University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

128

Pages:

12
Author:

pagkopyasi0

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!) 1 Dominant Strategies (An Advertising Decision) Firm B Firm A Advertise Advertise Don’t Don’t 10, 5 15, 0 6, 8 20, 2 2 Duopoly From Last Time Firm 2 (competitor) Firm 1 15 20 22.5 30 15 450, 450 375, 500 338, 506 225, 450 20 500, 375 400, 400 350, 394 200, 300 22.5 506, 338 394, 350 338, 338 125, 150 30 300, 200 150, 125 0, 0 (you) 450, 225 3 Scheduling a Dinner Party Pat Chris Fri. Night Fri. Night -10, -10 Sat. Night 5, 4 Sat. Night 4, 5 -10, -10 A Legal Dispute (Monetary Payoffs) Other Settle Sue -10, -10 -1, -2 Settle -200, 1 2, 4 You Sue 4 The IRS audit IRS Firm Audit Cheat Don’t cheat Don’t audit -2, 2 2, 0 0, -2 0, 0 5 Review of Concepts • Nash Equilibrium: Each player doing the best he/she can, given what the other is doing. • Dominant strategy: Player’s best choice doesn’t depend on choices of others. • Maximin Strategy: Choice that maximizes the minimum payoff, avoiding big losses The Prisoner’s Dilemma Prisoner B Prisoner A Don’t Confess Don’t -2, -2 -10, -1 Confess -1, -10 -5, -5 6 The Pricing of Airline Travel US Air Delta High Price Lower Price High Price 50, 50 -50, 100 Lower Price 100, -50 0, 0 7 Commitment and Credibility (Cortez and His Soldiers) Soldiers Cortez Stay & Fight Go Home Stay & Fight 10, 5 -10, 10 Go Home -10, -10 -5, 15 8 Selling Beer on the Beach • Design Characteristic is Location • Sunbathers are evenly spread. Will walk to nearest seller 9 Extensive Form Games: Sequential Moves Accommodate (50, 20) Incumbent Enter Compete (30, -10) Potential Entrant Not Enter (100, 0) Payoffs = (Incumbent payoff, Entrant payoff) 10 Entry Deterrence: Precommitment Accommodate (50-30, 20) = (20,20) Incumbent Enter Compete Potential Entrant Not Enter (30+10, -10) = (40,-10) (100 - 30, 0) = (70,0) Incumbent: Incurs 30 in costs to prepare for intense competition 11 Take 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? 12