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GAME THEORY & COMPETITIVE STRATEGY. Chapter 10 slide 1. Sizing up competitive situations according to: 1. Number of Competitors 2. The Degree of Conflict or Cooperation 3. The Opportunity for Communication. 4. Single or Repeated Competition 5. The Amount of Information Available.
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GAME THEORY & COMPETITIVE STRATEGY Chapter 10 slide 1 • Sizing up competitive situations • according to: • 1. Number of Competitors • 2. The Degree of Conflict or Cooperation • 3. The Opportunity for Communication • 4. Single or Repeated Competition • 5. The Amount of Information Available
ANALYZING PAYOFF TABLES 10.2 • First, Translate Competitive Situation into a Payoff Table. • Second, Analyze Table. • 1. Identify Each Side’s Best Responses. • 2. Eliminate Dominated Strategies (if any). • Does either side have a dominant strategy? • 3. In the Absence of Dominant Strategies, • is there a Pair of Equilibrium Strategies?
10.3 ZERO-SUM GAMES Market-Share Example C1 C2 C3 R1 -2 -1 4 R2 3 2 5 R3 7 -3 -5 , 2 , 1 , -4 , -3 , -2 , -5 , 7 , 3 , 5 2 4 2 -2 5 7 Equilibrium: R2 versus C2 (where circle and square coincide). Resulting Value is (2, -2). How does one find Equilibrium Strategies?
ZERO-SUM GAMES: SUMMARY 10.4 • - There is pure conflict: one side’s gain is the other’s loss. • - There is no possibility of cooperation. • - Equilibrium strategies result in definite value for the game. • - Making the first move is never an advantage and is • often a disadvantage.
NON-ZERO-SUM GAMES 10.5 • A Price War • High P=$8 Low P=$6 • High P=$8 10, 10 5, 12 • Low P=$6 12, 5 7, 7 • Price Rivalry (w/ Brand Allegience) • High P=$8 Low P=$6 • High P=$8 10, 10 5, 12 • Low P=$6 12, 5 7, 7 AC=$4 (2.5, 2.5) (6, 1.25) (3.5, 3.5) AC=$4 (2.5, 2.5) (4, 2) (3.5, 3.5) 12 10 10 8 8, 8 8, 8 12 7 7 8 With strong brand allegiance, price competition is blunted. Each firm’s self-interest is to set a high price. Price competition leads to a low prices and modest profits.
“CLASSIC” NON-ZERO-SUM GAMES 10.6 • The Prisoner's Dilemma • Holdout Double Cross • Hold Out 2, 2 8, 1 • Double Cross 1, 8 5, 5 • General • Cooperate Defect • Cooperate R, R S, T • Defect T, S P, P 1 T 1 5 5 T P P T > R > P > S Both prisoners double cross, so both serve long, 5-year terms. Each player’s dominant strategy is to defect (because the temptation payoff is best and the sucker payoff is worst.
QUANTITY COMPETITION 10.7 • Industry Price Depends On • Total Output: P = 30 - [Q1 + Q2]. • Payoff Table: • Q2 = 6 Q2 = 8 Q2 = 10 • Q1 = 6 72, 72 • Q1 = 8 64, 64 • Q1 = 10 40, 40 Each Firm's MC is $6. 60, 80 81 48, 80 49 According to table, Equilibrium is: Q1 = Q2 = 8 80, 60 64 64 48, 60 81 80, 48 60, 48 49 My Best Response to Competitor's Output?
MARKET ENTRY 10.8 Stay Out Enter Stay Out 0, 0 0, 4 Enter 4, 0 -4, -4 0 4 4 0 Is there a first-mover advantage? Absolutely. The firm that enters first preempts the market and deters the other from ever entering.
THINKING AHEAD Enter M Cut Price E Keep Price Stay Out M Cut Price 10.9 • Fashioning Strategies using Interactive Decision Trees • Example: Deterring Market Entry EM 5, 10 -5, 5 Keep Cut Enter 5, 10 -5,-5 Not 0,20 0,15 Keep Price 0, 20 0, 15 E enters in equilibrium. M’s threat to cut price is not credible.
DETERRING MARKET ENTRY (cont.) E M Enter E Stay Out 10.10 • What if M commits to a pricing strategy before E can commit to entering? EM 5, 10 0, 20 Enter Keep Cut Enter 5, 10 -5,-5 Not 0,20 0,15 Keep Price Stay Out -5, 5 0, 15 Cut Price Cutting price in advance deters entry!
10.11 BATTLE FOR AIR PASSENGERS Market = $900k (3,600 x $250) Each flight: $25k & 300 seats Therefore, A = 900[A/(A+B+C)] – 25A Airlines will make first-period decisions and see the profit results. Then, they will play for second and then third periods. Benchmarks: Collusion Perfect Competition Equilibium 4 each, = 200 each 12 each, = 0 each 8 each, = 100 each
