Overview: Game Theory and Competitive Strategy II • Fun and games with bidding situations • Games with one play only – Simultaneous choice – Someone goes first • Repeated games • Threats and commitment • Entry deterrence A Negotiation: The Rules • Objective: max your own financial position • 2 people negotiate over the division of $100, with offers in units of $1.00 • Person A offers B a division. If accepted, the division is made. End of negotiation. • If B refuses A’s offer, the amount drops to $90, and B proposes a division. Person A can accept or reject. If rejects, both get $0. • Negotiation ends (2 rounds only!) 1Dominant Strategies (An Advertising Decision) Firm A Firm B Advertise Don’t Advertise 10, 5 15, 0 20, 2Don’t 6, 8 2Duopoly From Last TimeFirm 2 (competitor) 15 20 22.5 30 15 Firm 1 (you) 20 22.5 30 450, 450 375, 500 338, 506 225, 450 500, 375 400, 400 350, 394 200, 300 506, 338 394, 350 338, 338 125, 150 450, 225 300, 200 150, 125 0, 0 3Scheduling a Dinner Party -10, -10 4, 5 5, 4 Pat Fri. Night Sat. Night Sat. NightFri. Night -10, -10 ChrisA Legal Dispute (Monetary Payoffs) -10, -10 -200, 1 2, 4 Other Settle Sue SettleSue -1, -2 You 4FirmThe IRS audit IRS Audit Don’t audit Cheat -2, 2 2, 0 Don’t cheat 0, -2 0, 0 5Review of Concepts • • Player’s best choice doesn’t depend on choices of others. • The Prisoner’s Dilemma -2, -2 -10, -1 -1, -10 Prisoner B Don’t Confess ConfessDon’t Nash Equilibrium: Each player doing the best he/she can, given what the other is doing. Dominant strategy: Maximin Strategy: Choice that maximizes the minimum payoff, avoiding big losses -5, -5 Prisoner A6The Pricing of Airline Travel Delta US Air High Price Lower Price High Price 50, 50 -50, 100 0, 0 Lower Price 100, -50 7Commitment and Credibility (Cortez and His Soldiers) Soldiers Stay & Fight Go Home Cortez Stay & Fight 10, 5 -10, 10 Go Home -10, -10 -5, 15 8Selling Beer on the Beach • Design Characteristic is Location • Sunbathers are evenly spread. Will walk to nearest seller 9Extensive Form Games: Sequential Moves Accommodate (50, 20) Incumbent Enter Compete (30, -10) Potential Entrant Not Enter (100, 0) Payoffs = (Incumbent payoff, Entrant payoff) 10Entry Deterrence: Precommitment Accommodate (50-30, 20) = (20,20)Incumbent Enter Compete (30+10, -10) = (40,-10)Potential Entrant Not Enter (100 - 30, 0) = (70,0) Incumbent: Incurs 30 in costs to prepare for intense competition 11Take Away Points • In strategic situations, think about your competitor's reasoning and incentives. In dynamic situations, this leads to backwards induction. • Communication can eliminate poor outcomes. • The prisoner's dilemma is one of the most important strategic situations to understand. Often, the only way out is to change the rules of the game. • Many strategic moves depend on credibility. Commitment may be key here. Preparation for Next Time GE-Westinghouse – Is this (or could this become) an attractive industry? – If you were in charge of pricing for GE, what policy changes would you recommend?
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