Chapter 13 Slide 7Gaming and Strategic Decisions Noncooperative versus Cooperative Games “The strategy design is based on understanding your opponent’s point of view, and assuming
Trang 1Chapter 13
Game Theory
and Competitive
Strategy
Trang 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?”
Trang 5Chapter 13 Slide 5
Gaming and Strategic Decisions
Noncooperative versus Cooperative
by two firms (i.e Microsoft and Apple)
Binding contracts are possible
Trang 6Gaming and Strategic Decisions
Noncooperative versus Cooperative Games
Trang 7Chapter 13 Slide 7
Gaming and Strategic Decisions
Noncooperative 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”
Trang 8A & B sell competing products
They are deciding whether to undertake
Trang 10Payoff Matrix for Advertising Game
Firm A
Advertise
Don’t Advertise
Advertise
Don’t Advertise
Trang 11Don’t Advertise
Equilibrium in dominant
strategy
Trang 12Dominant Strategies
Game Without Dominant Strategy
The optimal decision of a player without a dominant strategy will depend on what the other player does
Trang 14Don’t Advertise
Trang 16The Nash Equilibrium Revisited
Trang 17Chapter 13 Slide
17
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 Equilibrium Revisited
Product Choice Problem
Product Choice Problem
Trang 18Product Choice Problem
Trang 20The Nash Equilibrium Revisited
Trang 22Don’t invest
Invest
Trang 24 Firm 1 might
play don’t invest
Minimize losses to 10
Trang 25Chapter 13 Slide
25
If both are rational and informed
Both firms invest
Nash equilibrium
The Nash Equilibrium Revisited
Maximin Strategy
Trang 26Firm 2’s maximin strategy is to invest.
If 1 knows 2 is using a maximin
The Nash Equilibrium Revisited
Maximin Strategy
Trang 27Prisoner B
-2, -2 -10, -1
Trang 28Prisoner B
-5, -5 -1, -10
-2, -2 -10, -1
Trang 29 With each repetition of the Prisoners’
Dilemma, firms can develop reputations about their behavior and study the
behavior of their competitors.
Trang 32Repeated Games
Conclusion:
With repeated game
The Prisoners’ Dilemma can have a cooperative outcome with tit-for-tat strategy
Trang 34Sequential Games
Players move in turn
Players must think through the possible actions and rational reactions of each player
Trang 36 Scenario
Two new (sweet, crispy) cereals
Successful only if each firm produces one cereal
Sweet will sell better
Both still profitable with only one producer
Sequential Games
The Extensive Form of a Game
Trang 38Modified Product Choice Problem
independently, simultaneously, and without
knowledge of the other’s
Trang 39 What will be the outcome of this game?
Modified Product Choice Problem
The Extensive Form of a Game
Trang 40Sequential Games
The Extensive Form of a Game
Using a decision tree
Work backward from the best outcome for Firm 1
The Extensive Form of a Game
Trang 41-5, -5
10, 20
20, 10 -5, -5
Trang 42Sequential Games
The Advantage of Moving First
In this product-choice game, there is a clear advantage to moving first
Trang 44 How To Make the First Move
Demonstrate Commitment
Firm 1 must constrain his behavior to the
extent Firm 2 is convinced that he is
committed
Threats, Commitments, and Credibility
Trang 45credible in the eyes of the competitors.
Threats, Commitments, and Credibility
Trang 48 Sequential game with RCM as the leader
FOE has no power to threaten to build big
Threats, Commitments, and Credibility
Trang 49Chapter 13 Slide
49
Production Choice Problem
Far Out Engines
Small cars Big cars
Trang 51Far Out Engines
Small cars Big cars
Small engines
Big engines
Race Car Motors
Trang 52 Questions
1) What is the risk of this strategy?
2) How could irrational behavior give
FOE some power to control output?
Modified Production Choice Problem
Trang 53 How did Wal-Mart gain monopoly power?
Preemptive game with Nash equilibrium
Trang 54The Discount Store Preemption Game
Trang 56Entry Deterrence
To deter entry, the incumbent firm must convince any potential competitor that entry will be unprofitable.
Trang 58Entry Deterrence
Question
How could I keep X out?
Is the threat credible?
Trang 59Chapter 13 Slide
59
Entry Deterrence
How could I keep X out?
1) Make an investment before entry
(irrevocable commitment) 2) Irrational behavior
Trang 64Development of a New Aircraft
Trang 67Chapter 13 Slide
67
Bargaining Strategy
Alternative outcomes are possible if
firms or individuals can make promises that can be enforced.
Trang 68Bargaining Strategy
Consider:
Two firms introducing one of two complementary goods
Trang 70Bargaining Strategy
Firm 1
Produce A Produce B Produce A
Trang 72Firm 2
40, 40
20, 10
Trang 74Bargaining Strategy
Linking the Bargain Problem
Firm 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
Trang 76 A 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
Trang 77Chapter 13 Slide
77
Summary
Some 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.
Trang 78 An 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.
Trang 79End of Chapter 13
Game Theory
and Competitive
Strategy