University:
Massachusetts Institute of Technology
Course:
15.992 | S-Lab: Laboratory for Sustainable Business
Academic year:

2023
Views:

192

Pages:

16
Author:

pararanfj4

Lecture 7 Game Plan More on strategic substitutes and complements Application to Entry: Ryan Air Strategic exercise of real options Systems and Product Compatibility Tape deck + speaker = sound system Two firms produce both tape decks and speakers. First, firms decide whether or not to allow for compatibility • products are compatible if both allow for it Second, firms compete on price Sound System Consumers Each firm’s products are described as corners of a square. Consumers are represented as points in the square Each consumer buys from whatever firm has lowest price + distance “distance” captures comparative preference for the products Incompatible Competition Consumers in upper-left and lowerright prefer to mix and match GREEN SPEAKER RED SPEAKER RED TAPE-DECK represents consumers who buy from firm1 represents firm 1’s products GREEN TAPE-DECK Compatible Competition Consumers are better matched in regions AND price competition is less intense represents consumers who buy both from firm1 represents consumers who buy from firm1 & firm 2 Compatible Competition Less Intense When firm 1 lowers price of RED SPEAKER, it raises demand for GREEN TAPE-DECK tends to lead GREEN to raise its price Under incompatibility, lowering price of RED SPEAKER lowers GREEN TAPE-DECK demand The firms appear to have a common interest in compatibility Incompatibility & Exit Previous discussion implicitly assumed entrenched firms If firm 1 wants to drive firm 2 out of the market (or deter entry), compatibility is a bad approach since it increases both firms’ payoffs Strategies to Induce Exit in Competitive Games More Makes You Tougher Strategic Complements Strategic Substitutes More Makes You Softer Top Dog Lean & Hungry more investment makes you more aggressive, hurting other player less investment makes you more aggressive, hurting other player Top Dog Lean & Hungry more investment makes you more aggressive, hurting other player less investment makes you more aggressive, hurting other player Reliance Games Conclusions for competitive games apply to reliance games, except “flipped” to induce entry, do whatever makes you more aggressive Entry “The wise win before they fight, while the ignorant fight to win.” -Zhuge Liang, chief military strategist, Shu Kingdom, 200 AD Real Options Entering a new market Investments in large, risky projects Option to enter later Option to delay and to stop New technologies: multi-stage option R&D Æ patent Æ testing Æ pilot Æ Parking Lots You own an unprofitable undeveloped parking lot downtown Additional parking revenues would be more than sufficient to cover costs of building a multi-level parking garage Building a garage is a no-brainer, right? A Tale of Two Parking Lots Another undeveloped lot sits right next to yours Does the presence of this other lot make you more or less eager to build an office building on your land? Strategic Incentives to Exercise Real Options First-mover effect that we’ve seen before Æ Want to move first exactly when: investments are strategic substitutes OR investments are strategic complements and reaction curves have slope > 1 Informational benefit of observing others’ investment Æ Want to move last others’ decision to invest is “good news” about their information • first-mover suffers Winner’s Curse, see Lecture 9 outcome of investment also informative Exercising Cascades When others exercise an option this reveals positive information Furthermore: more information Æ less option value Æ others more likely to exercise This can lead to cascades in which many firms follow an early exerciser Example: “Miracle on Sixth Avenue” Summary When considering entering a market anticipate and control incumbents’ incentive to retaliate consider how your entry may change followers’ decision whether/how to enter themselves