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Lecture Ten: Strategic Thinking

Lecture Ten: Strategic Thinking. IPEM Tohoku University Managerial Economics Lecturer: Jack Wu Period 3/ February 18. Coke vs. Pepsi, 1999. Nov. 16: Coca-Cola raised price 7% Nov. 22: Pepsi raised price 6.9%

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Lecture Ten: Strategic Thinking

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  1. Lecture Ten: Strategic Thinking IPEM Tohoku University Managerial Economics Lecturer: Jack Wu Period 3/ February 18

  2. Coke vs. Pepsi, 1999 Nov. 16: Coca-Cola raised price 7% Nov. 22: Pepsi raised price 6.9% “Coke and Pepsi will move now from price-based competition to marketing-based competition”, Andrew Conway, Morgan Stanley

  3. Competitive Dilemma What should Coke do?

  4. Strategic Situations • parties actively consider the interactions with one another in making decisions • game theory -- set of ideas and principles to guide strategic thinking • simultaneous actions: strategic form • sequential actions: extensive form

  5. Dominated Strategy generates worse consequences than another strategy, regardless of the choices of the other parties • never use dominated strategy

  6. Nash Equilibrium Given that the other players choose their Nash equilibrium strategies, each party prefers its own Nash equilibrium strategy • No one is willing to deviate unilaterally from a Nash equilibrium

  7. Solving for Nash Equilibrium • eliminate dominated strategies, then check remaining cells • “arrow” technique

  8. Nash equilibrium:Competitive dilemma • What should Coke do?

  9. Coke and Pepsi Game • Nash equilibrium: for both parties, “raise price” is dominated by “discount”. • but discounting is bad for both -- if only they could agree somehow to raise price. • Coke and Pepsi stuck in this situation for four years until November 1999.

  10. Nash equilibrium:Prisoners’ dilemma • What should Sam do?

  11. Out of Nash Equilibrium What if another player doesn’t play Nash equilibrium strategy? • Nash equilibrium strategy may not be best • still don’t use dominated strategy

  12. WHERE TO ADVERTISE? No Nash equilibrium in pure strategies

  13. Randomized Strategies • choose among pure strategies according to probabilities • must be unpredictable • Example: where to advertise • _ We.com: ½ NBA and ½ NHL • _ Competitor.com: ½ NBA and ½ NHL

  14. Randomized strategies: Retail price competition • Solution: randomizeddiscounts

  15. Coordination/competition:Evening news

  16. Coordination and Competition • Prime time for news is 8:0pm; second best is 7:30pm; • since audience is limited, get maximum viewership if two channels schedule at different times. • Question: which station gets 8:0pm? Situation has elements of • coordination -- avoiding same time slot • competition -- getting the 8:0pm slot

  17. Zero/Positive Sum • zero-sum games: pure competition -- one party better off only if other is worse off • positive-sum games: coordination -- both can be better off or both worse off • co-opetition: competition and coordination

  18. Coordination/Competition: Focal Point • Single Nash equilibrium - clear focal point • Multiple Nash equilibria - look for focal point to see which one to play

  19. Sequencing Game in extensive form – sequence of moves: • nodes • branches • outcomes

  20. Extensive Form: Equilibrium backward induction • final nodes  intermediate nodes  initial node

  21. Sequencing:Extensive Form- TV News

  22. Strategic Move Action to influence beliefs or actions of other parties in a favorable way • credibility • first mover advantage • second mover advantage

  23. Examples • Examples: • Evening TV news -- both stations want to move first: which one can? • Use strategic move, eg, contracts with advertisers to deliver news at 8pm. • Famous Chinese general: after crossing a river, burnt his ships -- strategic move to force soldiers to fight harder. • Issue: Is the move credible? Will it convince the other players? • Advantage doesn’t always go to first mover; • In war, better to see opponent’s move, and then take action, eg is enemy moving south or north? • new product category -- let competitor test the market and educate the customers

  24. Lithographer Make more prints Buy Litho Make prints consumer Do not Do not Litho (1) serial number (2) destroying the plate (3) other solution? Do not

  25. Conditional Strategic Moves • Threats – if it succeeds, then it needn’t be carried out • Promises – if it succeeds, then it needn’t be carried out • Ideal strategic move doesn’t impose costs

  26. MORGAN STANLEY:“SHAREHOLDER RIGHTS PLAN” If any party acquires 10% or more of company’s shares, other shareholders get right to buy additional shares at 50% discount. • Impact on hostile bidder?

  27. Shareholder Rights Plan • This shareholder rights plan is a threat to potential bidders: • most hostile bidders begin with small stake; • with shareholder rights plan, if bidder acquires more than 10%, then rights triggered, and bidder will be diluted. • Nickname: poison pill. • Actually works against shareholder rights -- by entrenching existing management.

  28. Poison Pill Hilda loses on initial stake + cost of takeover rises activates rights acquires 100,000 shares Sharon Hilda does not doesn’t bid

  29. Strike Lose current wage and possibly gain in future wage strike reject union demand Union do not Maintain current wage Employer accept Why are strikes rare in American professional football?

  30. depositor bank remains solvent principal + interest maintains deposit bank insolvent zero depositor bank remains solvent principal withdraws deposit bank insolvent principal Conditional strategic move: Without deposit insurance

  31. depositor bank remains solvent principal + interest maintains deposit bank insolvent principal depositor bank remains solvent principal withdraws deposit bank insolvent principal Conditional strategic move: With deposit insurance

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