Game Theory and Competitive Strategy

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لحعجصمح() عا با ‎Vopios‏ ‎ord Gtrateqico Devisioas‏ من () ظ رهظ ‎Dowie‏ ® ‎Dke Musk Gquilbriuez Revisited‏ # ‎" Repected Guwes ‎0۳۷ IS Oke S ‎ 

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لحعجصمح() عا با ‎Vopios‏ " Gequeciidl Cawer © Dhreus, Cowwikveuts, und Oredibility ® Gaty Oetereue ون رجنمنمیب() ۲ ® @uotivw 0۳۷ IS Oke SD 

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عصته() هه 8 له بمموه) a “AP beheue teat wy cowpetiors are roti vod ut 7 woxivize their uve proFits, how should 17 take their bekavier tote ascot whe ‏مور میور ره بووین‎ ‏سل‎ 0۳۷ IS Oke 

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عصته() هه 8 له بمموه) ® Qpupoopenive versus Covpernive Buwes ® Covpercive Bawe * Plers veyptiate biediog cvotcarts that ula ‏حول‎ to plac jpict stroteqies خام عم ها ری اوه له رن ریق و ووس ”ا مب را وت ات وه ‎youd or service‏ جد ‎(ie. DirroevFt od Opp)‏ ‎possible‏ نات ‎0۳۷ IS Oke S ‎ 

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عصته() هه 8 له بمموه) ® Qowvoperdive versus Covpertive Bawes ‏)رم( و‎ * Oeypiaivg god eoPorcewedt ‏تا و خا‎ powtieat une unt possible © Cxanple: Two vowpeticy Pires ussucvicy the vihers bebuvior detersvine, ‏,ول سول‎ prictary ced advertisiy strategy ty qatar warket shore ۱ ‏اه وت پل‎ unt possible 0۳۷ IS Oke Oo 

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عصته() هه 8 له بمموه) a Ovwvpertiive versus Covpercive Guves 0! Dke straey desiqa is based va vaderstacday pour oppoued = poiet oP view, ood ‏بر جوم‎ pppoued is roticcd) deductoy hous ke or she te tkely to respood te pour actives” 0۳۷ IS 6 

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عصته() هه 8 له بمموه) ‎to buy a dolar bill‏ ۱ ام( () ظ ‎a dobar bill‏ متس ‎d)‏ ‎©) inhest bidder reveives the dolar it retuce Por the aout bid ‎۱ ‎0۳۷ IS Oke O ‎ 

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عصته() هه 8 له بمموه) ® Oa Cxanple 9) Gevodd highest bidder wust pay the aout he or she bil dolar? 0۳۷ IS Oke SO 

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Ovquirtay a Oowpuay ® Gceu ‏مرن و‎ @: Dhe @Orquirer © Cowpea 7: The ‏اه‎ ‎© )8 ‏لازن‎ PP er cask Por oll oP T's shores ® Oka price to oP Per? 0۳۷ IS ۵ 0 

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Ovquirtay a Oowpuay ® Goewwiv © The udue oP DP depeuds oo the ‏و‎ Po poured vil exploraica project. *Pahure: T's vue = $0 * Suess: T's vous = $000/skare ۰) ‏و وی‎ equally likely 0۳۷ IS Olde 0 

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Ovquirtay a Oowpuay ® Goeui © T's ute wil be GO% oreuter wik B's 7۵ © BD, wet submit the proposdl bePore the © PD wil wt choose to uve or reject Until Pier the puioowe is kapwe oly to 7. Bow wuk should @ vPPer? 0۳۷ IS Oke IC 

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جعنو جه 5 8) ‎Opwwicat‏ "3 ‏بوجدس:8) أددواوون(])‎ ® Ove thot is vpticod ow water ‏اوه مه ار‎ © Ba Cxacople «+ ۵ ‏ک‎ O seh cowpeticy products هلت ها ‎whether‏ متس و را ‎Popo 5‏ ۱ 0۳۷ IS Oke 1S 

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PapoPP Outrix Por @dverisingy Gawe يون ۲ as, O qo, 8 

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PaPP Outrix Por Odveristry Gave © Obsenntiow © Br rerdess oF Pre ® do's O, odvertisiag i= the best ‏ده‎ 40, 46,۰ ‏م۵ و‎ oF O, aduertisiay i= 6 Le ‏ده‎ 22 09 0۳۷ IS Oke IS 

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PaPP Outrix Por Odveristry Gave ® Obsernveiows ره نمی( و ‎Por )© & )©‏ ال تس نت بل و ‎OPP‏ اه انح ‎oe 0,0 109‏ وبا © Gauilbriuc tt ۱ strate 0۳۷ IS ۵» 

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صرح ۱ ومونون() ® Gave Oikou Ooeiccat Gtratexp ‎oP a player witout a‏ مت من باه ‎depeod vo what the other‏ ند واه ول ‎plier does.‏ ‎ ‏ع0 عبت ‎IS‏ 0۳۷ ‎ 

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sre Pe res See يون ۲ 06, © 90,9 

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0۳ مين © صم 49, 60, Oke 1S مح سیم ‎Ovu't‏ ‎Odertee‏ a 0 5 ‏اد )۵ و‎ sirdeyy, depeods 2 )2< ‏ماه‎ ‎©» @: Oderise ® Qvesiva © Oka should @ lo? (Wict: vowider (B's devisiva 

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The Ousk Gquilbrivay Revised ® Dowco Groteyies 0 eo dota he best Vo a7 walter whet pou de © Vow re dot the best pou poo a7 wutter wot 7 ub.” 0۳۷ IS Obde SD 

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The Ousk Gquilbrivay Revised ® Dusk Eaquitbriane © oa ‏جنوك‎ the best 1 oes yived whol pou ore be ‏و‎ Vow re doi the best pou coo given what 7 oo bee 0۳۷ IS Oke Od 

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The Ousk Gquilbrivay Revised Product Okoice Problew " Cxavples Dik ® Dusk Cquitbrive ‏75لكد ددمت ام رو‎ ‏او و‎ Por ‏اه رو اهر و‎ © Market Por var producer ‏اه امه ره‎ © Gutk Pir voy kos the resources to iotoduce poe vered © Dow opertive 0۳۷ IS 60-66 

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وه ی اسر 00, 0 00, 0 

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Q®euwk Lovuiod Cave ® Gceu ‏ری رن و‎ Y ard O, setiag soPt dicks ® Beak COO pards Ira © Gucbukers ae spread evedy oloay the beack ‏و‎ Prive = Prive O © Oxstower will buy Prov the closest veo 0۳۷ IS ‏ی‎ OS 

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Q®euwk Lovuiod Cave 0 ‏مجو‎ ‎oO ‎۱۳ ‏سب‎ slag Se leg Sh mle Se ol oO © ®rwk @ 800 pad Okere will the cowpetitors lpoote (ie. where is the Dusk ‏#(مستطلانوج‎ 0۳۷ IS ‏ی‎ 

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Q®euwk Lovuiod Cave [ae las Sele ay alle Serene 0 @ Orwk © 800 pars كصاماك ككل د ‎Locate‏ © شاه امن و 0۳۷ Oke OP 

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The Ousk Gquilbrivay Revised ® Duxiwin Stroteqies ‏مین ه‎ مرها باه و مزر زارد ¢ Dkev bok use the sae eourrypiive standard by the viher - odvactage t7 poonvers) 0۳۷ IS Oke CO 

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The Ousk Gquilbrivay Revised دعل جاه 1 8) وادوور (]) "ا مین ه * Pir Tks ‏وا خسن و‎ worket share thoc Firm © * Ook ae cousideriagy iavestiog igo cel ‏وه ساوسو‎ 0۳۷ IS Obte SS 

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۵» 0 «0, dO SO, dO «100, O اوه 609 

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روج ممنی() تسیا " رو من ه ‎Pirw 2. Iwest‏ © Mask equilbriune * Fire 1 west *Pirv 2: Iovest 0۳۷ IS Oke Od 

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0۳۷ IS Obte SE 

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The Ousk Gquilbrivay Revised وه مه( BP bok ae rotiogd cod ‏لاه‎ ‎® (otk Pireos invest © Dusk equilbriva ۱ 0۳۷ IS ‏ی‎ 9 

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The Ousk Gquilbrivay Revised وه مه( 9 ‏لول‎ ‎۰ Phyer 9 is wt roived ‏امه سوه‎ ep * Pir 1's workin strateqp is 7 ut vest * Pir O's waxicvin strateup is ty vest. oP dkows Cis usta 0 woxtein strates, 7 vould ‏اجه‎ 0۳۷ IS ‏»لت‎ OE 

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ی ‎Prever @‏ 0 0 هون 0- ,4 ,4 ,مه 4 ,0« ‎ ‎ ‎09 ‎ ‎ ‎ ‎ 

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©) سودت 0 0099 و04 40 | مه رم 2,2 40,4 و ‎Ob‏ @risvvers’ Oiewewu © Oko is the: © Oowinct ‏ره‎ ‏و‎ Oask ‏تاج‎ اه من( و 

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The Ousk Gquilbrivay Revised Oned Craew 2 Pues Gtrotexp ‏و‎ her wokes u spevitic choice © OD ixed Girttexp © Plaver wokes 0 rondo ‏عه 7 كجصجكه جصادكات‎ wore possible uctives bused vou set oP ‏موی‎ 0۳۷ IS Ore 0 

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Ore SO 0, وت 

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QOutchicy (ewes © Obsenvuivas © Cue struc: Ov ‏اه سر‎ Ousk equiibrivcs ومد لسن © ‎be‏ وی موم ,4 0-,0 عمد ‎Oosk equilbrives‏ 3 ® بل اج سا ه ‎Dou‏ © ‎Tet] 4,4 4 ۸‏ اه لو 9 ی ‎IS‏ 0۳۷ 

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۵ FO 0,2 ۳2 ‏طله)‎ oP the Gexes dpa ماع 6,0 

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Tre utile oP he Gexes © Que ‏مرن‎ ‎ots wate‏ و ‎vores‏ ‎ok wack ppera‏ و ‎Died Gtrrotexp‏ © ‎© ice chooses ‏اسب‎ ‏ماه مورل و تسم ‎ ‎0۳۷ IS 9 0 ‎ 

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Repeved Caves ® Olkppolstic Pics phy « repeued yar. © ‏ی از‎ repetiicd oP the Prisvcers’ Oievowwu, Pires coo develop ‏نومه‎ about thei bekovior uc study the behavior oP their vowpetiiors. 0۳۷ IS Obde PO 

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Obde PS Ack Price 400, -0 SO, SO ‎Crobiew‏ بعرت ‎Fro @ ‎dO, dO ‎SO, 100 ‎ ‎۱ ick Price ‏و0۳‎ ‎ ‎bow Price ‎8 ‎ ‎ ‎ ‎ 

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)۳۷۲ Crobiew © Ovcrepeuted حست ۱۳ و سم © Croew te Lowy, ‏فد قلطا‎ یا Low Prive 00, © 000, ‏0ه‎ ‎® Repeued yawe ead ‏ره مرخ و‎ ‘ck Pree | . ۵0,400 ۰.0۵ is the wost proPitable 0۳۷ IS Obde OF 

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Repeved Caves ® Couksivd! ® Oik repeoted yawe Phe Prisvvers’ Dita vod hove ‏د‎ ‎DoUpentive Dupowe Uwity fi-Por-tat steotecpy 0۳۷ IS Obde PS 

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Repeved Caves ® Couhusion: © Dis is wovst thely to pour io worket wits! * Pew Firs * Grable ‏موس‎ ‎* Grable vost 0۳۷ IS Obde 0 

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Repeved Caves ® Couksiva © Cooperniion is dPPicat ot best stove these Puvtors ‏رما لا و موه روم‎ ع دی ‎IS‏ 0۳۷ 

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Okppolstc Covperatiod to the Outer (2 Techsiry © Choruteristivs oP the Durket ‏و‎ Pow Producers * Rockwell ‏امه هه‎ (89%), acer Oevter, Deprae Outer Deter Cowpaap, acd Wersev Products (Badger, Deptuar, ood ‏لاو مور‎ kave ubout a GO to 0 shure) 0۳۷ IS Ore FO 

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Okppolstc Covperatiod to the Outer (2 Techsiry © Choruteristivs oP the Durket ® Oe ivetsstic ‏لحممصل‎ ‎* Oot a siqaPiccat part oF the budget 0۳۷ IS Obde 9 

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Oltopoticic Covperuiva ta the Outer Orter Industry © Choruteristivs oP the Durket © Grable dewarerd © ‏بمو ر|‎ stocdiogy netoiveship betverd poorer ord producer * Barter © Coowwier oP sve * Barter 0۳۷ IS Obte 0 

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Oltopoticic Covperuiva ta the Outer Orter Industry ® Chorunteristics oP the Darket © This igo Prisvvers’ Dilewwa * Lower price to a vowpetiive bevel * Copperute ‏و‎ Repeded Cuwe ® Qvuesiivd © Ohy kes ‏ام هجوت‎ 0۳۷ IS Oke 0 

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Covpprttica and Cvlusion to the Orde ‏ريص لح‎ # Oka Ov You Phish? 045 there pooperciiva & oolusiod ic the ‏ات‎ ‎istry? 0۳۷ IS Obte SO 

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Gequecid Guves ® Phers wove in tur ® Phers woot thick thou the possible untivas ‏هه امه وت‎ oF ‏وی‎ player ۱ 0۳۷ IS Obte SO 

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Geqecid Gaver ® Cxanples ® Respoudiag 7 u cow petion’ Ss od Compu ‏جك‎ ‏ه‎ Gary devisives ® Respoudiag to ‏ولو‎ policy 0۳۷ IS Obde SE 

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Geqecid Gaver The ‏رصم‎ Pore oP ou Cave © Gcveuw © Dio vew (sweet, crispy) vereds ‎val) P eack Pir produces oor‏ ای و ‎vered‏ ‎© Gweet wil sell better © otk oil proP table with oly vor proche ‎0۳۷ IS Obte SS ‎ ‎ ‎ 

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Obte SO SO, dO 

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Ore SP QOodPied Product Okvive Probiew 80, 40 Frod © Qvesiiva ‎What is the lthely‏ و عامط خلا ‎vuiooee‏ ‎woke their‏ ‏راید تاد ‎oP the viher’s‏ اس ‎ ‎ ‎ 

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QOodPied Product Okvive Probiew The ‏رصم‎ Pore oP ou Cave © @ssuve that Piro (1 ‏مه ار‎ its ce vered First (a sequecicl yar). # Qvestivd © Okat will be the vutoowe oP this yore? 0۳۷ IS Ore SO 

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Geqecid Gaver The ‏رصم‎ Pore oP ou Cave © he Oxteusive Pore ‏ه خام‎ Cae © Ostay 0 decision tree * Oork backward Prow the best vutoowe Por Pir ٩ 0۳۷ IS Obte SO 

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‎Choice Curve to Cxtecsive Porw‏ أ لحرت ‎~{ ‎0۳۷ IS ۵» 0 ‏و ره حسرويين ‎owe‏ — ربیب ‎Curi— 0, CO‏ ‎Orspy— 00,0 ‏سوه — ‎Gweet‏ ‏6ه ,و سب یور ‎ 

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Geqecid Gaver # Phe Oducataye oP Davie Pirst ‎productohvice cave, there ts 0 clear‏ با باه ‎to woviery Pirst.‏ ول ‎0۳۷ IS Oke Od ‎ 

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Geqecid Gaver The @dvactage of Oovier First © Qsance: Ouvpoly P=30- Q Q=TotaProductionQ + Q, MC=0 \ Q+Q =10andP=10 x =100 Firn 0 605-68 

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Geqecid Gaver The @duactage oF Dovey Pirst " )( ‏امرض‎ ‎WithCollusion ‎Q=Q,=75andP=15 » =11250/Firn FirnMoveFirstStackelbg) Q=15 Q=75 andP=7.50 7, 211250 7 =5625 ی 0۳۷ 

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‎Output‏ بسا ‎Fro @ ‏ه26‎ 0 as ‎?.GMC.SO, MS.S08S8.7S, 16S 66.0, 0 ‎Pred 01 66, ‏(6م.وه‎ 0,۵ 60, 76 ‎ ‎ ‎ ‎ ‏0,0 0 ,28 م ,1190 ‎0۳۷ Obde OF ‎ ‎ ‎ ‎ ‎ 

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Chovsiaq Output © This pp 3 thusteaies voious Pree ‏و‎ 0 6 12101717725 9 ‏وداه م ااا اميه سر(‎ 80,002.84 69:70, 080 Laem produce ID Grog | 160,6076| 100,000 20,78 © ‏میتی‎ ‎* Oka F Pir 0 9410.60,60.00] 70,00 ‏هه‎ ‎wwoves Pirst? وس ات 

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Treas, Oowwitveds, wad Oredbily ® Giroteyio Ooves © Oket antioss coe a Pircy take to gait odverotage fo * Deter eury ‏یلم‎ cow petiiors to reduce vuilput, leave, Wise price ‏ما مسرت تارب‎ beoePit oe Pir 0۳۷ IS Obte SO 

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Treas, Oowwitveds, wad Oredbily Bow Vo Duke the Pirst Dove ® Oeworstrate Cowwitreat ® Fire dost cosstron kis bekavior to the exteot ire OC is vowwiuwed that ke is ‏موجه‎ عه ل ‎IS‏ 0۳۷ 

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Treas, Oowwitveds, wad Oredbily ® Gwe ۱۱! ‎a Pir will be worse oPP Pit charges u bw‏ و ‎price, the threat oP u low price is ot credible in the‏ ‎Byes oF the powpetitors.‏ ‎0۳۷ IS Oke OO ‎ 

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Obte OS rictay oP Oowputers und Oord Provessors Fra 2 ‏حنمت ناه‎ bow Prive Ik Pree | OO, OO 80, (OO Fro d Pou So, O 00, 0 

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9 Aik Pree Low Pree 100,90 ١ ۵ 90, 00, 60 Ode TO Crictay oP Cowputer> aad Oord Processors © Qcesiiva ° Cas Pir 1 Porce Pirw 9 ۰ ‏ده‎ ‎high price by threutesiag to bwver Wigs Price 2 is price? 0 bow Price 0۳۷ 1S 

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Treas, Oowwitveds, wad Oredbily ® Gceu © Rave Car Ovtors, aw. (RCO) ‏جوت بعص لصم‎ © Pa Ou Cagices (POE) produces spevicty var poytaes oad sels wost oP thew to ROD © Gequectd ‏سم‎ wits ROO us the leader © POE kes w power to ‏وا‎ to build big since RCO controls vutput. 0۳۷ IS Obde TO 

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Oke TO Rue Ow Ovtrs ‏وی‎ ras ‏وه وه‎ 9, 9,0 4, ٩ 8,9 God rages Por Ou Cages ee 

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Treas, Oowwitveds, wad Oredbily ® Qvuestioa © Wow coud POE Porve RCO to shiFt ‏صا‎ big urs? 0۳۷ IS Oe TS 

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ی QOodPted Production Choice Problew Ree Ow Optrs Gud cas Ory cows Gud rages 0, 3 0, 0 Pa Ou Cages \ 5-5-5 00 6,9 0۳۷ 

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QOodPied Production Choice Probew ® Qvuesives ) Okatis the risk oP this strateqy? ©) ew ‏جرف و ام تال‎ POG sowe power to coord! ‏ان‎ + 0۳۷ IS Oe 7S 

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ا اك ‎Giroew‏ لمعم اوعره ]1 عر محص 2) ® Qvuestioa Wow did Oot Ou berowe the largest retailer ia the O.G. wheo woop established retail choice were Dpsivny their doors? Wit Low did OotOort yon woowpoly power? ‏شم و‎ yawe wih Dusk ‏نانوی‎ 0۳۷ IS Ore TO 

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۶ The Osco Gtore @reewpiord Cave Opwpow XC Coter Oov't rotor «0, 0 00, 0 

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The Osvouct Gtore Preewpiod Cave # Duo Owk ‏انم‎ ‏موجن‎ X ‏بت چا زرا و‎ ۳ © Dpper right oer! 00, 0 ‏,هه‎ © OdtDet 1 © Oust be preewpive Ove’ ١ tik iver | 0,80 0,0 0۳۷ IS ۵ TO 

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هه( رهظ اص ما میج ‎curry, the‏ یل ۵ ا" ‎way poteutal aowpetiior thot edi will‏ تور ‎be waproPitable.‏ 0۳۷ IS Oke TS 

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2 ossibiliies Poteau ‏سس‎ ‎6 Cry ot 000, 00 SOO, O 70,40 | 60 Ore OO سر سا السسسسست) bow Price (uPar) 

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هه( رهظ موی 6) ۱ © ‏مومت امین‎ (1) ood prosperiive evict 00 © X site cost = $00 wiltoa to bud phot 0۳۷ 9۷» 0 

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هه( رهظ موی 6) ۱ OP Xdoes wt etter Toohes u ه<‎ 0 harges u high proce 7 ears u OP OC ecters ocd of probit oP $000 wilica ood X ears $20 wiliva. horyes u low price 7 eu 3 © PX ecters und of probit oF $PO wiliva cad ‏ا‎ cures $-dO wiliva. Oke OS 

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هه( رهظ ین 6 5 ow coud Theep Xt? 045 the threat credible? 0۳۷ IS Ore OS 

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هه( رهظ ونس 2 م1۳ ای ‎Low‏ ۵ 0) ‏عاه()‎ vo vested bePore Burp (iq-evorble ‏(ام حور‎ عصاء م۱ )© 0۳۷ IS Oe OF 

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Ore OS Garp ‏موه(‎ Protected Curcat 29 Ory ot A ete | 0 aso, © ‘keowobet bow Price were | PO, dO 60,0 

صفحه 86:
Garp ‏موه(‎ © Dabo ‏را‎ ‏ویو‎ Corot BOC wil stay vat Over Cryo ‘Iker | 0 60,۰ 40,۰ Ore OO سمل سي bow Pree Gea PO, AO 

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هه( رهظ ‎@veicry‏ رن جرا )ها ‎© Dikou Oirbus beiny subsidized, the payoPP watrix | ome eae ners ١ ‎0۳۷ IS Oke OF ‎ 

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Qevebpwedt oP a ‏ابص( تبون‎ ODou't poder 460060, 0 Okt 66 rode -d0, <0 0, 00 Overy \ ‏و0‎ produce Obepter 18 

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Qevebpwedt oP a ‏ابص( تبون‎ ® Oveiay wil produce 7 | مس ۹ prooduce 0,0 0 ]| ده 0۳۷ IS Ore 9 

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ODou't poder 460060, 0 ۵» OD Qevebpwedt oF a Birorcdt @Pter Gwopest Gubstty ] Prete | 10, 0 2 0 ‏دس‎ 0 0 

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Oke Od Order 

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Ornper Ours ® vec though there oe ody two wupr Pins, vow petiiog is ieuse. 9 Phe powpetiion poours wos to the Porc oP 0۳۷ IS ‏ی‎ SS 

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COeobert-Chrk Ov REO 0ه ,60 60, 00 و ی R&O 00, SO 200, 90 R&O P&B | ee 

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Knobert-Okek REO Ov REO €0,€0 | 9۵,0 ‏هه ,وم‎ | 0,0۵ ‏دبک‎ 96 © ®ok specd oo R&O * Qvesiiva © Oky wt coopercie Gan PEB ‏هق ده‎ 

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روجاد 35 وود وين 089 © Ohenniive putoowes ure possible P Pins pr iedviduds coo woke prowises that cod be ‏اه‎ 0۳۷ IS ‏ی‎ 

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روجاد 35 وود وين 089 سردل ص00 9 ناه اه و رل دا پر و ‎vowplexweutary ywods.‏ و ی ‎IS‏ 0۳۷ 

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Chapter 13 Game Theory and Competitive Strategy Topics to be Discussed  Gaming and Strategic Decisions  Dominant Strategies  The Nash Equilibrium Revisited  Repeated Games Chapter 13 Slide 2 Topics to be Discussed  Sequential Games  Threats, Commitments, and Credibility  Entry Deterrence  Bargaining Strategy  Auctions Chapter 13 Slide 3 Gaming and Strategic Decisions  “If I believe that my competitors are rational and act to maximize their own profits, how should I take their behavior into account when making my own profit-maximizing decisions?” Chapter 13 Slide 4 Gaming and Strategic Decisions  Noncooperative versus Cooperative Games  Cooperative  Game Players negotiate binding contracts that allow them to plan joint strategies Example: Buyer and seller negotiating the price of a good or service or a joint venture by two firms (i.e. Microsoft and Apple) Binding contracts are possible Chapter 13 Slide 5 Gaming and Strategic Decisions  Noncooperative versus Cooperative Games  Noncooperative  Game Negotiation and enforcement of a binding contract are not possible Example: Two competing firms assuming the others behavior determine, independently, pricing and advertising strategy to gain market share Binding contracts are not possible Chapter 13 Slide 6 Gaming and Strategic Decisions  Noncooperative versus Cooperative Games  “The strategy design is based on understanding your opponent’s point of view, and (assuming you opponent is rational) deducing how he or she is likely to respond to your actions” Chapter 13 Slide 7 Gaming and Strategic Decisions  An Example: How to buy a dollar bill 1) Auction a dollar bill 2) Highest bidder receives the dollar in return for the amount bid Chapter 13 Slide 8 Gaming and Strategic Decisions  An Example 3) Second highest bidder must pay the amount he or she bid 4) How much would you bid for a dollar? Chapter 13 Slide 9 Acquiring a Company  Scenario  Company A: The Acquirer  Company T: The Target A  will offer cash for all of T’s shares What price to offer? Chapter 13 Slide 10 Acquiring a Company  Scenario value of T depends on the outcome of a current oil exploration project.  The Chapter 13  Failure: T’s value = $0  Success: T’s value = $100/share  All outcomes are equally likely Slide 11 Acquiring a Company  Scenario  T’s value will be 50% greater with A’s management.  A, must submit the proposal before the exploration outcome is known. T will not choose to accept or reject until after the outcome is known only to T.  How much should A offer? Chapter 13 Slide 12 Dominant Strategies  Dominant Strategy One An   Chapter 13 that is optimal no matter what an opponent does. Example A & B sell competing products They are deciding whether to undertake advertising campaigns Slide 13 Payoff Matrix for Advertising Game Firm B Advertise Advertise Don’t Advertise 10, 5 15, 0 6, 8 10, 2 Firm A Don’t Advertise Chapter 13 Slide 14 Payoff Matrix for Advertising Game  Observations Firm B Don’t Advertise Advertise  A: regardless of B, advertising is the best  B: regardless of A, advertising is best Chapter 13 Advertise 10, 5 15, 0 6, 8 10, 2 Firm A Don’t Advertise Slide 15 Payoff Matrix for Advertising Game  Observations strategy for A & B is to advertise Firm B Don’t Advertise Advertise  Dominant  Do not worry about the other player Advertise 10, 5 15, 0 6, 8 10, 2 Firm A Don’t Advertise  Equilibrium in dominant strategy Chapter 13 Slide 16 Dominant Strategies  Game Without Dominant Strategy The optimal decision of a player without a dominant strategy will depend on what the other player does. Chapter 13 Slide 17 Modified Advertising Game Firm B Advertise Advertise Don’t Advertise 10, 5 15, 0 6, 8 20, 2 Firm A Don’t Advertise Chapter 13 Slide 18 Modified Advertising Game  Observations Firm B Don’t Advertise Advertise  A: No dominant strategy; depends on B’s actions  B:  Advertise Question should A do? (Hint: consider B’s decision  What Chapter 13 Advertise 10, 5 15, 0 6, 8 20, 2 Firm A Don’t Advertise Slide 19 The Nash Equilibrium Revisited  Dominant Strategies  “I’m doing the best I can no matter what you do.”  “You’re doing the best you can no matter what I do.” Chapter 13 Slide 20 The Nash Equilibrium Revisited  Nash Equilibrium doing the best I can given what you are doing”  “I’m  “You’re doing the best you can given what I am doing.” Chapter 13 Slide 21 The Nash Equilibrium Revisited Product Product Choice Choice Problem Problem  Examples With A Nash Equilibrium  Two cereal companies  Market for one producer of crispy cereal  Market for one producer of sweet cereal  Each firm only has the resources to introduce one cereal  Noncooperative Chapter 13 Slide 22 Product Choice Problem Firm 2 Crispy Crispy Sweet -5, -5 10, 10 10, 10 -5, -5 Firm 1 Sweet Chapter 13 Slide 23 Product Choice Problem  Question Firm 2  Is there a Nash equilibrium?  If  If not, why? so, how can it be reached Crispy Sweet -5, -5 10, 10 10, 10 -5, -5 Firm 1 Sweet Chapter 13 Crispy Slide 24 Beach Location Game  Scenario  Two competitors, Y and C, selling soft drinks  Beach 200 yards long  Sunbathers  Price Y = Price C  Customer Chapter 13 are spread evenly along the beach will buy from the closest vendor Slide 25 Beach Location Game Ocean C 0 B Beach A 200 yards Where will the competitors locate (i.e. where is the Nash equilibrium)? Chapter 13 Slide 26 Beach Location Game Ocean C B 0 2) A Examples of this decision problem  Locating 200 yards include: a gas station  Presidential Chapter 13 Beach elections Slide 27 The Nash Equilibrium Revisited  Maximin Strategies Scenario Chapter 13  Two firms compete selling file-encryption software  They both use the same encryption standard (files encrypted by one software can be read by the other - advantage to consumers) Slide 28 The Nash Equilibrium Revisited  Maximin Strategies Scenario   Chapter 13 Firm 1 has a much larger market share than Firm 2 Both are considering investing in a new encryption standard Slide 29 Maximin Strategy Firm 2 Don’t invest Don’t invest Invest 0, 0 -10, 10 -100, 0 20, 10 Firm 1 Invest Chapter 13 Slide 30 Maximin Strategy  Observations  Dominant strategy Firm 2: Invest  Nash equilibrium Firm 1: invest  Firm 2: Invest Firm 2 Don’t invest Don’t invest  Chapter 13 Invest 0, 0 -10, 10 -100, 0 20, 10 Firm 1 Invest Slide 31 Maximin Strategy  Observations Firm 2 does not invest, Firm 1 incurs significant losses  If  Firm 1 might play don’t invest  Minimize losses to 10 -maximin strategy Chapter 13 Firm 2 Don’t invest Don’t invest Invest 0, 0 -10, 10 -100, 0 20, 10 Firm 1 Invest Slide 32 The Nash Equilibrium Revisited Maximin Maximin Strategy Strategy  If both are rational and informed  Both firms invest  Nash Chapter 13 equilibrium Slide 33 The Nash Equilibrium Revisited Maximin Maximin Strategy Strategy  Consider  If Player 2 is not rational or completely informed Firm 1’s maximin strategy is to not invest  Firm 2’s maximin strategy is to invest.  If 1 knows 2 is using a maximin strategy, 1 would invest  Chapter 13 Slide 34 Prisoners’ Dilemma Prisoner B Confess Confess Don’t Confess -5, -5 -1, -10 -10, -1 -2, -2 Prisoner A Don’t Confess Chapter 13 Slide 35 Prisoners’ Dilemma  What is the:  Dominant  Nash strategy Prisoner B equilibrium  Maximin solution Confess Confess Don’t Confess -5, -5 -1, -10 -10, -1 -2, -2 Prisoner A Don’t Confess Chapter 13 Slide 36 The Nash Equilibrium Revisited Mixed Mixed Strategy Strategy  Pure Strategy  Player  makes a specific choice Mixed Strategy Player makes a random choice among two or more possible actions based on a set of chosen probabilities Chapter 13 Slide 37 Matching Pennies Player B Heads Heads Tails 1, -1 -1, 1 -1, 1 1, -1 Player A Tails Chapter 13 Slide 38 Matching Pennies  Observations  Pure strategy: No Nash equilibrium  Mixed strategy: Random choice is a Nash equilibrium  Would a firm set price based on random choice assumption? Chapter 13 Player B Heads Tails Heads 1, -1 -1, 1 -1, 1 1, -1 Player A Tails Slide 39 The Battle of the Sexes Joan Wrestling Wrestling Opera 2,1 0,0 0,0 1,2 Jim Opera Chapter 13 Slide 40 The Battle of the Sexes  Pure Strategy Joan  Both watch wrestling  Both watch opera  Wrestling Mixed Strategy  Jim chooses wrestling Opera Wrestling 2,1 0,0 Opera 0,0 1,2 Jim  Joan chooses wrestling Chapter 13 Slide 41 Repeated Games  Oligopolistic firms play a repeated game.  With each repetition of the Prisoners’ Dilemma, firms can develop reputations about their behavior and study the behavior of their competitors. Chapter 13 Slide 42 Pricing Problem Firm 2 Low Price Low Price High Price 10, 10 100, -50 -50, 100 50, 50 Firm 1 High Price Chapter 13 Slide 43 Pricing Problem  Non-repeated game  Strategy Low2  Low Price is Low1, Low Price Repeated game  Tit-for-tat is the most profitable Chapter 13 Firm 2 strategy High Price 10, 10 100, -50 -50, 100 50, 50 Firm 1 High Price Slide 44 Repeated Games  Conclusion:  With  Chapter 13 repeated game The Prisoners’ Dilemma can have a cooperative outcome with tit-for-tat strategy Slide 45 Repeated Games  Conclusion:  This Chapter 13 is most likely to occur in a market with:  Few firms  Stable demand  Stable cost Slide 46 Repeated Games  Conclusion  Cooperation is difficult at best since these factors may change in the long-run. Chapter 13 Slide 47 Oligopolistic Cooperation in the Water Meter Industry  Characteristics of the Market  Four  Chapter 13 Producers Rockwell International (35%), Badger Meter, Neptune Water Meter Company, and Hersey Products (Badger, Neptune, and Hersey combined have about a 50 to 55% share) Slide 48 Oligopolistic Cooperation in the Water Meter Industry  Characteristics of the Market  Very  Chapter 13 inelastic demand Not a significant part of the budget Slide 49 Oligopolistic Cooperation in the Water Meter Industry  Characteristics of the Market  Stable demand  Long standing relationship between consumer and producer  Barrier  Economies  Chapter 13 of scale Barrier Slide 50 Oligopolistic Cooperation in the Water Meter Industry  Characteristics of the Market  This is a Prisoners’ Dilemma  Lower price to a competitive level  Cooperate  Repeated  Game Question  Why Chapter 13 has cooperation prevailed? Slide 51 Competition and Collusion in the Airline Industry  What Do You Think?  Is there cooperation & collusion in the airline industry? Chapter 13 Slide 52 Sequential Games  Players move in turn  Players must think through the possible actions and rational reactions of each player Chapter 13 Slide 53 Sequential Games  Examples  Responding  Entry decisions  Responding Chapter 13 to a competitor’s ad campaign to regulatory policy Slide 54 Sequential Games The The Extensive Extensive Form Form of of aa Game Game  Scenario  Two new (sweet, crispy) cereals  Successful only if each firm produces one cereal  Sweet  Both Chapter 13 will sell better still profitable with only one producer Slide 55 Modified Product Choice Problem Firm 2 Crispy Sweet Crispy -5, -5 10, 20 Sweet 20, 10 -5, -5 Firm 1 Chapter 13 Slide 56 Modified Product Choice Problem  Question is the likely outcome if both make their decisions independently, simultaneously, and without knowledge of the other’s intentions? Firm 2 Crispy  What Chapter 13 Crispy Sweet -5, -5 10, 20 20, 10 -5, -5 Firm 1 Sweet Slide 57 Modified Product Choice Problem The The Extensive Extensive Form Form of of aa Game Game  Assume that Firm 1 will introduce its new cereal first (a sequential game).  Question  What Chapter 13 will be the outcome of this game? Slide 58 Sequential Games The The Extensive Extensive Form Form of of aa Game Game  The Extensive Form of a Game  Using  Chapter 13 a decision tree Work backward from the best outcome for Firm 1 Slide 59 Product Choice Game in Extensive Form Crispy Chapter 13 -5, -5 Sweet 10, 20 Crispy 20, 10 Sweet -5, -5 Firm 2 Firm 1 Sweet Crispy Firm 2 Slide 60 Sequential Games  The Advantage of Moving First  In this product-choice game, there is a clear advantage to moving first. Chapter 13 Slide 61 Sequential Games The The Advantage Advantage of of Moving Moving First First  Assume: Duopoly P 30 Q Q TotalProduction Q1  Q2 MC0 Q1  Q2 10andP 10  100/ Firm Chapter 13 Slide 62 Sequential Games The The Advantage Advantage of of Moving Moving First First  Duopoly WithCollusion Q1 Q2 7.5andP 15  112.50/ Firm FirmMovesFirst(Stackelbe rg) Q1 15 Q2 7.5 and P 7.50  1 112.50  2 56.25 Chapter 13 Slide 63 Choosing Output Firm 2 7.5 10 15 7.5112.50, 112.5093.75, 125 56.25, 112.50 Firm 1 Chapter 13 10 125, 93.75 100, 100 50, 75 15112.50, 56.25 75, 50 0, 0 Slide 64 Choosing Output  This payoff matrix illustrates various outcomes together, both produce 10 Firm 2 7.5 7.5112.50, 112.50 93.75, 125  Move  Question  Chapter 13 What if Firm 1 moves first? 10 Firm 1 10 125, 93.75 15 112.50, 56.25 15 56.25, 112.50 100, 100 50, 75 75, 50 0, 0 Slide 65 Threats, Commitments, and Credibility  Strategic Moves  What actions can a firm take to gain advantage in the marketplace? Chapter 13  Deter entry  Induce competitors to reduce output, leave, raise price  Implicit agreements that benefit one firm Slide 66 Threats, Commitments, and Credibility  How To Make the First Move  Demonstrate Commitment  Firm 1 must constrain his behavior to the extent Firm 2 is convinced that he is committed Chapter 13 Slide 67 Threats, Commitments, and Credibility  Empty Threats  If a firm will be worse off if it charges a low price, the threat of a low price is not credible in the eyes of the competitors. Chapter 13 Slide 68 Pricing of Computers and Word Processors Firm 2 High Price High Price Low Price 100, 80 80, 100 Firm 1 Low Price Chapter 13 20, 0 10, 20 Slide 69 Pricing of Computers and Word Processors  Question Firm 1 force Firm 2 to charge a high price by threatening to lower its price?  Can Firm 2 High Price Low Price 100, 80 80, 100 Firm 1 Low Price Chapter 13 High Price 20, 0 10, 20 Slide 70 Threats, Commitments, and Credibility  Scenario  Race Car Motors, Inc. (RCM) produces cars Out Engines (FOE) produces specialty car engines and sells most of them to RCM  Far  Sequential game with RCM as the leader  FOE has no power to threaten to build big since RCM controls output. Chapter 13 Slide 71 Production Choice Problem Race Car Motors Small engines Small cars Big cars 3, 6 3, 0 1, 1 8, 3 Far Out Engines Big engines Chapter 13 Slide 72 Threats, Commitments, and Credibility  Question  How could FOE force RCM to shift to big cars? Chapter 13 Slide 73 Modified Production Choice Problem Race Car Motors Small engines Small cars Big cars 0, 6 0, 0 1, 1 8, 3 Far Out Engines Big engines Chapter 13 Slide 74 Modified Production Choice Problem  Questions 1) What is the risk of this strategy? 2) How could irrational behavior give FOE some power to control output? Chapter 13 Slide 75 Wal-Mart Stores’ Preemptive Investment Strategy  Question  How did Wal-Mart become the largest retailer in the U.S. when many established retail chains were closing their doors? Hint How did Wal-Mart gain monopoly power? Preemptive game with Nash equilibrium Chapter 13 Slide 76 The Discount Store Preemption Game Company X Enter Enter Don’t enter -10, -10 20, 0 0, 20 0, 0 Wal-Mart Don’t enter Chapter 13 Slide 77 The Discount Store Preemption Game  Two Nash equilibrium  Low left  Upper  right Must be preemptive to win Chapter 13 Company X Enter Enter Don’t enter -10, -10 20, 0 0, 20 0, 0 Wal-Mart Don’t enter Slide 78 Entry Deterrence  To deter entry, the incumbent firm must convince any potential competitor that entry will be unprofitable. Chapter 13 Slide 79 Entry Possibilities Potential Entrant High price (accommodation) Enter Stay out 100, 20 200, 0 70, -10 130, 0 Incumbent Low Price (warfare) Chapter 13 Slide 80 Entry Deterrence  Scenario  Incumbent monopolist (I) and prospective entrant (X) X Chapter 13 single cost = $80 million to build plant Slide 81 Entry Deterrence  Scenario X does not enter I makes a profit of $200 million.  If X enters and charges a high price I earns a profit of $100 million and X earns $20 million.  If  If X enters and charges a low price I earns a profit of $70 million and X earns $-10 million. Chapter 13 Slide 82 Entry Deterrence  Question How  Chapter 13 could I keep X out? Is the threat credible? Slide 83 Entry Deterrence  How could I keep X out? 1) Make an investment before entry (irrevocable commitment) 2) Irrational behavior Chapter 13 Slide 84 Entry Deterrence After After $50 $50 million million Early Early Investment Investment Potential Entrant High price (accommodation) Enter Stay out 50, 20 150, 0 70, -10 130, 0 Incumbent Low Price (warfare) Chapter 13 Slide 85 Entry Deterrence After After $50 $50 million million Early Early Investment Investment  Warfare likely Potential Entrant  X will stay out High price (accommodation) Enter Stay out 50, 20 150, 0 70, -10 130, 0 Incumbent Low Price (warfare) Chapter 13 Slide 86 Entry Deterrence  Airbus vs. Boeing  Without Airbus being subsidized, the payoff matrix for the two firms would differ significantly from one showing subsidization. Chapter 13 Slide 87 Development of a New Aircraft Airbus Produce Produce Don’t produce -10, -10 100, 0 0, 120 0, 0 Boeing Don’t produce Chapter 13 Slide 88 Development of a New Aircraft   Boeing will produce Airbus will not produce Airbus Produce Produce Don’t produce -10, -10 100, 0 0, 120 0, 0 Boeing Don’t produce Chapter 13 Slide 89 Development of a Aircraft After European Subsidy Airbus Produce Produce Don’t produce -10, 10 100, 0 0, 120 0, 0 Boeing Don’t produce Chapter 13 Slide 90 Development of a Aircraft After European Subsidy   Airbus will produce Boeing will not produce Airbus Produce Produce Don’t produce -10, 10 100, 0 0, 120 0, 0 Boeing Don’t produce Chapter 13 Slide 91 Diaper Wars  Even though there are only two major firms, competition is intense.  The competition occurs mostly in the form of cost-reducing innovation. Chapter 13 Slide 92 Competing Through R & D Kimberly-Clark R&D R&D No R&D 40, 20 80, -20 -20, 60 60, 40 P&G No R&D Chapter 13 Slide 93 Competing Through R & D   Both spend on R&D Kimberly-Clark Question  Why not cooperate R&D R&D No R&D 40, 20 80, -20 -20, 60 60, 40 P&G No R&D Chapter 13 Slide 94 Bargaining Strategy  Alternative outcomes are possible if firms or individuals can make promises that can be enforced. Chapter 13 Slide 95 Bargaining Strategy  Consider:  Two firms introducing one of two complementary goods. Chapter 13 Slide 96 Bargaining Strategy Firm 2 Produce A Produce A Produce B 40, 5 50, 50 60, 40 5, 45 Firm 1 Produce B Chapter 13 Slide 97 Bargaining Strategy  With collusion:  Produce  A1B2 Firm 2 Produce A Produce B 40, 5 50, 50 60, 40 5, 45 Without collusion:  Produce  Nash Chapter 13 A1B2 equilibrium Produce A Firm 1 Produce B Slide 98 Bargaining Strategy  Suppose  Each firm is also bargaining on the decision to join in a research consortium with a third firm. Chapter 13 Slide 99 Bargaining Strategy Firm 2 Work alone Work alone Enter consortium 10, 10 10, 20 20, 10 40, 40 Firm 1 Enter consortium Chapter 13 Slide 100 Bargaining Strategy  Dominant strategy  Both enter Firm 2 Work alone Work alone Enter consortium 10, 10 10, 20 20, 10 40, 40 Firm 1 Enter consortium Chapter 13 Slide 101 Bargaining Strategy  Linking the Bargain Problem Firm 1 announces it will join the consortium only if Firm 2 agrees to produce A and Firm 1 will produce B.  Chapter 13 Firm 1’s profit increases from 50 to 60 Slide 102 Bargaining Strategy  Strengthening Bargaining Power  Credibility  Reducing Chapter 13 flexibility Slide 103 Auctions  Auction Formats Traditional Dutch English (oral) auction Sealed-bid Chapter 13  First price  Second price Slide 104 Auctions Valuation Valuation and and Information Information  How to choose an auction format Private-value auction: bidders uncertain about the other bidders reservation price Common-value auction: bidders uncertain what the value is Chapter 13 Slide 105 Auctions Private Private Value Value Auction Auction  Second-price sealed auction: bid your reservation price  English auction: Bid in small increments until you reach your reservation price Chapter 13 Slide 106 Auctions Private Private Value Value Auction Auction  The winning bids in both auctions is the reservation price of the second highest bidder Chapter 13 Slide 107 Auctions Private Private Value Value Auction Auction  Sealed-bid auction First-price auction: lowers the bid Second-price auction: bid just above the second highest reservation price  Both yield the same revenue Chapter 13 Slide 108 Auctions Common Common Value Value Auction Auction  Winner’s Curse The winner is worse off than those who did not win Chapter 13 Slide 109 Auctions Common Common Value Value Auction Auction  Examples Bidding on a construction job Bidding on offshore oil reserves Chapter 13 Slide 110 Auctions Common Common Value Value Auction Auction  Question How Chapter 13 can you avoid the winner’s curse? Slide 111 Auctions Maximizing Maximizing Auction Auction Revenue Revenue  Private-value Auction Have  as many bidders as possible Common-value Auction Use open-bid format Release Chapter 13 information about value Slide 112 Internet Auctions  A Few Caveats Now quality control function Poor seller feedback Bid Chapter 13 manipulation may occur Slide 113 Summary  A game is cooperative if the players can communicate and arrange binding contracts; otherwise it is noncooperative.  A Nash equilibrium is a set of strategies such that all players are doing their best, given the strategies of the other players. Chapter 13 Slide 114 Summary  Some games have no Nash equilibrium in pure strategies, but have one or more equilibria in mixed strategies.  Strategies that are not optimal for a one-shot game may be optimal for a repeated game.  In a sequential game, the players move in turn. Chapter 13 Slide 115 Summary  An empty threat is a threat that one would have no incentive to carry out.  To deter entry, an incumbent firm must convince any potential competitor that entry will be unprofitable.  Bargaining situations are examples of cooperative games. Chapter 13 Slide 116 Summary  Auctions can be conducted in a number of formats which influence the revenue raised and the price paid by the buyer. Chapter 13 Slide 117 End of Chapter 13 Game Theory and Competitive Strategy