1、,Chapter 13,Game Theory and Competitive Strategy,Chapter 13,Slide 2,Topics to be Discussed,Gaming and Strategic Decisions Dominant Strategies The Nash Equilibrium Revisited Repeated Games,Chapter 13,Slide 3,Topics to be Discussed,Sequential Games Threats, Commitments, and Credibility Entry Deterrenc

2、e Bargaining Strategy Auctions,Chapter 13,Slide 4,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 5,Gaming and Strategi

3、c 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 poss

4、ible,Chapter 13,Slide 6,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 t

5、o gain market share Binding contracts are not possible,Chapter 13,Slide 7,Gaming and Strategic Decisions,Noncooperative versus Cooperative Games “The strategy design is based on understanding your opponents point of view, and (assuming you opponent is rational) deducing how he or she is likely to re

6、spond to your actions”,Chapter 13,Slide 8,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 9,Gaming and Strategic Decisions,An Example 3)Second highest bidder must pay the am

7、ount he or she bid 4)How much would you bid for a dollar?,Chapter 13,Slide 10,Acquiring a Company,Scenario Company A: The Acquirer Company T: The Target A will offer cash for all of Ts shares What price to offer?,Chapter 13,Slide 11,Acquiring a Company,Scenario The value of T depends on the outcome

8、of a current oil exploration project. Failure: Ts value = $0 Success: Ts value = $100/share All outcomes are equally likely,Chapter 13,Slide 12,Acquiring a Company,Scenario Ts value will be 50% greater with As management. A, must submit the proposal before the exploration outcome is known. T will no

9、t choose to accept or reject until after the outcome is known only to T. How much should A offer?,Chapter 13,Slide 13,Dominant Strategies,Dominant Strategy One that is optimal no matter what an opponent does. An Example A depends on Bs actions B: Advertise Question What should A do? (Hint: consider

10、Bs decision,Chapter 13,Slide 20,The Nash Equilibrium Revisited,Dominant Strategies “Im doing the best I can no matter what you do.” “Youre doing the best you can no matter what I do.”,Chapter 13,Slide 21,The Nash Equilibrium Revisited,Nash Equilibrium “Im doing the best I can given what you are doin

11、g” “Youre doing the best you can given what I am doing.”,Chapter 13,Slide 22,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,The Nash Equilib

12、rium Revisited,Product Choice Problem,Chapter 13,Slide 23,Product Choice Problem,Firm 1,Crispy,Sweet,Crispy,Sweet,Firm 2,Chapter 13,Slide 24,Product Choice Problem,Question Is there a Nash equilibrium? If not, why? If so, how can it be reached,Chapter 13,Slide 25,Beach Location Game,Scenario Two com

13、petitors, Y and C, selling soft drinks Beach 200 yards long Sunbathers are spread evenly along the beach Price Y = Price C Customer will buy from the closest vendor,Chapter 13,Slide 26,Beach Location Game,Where will the competitors locate (i.e. where is the Nash equilibrium)?,Chapter 13,Slide 27,Bea

14、ch Location Game,2)Examples of this decision problem include: Locating a gas station Presidential elections,Chapter 13,Slide 28,The Nash Equilibrium Revisited,Maximin Strategies Scenario Two firms compete selling file-encryption software They both use the same encryption standard (files encrypted by

15、 one software can be read by the other - advantage to consumers),Chapter 13,Slide 29,The Nash Equilibrium Revisited,Maximin Strategies Scenario Firm 1 has a much larger market share than Firm 2 Both are considering investing in a new encryption standard,Chapter 13,Slide 30,Maximin Strategy,Firm 1,Do

16、nt invest,Invest,Firm 2,Dont invest,Invest,Chapter 13,Slide 31,Maximin Strategy,Observations Dominant strategy Firm 2: Invest Nash equilibrium Firm 1: invest Firm 2: Invest,Chapter 13,Slide 32,Maximin Strategy,Observations If Firm 2 does not invest, Firm 1 incurs significant losses Firm 1 might play

17、 dont invest Minimize losses to 10 -maximin strategy,Chapter 13,Slide 33,If both are rational and informed Both firms invest Nash equilibrium,The Nash Equilibrium Revisited,Maximin Strategy,Chapter 13,Slide 34,Consider If Player 2 is not rational or completely informed Firm 1s maximin strategy is to

18、 not invest Firm 2s maximin strategy is to invest. If 1 knows 2 is using a maximin strategy, 1 would invest,The Nash Equilibrium Revisited,Maximin Strategy,Chapter 13,Slide 35,Prisoners Dilemma,Prisoner A,Confess,Dont Confess,Confess,Dont Confess,Prisoner B,Chapter 13,Slide 36,Prisoners Dilemma,What

19、 is the: Dominant strategy Nash equilibrium Maximin solution,Chapter 13,Slide 37,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,The Nash Equilibrium Revisited,Mixed Strategy,Chapter 13

20、,Slide 38,Matching Pennies,Player A,Heads,Tails,Heads,Tails,Player B,Chapter 13,Slide 39,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,Slide 40,The Battle of th

21、e Sexes,Jim,Wrestling,Opera,Wrestling,Opera,Joan,Chapter 13,Slide 41,The Battle of the Sexes,Pure Strategy Both watch wrestling Both watch opera Mixed Strategy Jim chooses wrestling Joan chooses wrestling,Chapter 13,Slide 42,Repeated Games,Oligopolistic firms play a repeated game. With each repetiti

22、on of the Prisoners Dilemma, firms can develop reputations about their behavior and study the behavior of their competitors.,Chapter 13,Slide 43,Pricing Problem,Firm 1,Low Price,High Price,Low Price,High Price,Firm 2,Chapter 13,Slide 44,Pricing Problem,Non-repeated game Strategy is Low1, Low2 Repeat

23、ed game Tit-for-tat strategy is the most profitable,Chapter 13,Slide 45,Repeated Games,Conclusion: With repeated game The Prisoners Dilemma can have a cooperative outcome with tit-for-tat strategy,Chapter 13,Slide 46,Repeated Games,Conclusion: This is most likely to occur in a market with: Few firms

24、 Stable demand Stable cost,Chapter 13,Slide 47,Repeated Games,Conclusion Cooperation is difficult at best since these factors may change in the long-run.,Chapter 13,Slide 48,Oligopolistic Cooperationin the Water Meter Industry,Characteristics of the Market Four Producers Rockwell International (35%)

25、, Badger Meter, Neptune Water Meter Company, and Hersey Products (Badger, Neptune, and Hersey combined have about a 50 to 55% share),Chapter 13,Slide 49,Oligopolistic Cooperationin the Water Meter Industry,Characteristics of the Market Very inelastic demand Not a significant part of the budget,Chapt

26、er 13,Slide 50,Characteristics of the Market Stable demand Long standing relationship between consumer and producer Barrier Economies of scale Barrier,Oligopolistic Cooperationin the Water Meter Industry,Chapter 13,Slide 51,Characteristics of the Market This is a Prisoners Dilemma Lower price to a competitive level Cooperate Repeated Game Question Why has cooperation prevailed?,Oligopolistic Cooperationin the Water Meter Industry,Chapter 13,Slide 52,What Do You Think? Is there cooperation otherwise it i