1ISyE 6230 Economic Decision Analysis II Spring Semester 2010 Instructor: Dr. Julie Swann TA: Jan Naragain Phumchusri Office: Groseclose 411 Office: ISyE Main 318 Phone: 404.385.3054 Phone: E-mail: [email protected] E-mail: [email protected] Class page: www.isye.gatech.edu/~jswann/teaching/6230s10 T-square: http://tsquare.gatech.edu/ Class meeting time/place: Tues/Thurs 4:25 – 5:55 pm, IC 105 PRE-REQUISITES ISYE 6669 (Deterministic Optimization): Relevant concepts from this class include objectives and constraints (formulating and understanding mathematical symbols), sensitivity analysis, lagrangian relaxation, and KKT conditions. Students are responsible for ensuring that they have the appropriate background, including reviewing the material if necessary. TEXTS Suggested Reading for all students: • Game Theory for Applied Economists by Robert Gibbons, Princeton University Press (1992). Reference books: • Game Theory by Drew Fudenberg and Jean Tirole, MIT Press (1991). [especially for PhD students] • An Introduction to the Economics of Information: Incentives and Contracts by I. Macho-Stadler and J. D. Perez-Castillo, Oxford University Press (2001). • Microeconomic Analysis by Hal Varian, W. W. Norton and Company (1992). 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 Many of the optional texts will be on reserve in the GT library for this class. In addition, if you miss a class or need to review material again, videos of the class may also be available in the library or through T-square. 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. Given that each firm is part of a complex web of interactions (within, among, or between entities), any business decision or action taken by a firm impacts multiple entities that2interact 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. We will also incorporate aspects of optimization, microeconomics, and other areas as necessary. 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. We will focus on how to model strategic decisions as a game, how to solve them, what a solution means, what insights can be gained from the solutions, and how the game can be changed to improve the overall system. We will also study game theory in several related disciplines. 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.) • Bayesian games with incomplete information • Principal-agent models including topics such as revelation principle, moral hazard, adverse selection • Price discrimination • Guest lecturers of game theory applications in various disciplines3GRADING Students are responsible for all announcements made in class and for all changes in the schedule that are posted on the class website or through email. 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 me. Tentative dates are Jan 28, Feb 11, Mar 18, April 1, April 27. Homework will be posted or given to the class with associated due dates. Late assignments carry no credit. The lowest homework grade will be dropped at the end of the semester. Midterm Exams: The exams will be held on or about February 18 and April 6. Dates will be verified closer to each exam. Each 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. If any equations sheets are allowed for exams, you will be informed in advance. Only simple (non-graphing) calculators will be allowed unless otherwise stated. No makeup exams will be given