1ISyE 6230 Economic Decision Analysis II Spring Semester 2005 Instructor: Dr. Julie Swann TA: Office: ISyE 411 Office: Phone: 404.385.3054 Phone: E-mail: [email protected] E-mail: Office hours: by appointment Office hours: TBD Class page: www.isye.gatech.edu/~jswann/teaching/6230S05 WebCT: http://webct.gatech.edu Class meeting time/place: Mon/Wed 3 – 4.30 pm, IC 215 PRE-REQUISITES ISYE 6669 (Deterministic Optimization) TEXTS Suggested Reading: • Game Theory for Applied Economists by Robert Gibbons, Princeton University Press (1992). Reference books (especially for Ph.D. students): • The Theory of Industrial Organization by Jean Tirole, MIT Press (1988). • Game Theory by Drew Fudenberg and Jean Tirole, MIT Press (1991). Other books: • Game Theory and Economic Modelling by K. M. Kreps, Oxford University Press (1990) Additional Reading (most available online): • Game Theory in Business Applications by Feryal Erhun and Pinar Keskinocak. • Game Theory in Supply Chain Analysis by Gerard Cachon and Serguei Netessine. • Supply Chain Coordination with Contracts by Gerard Cachon. • www.gametheory.net COURSE DESCRIPTION AND OBJECTIVES In this course we will study the interactions between multiple players (decision makers), such as suppliers, manufacturers, retailers, consumers, etc., and the resulting dynamics in a market environment. In any business, interactions with customers, suppliers, other business partners, and competitors, as well as interactions across people and different organizations within the firm, play an integral role in any decision and its consequences. Advances in information technology (IT) and e-commerce further enrich and broaden these interactions, by increasing the degree of connectivity between different parties involved in commerce. Thanks to globalization, now the entire world is the playground for many firms, increasing the complexity of these interactions.2Given that each firm is part of a complex web of interactions, any business decision or action taken by a firm impacts multiple entities that interact with or within that firm, and vice versa. Ignoring these interactions could lead to unexpected and potentially very undesirable outcomes. Our focus in this course will be on the strategic behavior of the players in the market and the impact of the market (or contract) structure on the participants' actions and the overall market dynamics. In making a decision, each player acts on self-interest, e.g., tries to maximize its own profit, and therefore has to consider the potential responses/reactions of other players. Typical decisions of manufacturers and suppliers include quantity to produce and sell, and pricing. Typical decisions of consumers include what to purchase, from which vendor, and how much. The strategic interaction of a firm with its competitors, customers and suppliers can be modeled as a game, and hence, our main tool of analysis in this course will be Game Theory. To identify its own strategy, each firm needs to understand how other firms or customers form their strategies and expectations. Given an understanding of other players' behavior, each player can then form its one’s own best response strategy. Course goals will be accomplished through lectures, homework, and readings. Lectures will generally emphasize the theoretical aspects of the field, and homework will focus on problem solving skills. Guest lectures, videos, and classroom games may complement the class material and help you to connect theory with practice. COURSE TOPICS The course deals with strategic decision making in reactive environments by groups and organizations when there are multiple interested parties (with different objectives and options). Topics to be covered include: • Introduction to game theory (game representation in normal and extensive form, Nash equilibrium, pure vs. mixed strategy equilibria, etc.) • Equilibrium models (Cournot, Stackelberg, Bertrand) • Supply chain coordination (revenue sharing, rebates, sequential procurement, etc.) • Price discrimination • Principal-agent models including topics such as revelation principle, moral hazard, adverse selection GRADING Students are responsible for all announcements made in class and for all changes in the schedule that are posted on the class website. Homework: All homework assignments will be required. Only a (randomly selected) subset of problems will be graded in some of the homework, and your grade will be based on your work in that subset. Depending on their length and difficulty, the total number of points in each homework might vary. Some homework assignments may be based on case studies. Students can discuss the assignments, but every student must turn in his/her own written solutions in his/her own words. Homework is meant to be a learning tool. If you are having difficulty, find help right away – don’t wait until you fall even further behind! Good sources of help are fellow students, teaching assistants, and I.3Homework will be posted on the course website with associated due dates. Late assignments carry no credit.. None of the homework is guaranteed to be dropped, so please make every attempt to submit all homework assignments on time. If 90% of the students in the class have filled out online course evaluations by Wednesday April 27, then students may have the option to drop their lowest homework grade. Midterm Exams: The midterm exams will be held on or about February 16 and March 30. Exact dates will be announced closer to each exam. Each midterm exam will be cumulative, i.e., will include all the topics covered in class since the beginning of the semester until the time of the exam. In-class exams will be closed book, closed notes, and must be done individually. No makeup exams will be given under any circumstances. If you have to miss an exam (for whatever reason), you will receive a grade of “0” for that exam unless your have a doctor’s documentation of illness or official travel documentation for Georgia Tech business. Final Exam: The final exam will be on Tuesday May 3, 11.30 am – 2.20 pm. Grading: Homework assignments will account for 25% of your total grade. Depending on their length and difficulty, homework assignments might carry different weights. The exams will contribute 75% to your final grade. None of the homework grades are guaranteed to be dropped, so please