Game Theory and Competitive Strategy
اسلاید 1: Chapter 13Game Theory and Competitive Strategy
اسلاید 2: Chapter 13Slide 2Topics to be DiscussedGaming and Strategic DecisionsDominant StrategiesThe Nash Equilibrium RevisitedRepeated Games
اسلاید 3: Chapter 13Slide 3Topics to be DiscussedSequential GamesThreats, Commitments, and CredibilityEntry DeterrenceBargaining StrategyAuctions
اسلاید 4: Chapter 13Slide 4Gaming 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?”
اسلاید 5: Chapter 13Slide 5Gaming and Strategic DecisionsNoncooperative versus Cooperative GamesCooperative GamePlayers negotiate binding contracts that allow them to plan joint strategiesExample: 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
اسلاید 6: Chapter 13Slide 6Gaming and Strategic DecisionsNoncooperative versus Cooperative GamesNoncooperative GameNegotiation and enforcement of a binding contract are not possibleExample: Two competing firms assuming the others behavior determine, independently, pricing and advertising strategy to gain market shareBinding contracts are not possible
اسلاید 7: Chapter 13Slide 7Gaming and Strategic DecisionsNoncooperative 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”
اسلاید 8: Chapter 13Slide 8Gaming and Strategic DecisionsAn Example: How to buy a dollar bill1)Auction a dollar bill2)Highest bidder receives the dollar in return for the amount bid
اسلاید 9: Chapter 13Slide 9Gaming and Strategic DecisionsAn Example3)Second highest bidder must pay the amount he or she bid4)How much would you bid for a dollar?
اسلاید 10: Chapter 13Slide 10Acquiring a CompanyScenarioCompany A: The AcquirerCompany T: The TargetA will offer cash for all of T’s sharesWhat price to offer?
اسلاید 11: Chapter 13Slide 11Acquiring a CompanyScenarioThe value of T depends on the outcome of a current oil exploration project.Failure: T’s value = $0Success: T’s value = $100/shareAll outcomes are equally likely
اسلاید 12: Chapter 13Slide 12Acquiring a CompanyScenarioT’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?
اسلاید 13: Chapter 13Slide 13Dominant StrategiesDominant StrategyOne that is optimal no matter what an opponent does.An ExampleA & B sell competing productsThey are deciding whether to undertake advertising campaigns
اسلاید 14: Chapter 13Slide 14Payoff Matrix for Advertising GameFirm AAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirm B10, 515, 010, 26, 8
اسلاید 15: Chapter 13Slide 15Payoff Matrix for Advertising GameFirm AAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirm B10, 515, 010, 26, 8ObservationsA: regardless of B, advertising is the bestB: regardless of A, advertising is best
اسلاید 16: Chapter 13Slide 16Payoff Matrix for Advertising GameFirm AAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirm B10, 515, 010, 26, 8ObservationsDominant strategy for A & B is to advertiseDo not worry about the other playerEquilibrium in dominant strategy
اسلاید 17: Chapter 13Slide 17Dominant StrategiesGame Without Dominant StrategyThe optimal decision of a player without a dominant strategy will depend on what the other player does.
اسلاید 18: Chapter 13Slide 1810, 515, 020, 26, 8Firm AAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirm BModified Advertising Game
اسلاید 19: Chapter 13Slide 1910, 515, 020, 26, 8Firm AAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirm BModified Advertising GameObservationsA: No dominant strategy; depends on B’s actionsB: AdvertiseQuestionWhat should A do? (Hint: consider B’s decision
اسلاید 20: Chapter 13Slide 20The Nash Equilibrium RevisitedDominant 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.”
اسلاید 21: Chapter 13Slide 21The Nash Equilibrium RevisitedNash Equilibrium“I’m doing the best I can given what you are doing”“You’re doing the best you can given what I am doing.”
اسلاید 22: Chapter 13Slide 22Examples With A Nash EquilibriumTwo cereal companiesMarket for one producer of crispy cerealMarket for one producer of sweet cerealEach firm only has the resources to introduce one cerealNoncooperativeThe Nash Equilibrium RevisitedProduct Choice Problem
اسلاید 23: Chapter 13Slide 23Product Choice ProblemFirm 1CrispySweetCrispySweetFirm 2-5, -510, 10-5, -510, 10
اسلاید 24: Chapter 13Slide 24Product Choice ProblemFirm 1CrispySweetCrispySweetFirm 2-5, -510, 10-5, -510, 10QuestionIs there a Nash equilibrium?If not, why?If so, how can it be reached
اسلاید 25: Chapter 13Slide 25Beach Location GameScenarioTwo competitors, Y and C, selling soft drinksBeach 200 yards longSunbathers are spread evenly along the beachPrice Y = Price CCustomer will buy from the closest vendor
اسلاید 26: Chapter 13Slide 26Beach Location GameWhere will the competitors locate (i.e. where is the Nash equilibrium)?Ocean0BBeachA200 yardsC
اسلاید 27: Chapter 13Slide 27Beach Location Game2)Examples of this decision problem include:Locating a gas stationPresidential electionsOcean0BBeachA200 yardsC
اسلاید 28: Chapter 13Slide 28The Nash Equilibrium RevisitedMaximin StrategiesScenarioTwo firms compete selling file-encryption softwareThey both use the same encryption standard (files encrypted by one software can be read by the other - advantage to consumers)
اسلاید 29: Chapter 13Slide 29The Nash Equilibrium RevisitedMaximin StrategiesScenarioFirm 1 has a much larger market share than Firm 2Both are considering investing in a new encryption standard
اسلاید 30: Chapter 13Slide 30Maximin StrategyFirm 1Don’t investInvestFirm 20, 0-10, 1020, 10-100, 0Don’t investInvest
اسلاید 31: Chapter 13Slide 31Maximin StrategyFirm 1Don’t investInvestFirm 20, 0-10, 1020, 10-100, 0Don’t investInvestObservationsDominant strategy Firm 2: InvestNash equilibriumFirm 1: investFirm 2: Invest
اسلاید 32: Chapter 13Slide 32Maximin StrategyFirm 1Don’t investInvestFirm 20, 0-10, 1020, 10-100, 0Don’t investInvestObservationsIf Firm 2 does not invest, Firm 1 incurs significant lossesFirm 1 might play don’t investMinimize losses to 10 --maximin strategy
اسلاید 33: Chapter 13Slide 33If both are rational and informedBoth firms investNash equilibriumThe Nash Equilibrium RevisitedMaximin Strategy
اسلاید 34: Chapter 13Slide 34ConsiderIf Player 2 is not rational or completely informedFirm 1’s maximin strategy is to not investFirm 2’s maximin strategy is to invest.If 1 knows 2 is using a maximin strategy, 1 would investThe Nash Equilibrium RevisitedMaximin Strategy
اسلاید 35: Chapter 13Slide 35Prisoners’ DilemmaPrisoner AConfessDon’t ConfessConfessDon’tConfessPrisoner B-5, -5-1, -10-2, -2-10, -1
اسلاید 36: Chapter 13Slide 36Prisoners’ DilemmaPrisoner AConfessDon’t ConfessConfessDon’tConfessPrisoner B-5, -5-1, -10-2, -2-10, -1What is the:Dominant strategyNash equilibriumMaximin solution
اسلاید 37: Chapter 13Slide 37Pure StrategyPlayer makes a specific choiceMixed StrategyPlayer makes a random choice among two or more possible actions based on a set of chosen probabilitiesThe Nash Equilibrium RevisitedMixed Strategy
اسلاید 38: Chapter 13Slide 38Matching PenniesPlayer AHeadsTailsHeadsTailsPlayer B1, -1-1, 11, -1-1, 1
اسلاید 39: Chapter 13Slide 39Matching PenniesPlayer AHeadsTailsHeadsTailsPlayer B1, -1-1, 11, -1-1, 1ObservationsPure strategy: No Nash equilibriumMixed strategy: Random choice is a Nash equilibriumWould a firm set price based on random choice assumption?
اسلاید 40: Chapter 13Slide 40The Battle of the SexesJimWrestlingOperaWrestlingOperaJoan2,10,01,20,0
اسلاید 41: Chapter 13Slide 41The Battle of the SexesJim WrestlingOperaWrestlingOperaJoan2,10,01,20,0Pure StrategyBoth watch wrestlingBoth watch operaMixed StrategyJim chooses wrestlingJoan chooses wrestling
اسلاید 42: Chapter 13Slide 42Repeated GamesOligopolistic 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.
اسلاید 43: Chapter 13Slide 43Pricing ProblemFirm 1Low PriceHigh PriceLow PriceHigh PriceFirm 210, 10100, -5050, 50-50, 100
اسلاید 44: Chapter 13Slide 44Pricing ProblemFirm 1Low PriceHigh PriceLow PriceHigh PriceFirm 210, 10100, -5050, 50-50, 100Non-repeated gameStrategy is Low1, Low2Repeated gameTit-for-tat strategy is the most profitable
اسلاید 45: Chapter 13Slide 45Repeated GamesConclusion:With repeated game The Prisoners’ Dilemma can have a cooperative outcome with tit-for-tat strategy
اسلاید 46: Chapter 13Slide 46Repeated GamesConclusion:This is most likely to occur in a market with:Few firmsStable demandStable cost
اسلاید 47: Chapter 13Slide 47Repeated GamesConclusionCooperation is difficult at best since these factors may change in the long-run.
اسلاید 48: Chapter 13Slide 48Oligopolistic Cooperation in the Water Meter IndustryCharacteristics of the MarketFour ProducersRockwell International (35%), Badger Meter, Neptune Water Meter Company, and Hersey Products (Badger, Neptune, and Hersey combined have about a 50 to 55% share)
اسلاید 49: Chapter 13Slide 49Oligopolistic Cooperation in the Water Meter IndustryCharacteristics of the MarketVery inelastic demandNot a significant part of the budget
اسلاید 50: Chapter 13Slide 50Characteristics of the MarketStable demandLong standing relationship between consumer and producer BarrierEconomies of scaleBarrierOligopolistic Cooperation in the Water Meter Industry
اسلاید 51: Chapter 13Slide 51Characteristics of the MarketThis is a Prisoners’ DilemmaLower price to a competitive levelCooperateRepeated GameQuestionWhy has cooperation prevailed?Oligopolistic Cooperation in the Water Meter Industry
اسلاید 52: Chapter 13Slide 52What Do You Think?Is there cooperation & collusion in the airline industry?Competition and Collusion in the Airline Industry
اسلاید 53: Chapter 13Slide 53Sequential GamesPlayers move in turnPlayers must think through the possible actions and rational reactions of each player
اسلاید 54: Chapter 13Slide 54Sequential GamesExamplesResponding to a competitor’s ad campaignEntry decisionsResponding to regulatory policy
اسلاید 55: Chapter 13Slide 55ScenarioTwo new (sweet, crispy) cerealsSuccessful only if each firm produces one cerealSweet will sell betterBoth still profitable with only one producerSequential GamesThe Extensive Form of a Game
اسلاید 56: Chapter 13Slide 56Modified Product Choice ProblemFirm 1CrispySweetCrispySweetFirm 2-5, -510, 20-5, -520, 10
اسلاید 57: Chapter 13Slide 57Modified Product Choice ProblemFirm 1CrispySweetCrispySweetFirm 2-5, -510, 20-5, -520, 10QuestionWhat is the likely outcome if both make their decisions independently, simultaneously, and without knowledge of the other’s intentions?
اسلاید 58: Chapter 13Slide 58Assume that Firm 1 will introduce its new cereal first (a sequential game).QuestionWhat will be the outcome of this game?Modified Product Choice ProblemThe Extensive Form of a Game
اسلاید 59: Chapter 13Slide 59Sequential GamesThe Extensive Form of a GameUsing a decision treeWork backward from the best outcome for Firm 1The Extensive Form of a Game
اسلاید 60: Chapter 13Slide 60Product Choice Game in Extensive FormCrispySweetCrispySweet-5, -510, 2020, 10-5, -5Firm 1CrispySweetFirm 2Firm 2
اسلاید 61: Chapter 13Slide 61Sequential GamesThe Advantage of Moving FirstIn this product-choice game, there is a clear advantage to moving first.
اسلاید 62: Chapter 13Slide 62Sequential GamesAssume: DuopolyThe Advantage of Moving First
اسلاید 63: Chapter 13Slide 63Sequential GamesDuopolyThe Advantage of Moving First
اسلاید 64: Chapter 13Slide 64Choosing OutputFirm 17.5Firm 2112.50, 112.5056.25, 112.500, 0112.50, 56.25125, 93.7550, 7593.75, 12575, 50100, 10010157.51015
اسلاید 65: Chapter 13Slide 65Choosing OutputFirm 17.5Firm 2112.50, 112.5056.25, 112.500, 0112.50, 56.25125, 93.7550, 7593.75, 12575, 50100, 10010157.51015This payoff matrix illustrates various outcomesMove together, both produce 10QuestionWhat if Firm 1 moves first?
اسلاید 66: Chapter 13Slide 66Threats, Commitments, and CredibilityStrategic MovesWhat actions can a firm take to gain advantage in the marketplace?Deter entryInduce competitors to reduce output, leave, raise priceImplicit agreements that benefit one firm
اسلاید 67: Chapter 13Slide 67How To Make the First MoveDemonstrate CommitmentFirm 1 must constrain his behavior to the extent Firm 2 is convinced that he is committedThreats, Commitments, and Credibility
اسلاید 68: Chapter 13Slide 68Empty ThreatsIf 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.Threats, Commitments, and Credibility
اسلاید 69: Chapter 13Slide 69Pricing of Computers and Word ProcessorsFirm 1High PriceLow PriceHigh PriceLow PriceFirm 2100, 8080, 10010, 2020, 0
اسلاید 70: Chapter 13Slide 70Pricing of Computers and Word ProcessorsFirm 1High PriceLow PriceHigh PriceLow PriceFirm 2100, 8080, 10010, 2020, 0QuestionCan Firm 1 force Firm 2 to charge a high price by threatening to lower its price?
اسلاید 71: Chapter 13Slide 71ScenarioRace Car Motors, Inc. (RCM) produces carsFar Out Engines (FOE) produces specialty car engines and sells most of them to RCMSequential game with RCM as the leaderFOE has no power to threaten to build big since RCM controls output.Threats, Commitments, and Credibility
اسلاید 72: Chapter 13Slide 72Production Choice ProblemFar Out EnginesSmall carsBig carsSmall enginesBig enginesRace Car Motors3, 63, 08, 31, 1
اسلاید 73: Chapter 13Slide 73QuestionHow could FOE force RCM to shift to big cars?Threats, Commitments, and Credibility
اسلاید 74: Chapter 13Slide 74Modified Production Choice Problem0, 60, 08, 31, 1Far Out EnginesSmall carsBig carsSmall enginesBig enginesRace Car Motors
اسلاید 75: Chapter 13Slide 75Questions1)What is the risk of this strategy?2)How could irrational behavior give FOE some power to control output?Modified Production Choice Problem
اسلاید 76: Chapter 13Slide 76Wal-Mart Stores’ Preemptive Investment StrategyQuestionHow did Wal-Mart become the largest retailer in the U.S. when many established retail chains were closing their doors?HintHow did Wal-Mart gain monopoly power?Preemptive game with Nash equilibrium
اسلاید 77: Chapter 13Slide 77The Discount Store Preemption GameWal-MartEnterDon’t enterEnterDon’t enterCompany X-10, -1020, 00, 00, 20
اسلاید 78: Chapter 13Slide 78The Discount Store Preemption GameWal-MartEnterDon’t enterEnterDon’t enterCompany X-10, -1020, 00, 00, 20Two Nash equilibriumLow leftUpper rightMust be preemptive to win
اسلاید 79: Chapter 13Slide 79Entry DeterrenceTo deter entry, the incumbent firm must convince any potential competitor that entry will be unprofitable.
اسلاید 80: Chapter 13Slide 80Entry PossibilitiesIncumbentEnterStay outHigh price(accommodation)Low Price(warfare)Potential Entrant100, 20200, 0130, 070, -10
اسلاید 81: Chapter 13Slide 81Entry DeterrenceScenarioIncumbent monopolist (I) and prospective entrant (X)X single cost = $80 million to build plant
اسلاید 82: Chapter 13Slide 82Entry DeterrenceScenarioIf 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 X enters and charges a low price I earns a profit of $70 million and X earns $-10 million.
اسلاید 83: Chapter 13Slide 83Entry DeterrenceQuestionHow could I keep X out?Is the threat credible?
اسلاید 84: Chapter 13Slide 84Entry DeterrenceHow could I keep X out?1)Make an investment before entry (irrevocable commitment) 2)Irrational behavior
اسلاید 85: Chapter 13Slide 85Entry DeterrenceIncumbentEnterStay outHigh price(accommodation)Low Price(warfare)Potential Entrant50, 20150, 0130, 070, -10After $50 million Early Investment
اسلاید 86: Chapter 13Slide 86Entry DeterrenceIncumbentEnterStay outHigh price(accommodation)Low Price(warfare)Potential Entrant50, 20150, 0130, 070, -10After $50 million Early InvestmentWarfare likelyX will stay out
اسلاید 87: Chapter 13Slide 87Airbus vs. BoeingWithout Airbus being subsidized, the payoff matrix for the two firms would differ significantly from one showing subsidization. Entry Deterrence
اسلاید 88: Chapter 13Slide 88Development of a New AircraftBoeingProduceDon’t produceAirbus-10, -10100, 00, 00, 120ProduceDon’t produce
اسلاید 89: Chapter 13Slide 89Development of a New AircraftBoeingProduceDon’t produceAirbus-10, -10100, 00, 00, 120ProduceDon’t produceBoeing will produceAirbus will not produce
اسلاید 90: Chapter 13Slide 90Development of a Aircraft After European SubsidyBoeingProduceDon’t produceAirbus-10, 10100, 00, 00, 120ProduceDon’t produce
اسلاید 91: Chapter 13Slide 91BoeingProduceDon’t produceAirbus-10, 10100, 00, 00, 120ProduceDon’t produceAirbus will produceBoeing will not produceDevelopment of a Aircraft After European Subsidy
اسلاید 92: Chapter 13Slide 92Diaper WarsEven though there are only two major firms, competition is intense.The competition occurs mostly in the form of cost-reducing innovation.
اسلاید 93: Chapter 13Slide 93Competing Through R & DP&GR&DNo R&DR&DNo R&DKimberly-Clark40, 2080, -2060, 40-20, 60
اسلاید 94: Chapter 13Slide 94Competing Through R & DP&GR&DNo R&DR&DNo R&DKimberly-Clark40, 2080, -2060, 40-20, 60Both spend on R&DQuestionWhy not cooperate
اسلاید 95: Chapter 13Slide 95Bargaining StrategyAlternative outcomes are possible if firms or individuals can make promises that can be enforced.
اسلاید 96: Chapter 13Slide 96Bargaining StrategyConsider:Two firms introducing one of two complementary goods.
اسلاید 97: Chapter 13Slide 97Bargaining StrategyFirm 1Produce AProduce BProduce AProduce BFirm 240, 550, 505, 4560, 40
اسلاید 98: Chapter 13Slide 98Bargaining StrategyFirm 1Produce AProduce BProduce AProduce BFirm 240, 550, 505, 4560, 40With collusion:Produce A1B2Without collusion:Produce A1B2Nash equilibrium
اسلاید 99: Chapter 13Slide 99Bargaining StrategySupposeEach firm is also bargaining on the decision to join in a research consortium with a third firm.
اسلاید 100: Chapter 13Slide 100Bargaining StrategyFirm 1Work aloneEnter consortiumWork aloneEnterconsortiumFirm 210, 1010, 2040, 4020, 10
اسلاید 101: Chapter 13Slide 101Bargaining StrategyFirm 1Work aloneEnter consortiumWork aloneEnterconsortiumFirm 210, 1010, 2040, 4020, 10Dominant strategyBoth enter
اسلاید 102: Chapter 13Slide 102Bargaining StrategyLinking the Bargain ProblemFirm 1 announces it will join the consortium only if Firm 2 agrees to produce A and Firm 1 will produce B.Firm 1’s profit increases from 50 to 60
اسلاید 103: Chapter 13Slide 103Bargaining StrategyStrengthening Bargaining PowerCredibilityReducing flexibility
اسلاید 104: Chapter 13Slide 104AuctionsAuction FormatsTraditional English (oral)Dutch auctionSealed-bidFirst priceSecond price
اسلاید 105: Chapter 13Slide 105AuctionsHow to choose an auction formatPrivate-value auction: bidders uncertain about the other bidders reservation priceCommon-value auction: bidders uncertain what the value isValuation and Information
اسلاید 106: Chapter 13Slide 106AuctionsSecond-price sealed auction: bid your reservation priceEnglish auction: Bid in small increments until you reach your reservation pricePrivate Value Auction
اسلاید 107: Chapter 13Slide 107AuctionsThe winning bids in both auctions is the reservation price of the second highest bidderPrivate Value Auction
اسلاید 108: Chapter 13Slide 108AuctionsSealed-bid auctionFirst-price auction: lowers the bidSecond-price auction: bid just above the second highest reservation priceBoth yield the same revenuePrivate Value Auction
اسلاید 109: Chapter 13Slide 109AuctionsWinner’s CurseThe winner is worse off than those who did not winCommon Value Auction
اسلاید 110: Chapter 13Slide 110AuctionsExamplesBidding on a construction jobBidding on offshore oil reservesCommon Value Auction
اسلاید 111: Chapter 13Slide 111AuctionsQuestionHow can you avoid the winner’s curse?Common Value Auction
اسلاید 112: Chapter 13Slide 112AuctionsPrivate-value AuctionHave as many bidders as possibleCommon-value AuctionUse open-bid formatRelease information about valueMaximizing Auction Revenue
اسلاید 113: Chapter 13Slide 113Internet AuctionsA Few CaveatsNow quality control functionPoor seller feedbackBid manipulation may occur
اسلاید 114: Chapter 13Slide 114SummaryA 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.
اسلاید 115: Chapter 13Slide 115SummarySome 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.
اسلاید 116: Chapter 13Slide 116SummaryAn 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.
اسلاید 117: Chapter 13Slide 117SummaryAuctions can be conducted in a number of formats which influence the revenue raised and the price paid by the buyer.
اسلاید 118: End of Chapter 13Game Theory and Competitive Strategy
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