian public sector banks may cooperate and divide the market among themselves, but if they chose competi­tion in lieu of cooperation, they may earn a modest competitive profit only;

c. A lemma indicating that contrary preferences of a bank and a potential borrower may lead to obstacles for cooperation has been derived;

d. The possible location of Nash Equilibrium under the assumption of rationality in a duopolistic set up where a bank behaves rationally and expects rational behavior from its competitors is detected;

e. The process of earning of additional profits by the competing banks from lending business by formulating mixed strategies of selling property insurance along with property loan and undercut­ting each other in similar businesses has been explained;

f. In the duopoly frame the calculation of pay-offs to the banks has been dem­onstrated when both the banks believe that whichever would first introduce one of the above two products would earn more profit from that product than would the other; hence, each bank chooses to respond to the other bank by launching the other product;

g. The possible strategies of cooperation and defection have been pointed out in the context of Prisoners’ Dilemma in the lender-borrower game highlighting the role of collateral mortgage; and finally

h.

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ItemId=16001

KEY TERMS AND DEFINITIONS

Bargaining: Negotiating regarding price between buyer and seller.

Decision Tree: A way of depicting the decision making process in the form of a network whereby one can make a prior estimate of pay-off of every alternative decision.

Dominant Strategy: It is one of the alternative strategies (i.e. courses of actions) that is expected to yield the highest pay-off.

Duopoly: Any market with all characteristic features of perfect competition but only with two sellers.

EMI: Equated Monthly Installment.

Maxmin Strategy: The strategy that is ex­pected to pay the maximum of the minimum pay-offs from other alternatives.

Mixed Strategies: It is the expected or probability-weighted sum of pay-offs from two or more alternative strategies.

Nash Equilibrium: It is that strategy, which has been chosen to be executed with any deviation from the same.

Oligopoly: Any market with all characteristic features of perfect competition but with a limited or few number sellers.

Prisoner’s Dilemma: It is a famous simile to describe the process of deciding whether to cooperate or not by two players in a game.

Pure Strategy: It is the opposite of mixed strategy. It is described in terms of the pay-off from this only.

RBI: Reserve Bank of India.

ENDNOTES

This may well apply to the HDFC Bank because of lower interest rate in comparison with the ICICI Bank (Roongta, 2009).

This assumption is plausible because the HDFC Ergo, the property insurance subsid­iary of the HDFC Bank had less premium income in 2012 than did the largest general insurance provider ICICI Lombard, a sub­sidiary of the ICICI B ank (Akanksha, 2012).

This work was previously published in Economic Behavior, Game Theory, and Technology in Emerging Markets, edited by Bryan Christiansen andMuslum Basilgan, pages 271-288, copyright 2014 by Business Science Reference (an imprint of IGl Global).

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