1、CHAPTER 13 OUTLINE,13.1 Gaming and Strategic Decisions13.2 Dominant Strategies13.3 The Nash Equilibrium Revisited13.4 Repeated Games13.5 Sequential Games13.6 Threats,Commitments,and Credibility13.7 Entry Deterrence13.8 Auctions,GAMING AND STRATEGIC DECISIONS,game Situation in which players(participa
2、nts)make strategic decisions that take into account each others actions and responses.,payoff Value associated with a possible outcome.,strategy Rule or plan of action for playing a game.,optimal strategy Strategy that maximizes a players expected payoff.,If I believe that my competitors are rationa
3、l and act to maximize their own payoffs,how should I take their behavior into account when making my decisions?,GAMING AND STRATEGIC DECISIONS,cooperative game Game in which participants can negotiate binding contracts that allow them to plan joint strategies.,noncooperative game Game in which negot
4、iation and enforcement of binding contracts are not possible.,Noncooperative versus Cooperative Games,GAMING AND STRATEGIC DECISIONS,Noncooperative versus Cooperative Games,How to Buy a Dollar Bill,A dollar bill is auctioned,but in an unusual way.The highest bidder receives the dollar in return for
5、the amount bid.However,the second-highest bidder must also hand over the amount that he or she bidand get nothing in return.If you were playing this game,how much would you bid for the dollar bill?,GAMING AND STRATEGIC DECISIONS,You represent Company A,which is considering acquiring Company T.You pl
6、an to offer cash for all of Company Ts shares,but you are unsure what price to offer.The value of Company T depends on the outcome of a major oil exploration project.If the project succeeds,Company Ts value under current management could be as high as$100/share.Company T will be worth 50 percent mor
7、e under the management of Company A.If the project fails,Company T is worth$0/share under either management.This offer must be made nowbefore the outcome of the exploration project is known.You(Company A)will not know the results of the exploration project when submitting your price offer,but Compan
8、y T will know the results when deciding whether to accept your offer.Also,Company T will accept any offer by Company A that is greater than the(per share)value of the company under current management.You are considering price offers in the range$0/share(i.e.,making no offer at all)to$150/share.What
9、price per share should you offer for Company Ts stock?The typical responseto offer between$50 and$75 per shareis wrong.The correct answer to this problem appears at the end of this chapter.,DOMINANT STRATEGIES,dominant strategy Strategy that is optimal no matter what an opponent does.,Suppose Firms
10、A and B sell competing products and are deciding whether to undertake advertising campaigns.Each firm will be affected by its competitors decision.,DOMINANT STRATEGIES,equilibrium in dominant strategies Outcome of a game in which each firm is doing the best it can regardless of what its competitors
11、are doing.,Unfortunately,not every game has a dominant strategy for each player.To see this,lets change our advertising example slightly.,THE NASH EQUILIBRIUM REVISITED,The Product Choice Problem,Two breakfast cereal companies face a market in which two new variations of cereal can be successfully i
12、ntroduced.,THE NASH EQUILIBRIUM REVISITED,The Beach Location Game,You(Y)and a competitor(C)plan to sell soft drinks on a beach.If sunbathers are spread evenly across the beach and will walk to the closest vendor,the two of you will locate next to each other at the center of the beach.This is the onl
13、y Nash equilibrium.If your competitor located at point A,you would want to move until you were just to the left,where you could capture three-fourths of all sales.But your competitor would then want to move back to the center,and you would do the same.,Beach Location Game,Figure 13.1,THE NASH EQUILI
14、BRIUM REVISITED,*Maximin Strategies,The concept of a Nash equilibrium relies heavily on individual rationality.Each players choice of strategy depends not only on its own rationality,but also on the rationality of its opponent.This can be a limitation.,maximin strategy Strategy that maximizes the mi
15、nimum gain that can be earned.,THE NASH EQUILIBRIUM REVISITED,Maximin Strategies,If Firm 1 is unsure about what Firm 2 will do but can assign probabilities to each feasible action for Firm 2,it could instead use a strategy that maximizes its expected payoff.,Maximizing the Expected Payoff,The Prison
16、ers Dilemma,What is the Nash equilibrium for the prisoners dilemma?,THE NASH EQUILIBRIUM REVISITED,*Mixed Strategies,In this game,each player chooses heads or tails and the two players reveal their coins at the same time.If the coins match,Player A wins and receives a dollar from Player B.If the coi
17、ns do not match,Player B wins and receives a dollar from Player A.,pure strategy Strategy in which a player makes a specific choice or takes a specific action.,Matching Pennies,mixed strategy Strategy in which a player makes a random choice among two or more possible actions,based on a set of chosen
18、 probabilities.,THE NASH EQUILIBRIUM REVISITED,*Mixed Strategies,Jim and Joan would like to spend Saturday night together but have different tastes in entertainment.Jim would like to go to the opera,but Joan prefers mud wrestling.,The Battle of the Sexes,REPEATED GAMES,How does repetition change the
19、 likely outcome of the game?,repeated game Game in which actions are taken and payoffs received over and over again.,REPEATED GAMES,Suppose the game is infinitely repeated.In other words,my competitor and I repeatedly set prices month after month,forever.With infinite repetition of the game,the expe
20、cted gains from cooperation will outweigh those from undercutting.,tit-for-tat strategy Repeated-game strategy in which a player responds in kind to an opponents previous play,cooperating with cooperative opponents and retaliating against uncooperative ones.,Tit-for-Tat Strategy,Infinitely Repeated
21、Game,REPEATED GAMES,Finite Number of Repetitions,Now suppose the game is repeated a finite number of timessay,N months.If my competitor(Firm 2)is rational and believes that I am rational,he will reason as follows:“Because Firm 1 is playing tit-for-tat,I(Firm 2)cannot undercutthat is,until the last m
22、onth.I should undercut the last month because then I can make a large profit that month,and afterward the game is over,so Firm 1 cannot retaliate.Therefore,I will charge a high price until the last month,and then I will charge a low price.”However,since I(Firm 1)have also figured this out,I also pla
23、n to charge a low price in the last month.Firm 2 figures that it should undercut and charge a low price in the next-to-last month.And because the same reasoning applies to each preceding month,the game unravels:The only rational outcome is for both of us to charge a low price every month.,REPEATED G
24、AMES,Tit-for-Tat in Practice,Since most of us do not expect to live forever,the unraveling argument would seem to make the tit-for-tat strategy of little value,leaving us stuck in the prisoners dilemma.In practice,however,tit-for-tat can sometimes work and cooperation can prevail.There are two prima
25、ry reasons.Most managers dont know how long they will be competing with their rivals,and this also serves to make cooperative behavior a good strategy.My competitor might have some doubt about the extent of my rationality.In a repeated game,the prisoners dilemma can have a cooperative outcome.,REPEA
26、TED GAMES,Almost all the water meters sold in the United States have been produced by four American companies.Rockwell International has had about a 35-percent share of the market,and the other three firms have together had about a 50-to 55-percent share.Most buyers of water meters are municipal wat
27、er utilities,who install the meters in order to measure water consumption and bill consumers accordingly.Utilities are concerned mainly that the meters be accurate and reliable.Price is not a primary issue,and demand is very inelastic.Because any new entrant will find it difficult to lure customers
28、from existing firms,this creates a barrier to entry.Substantial economies of scale create a second barrier to entry.The firms thus face a prisoners dilemma.Can cooperation prevail?It can and has prevailed.There is rarely an attempt to undercut price,and each firm appears satisfied with its share of
29、the market.,REPEATED GAMES,In March 1983,American Airlines proposed that all airlines adopt a uniform fare schedule based on mileage.The rate per mile would depend on the length of the trip,with the lowest rate of 15 cents per mile for trips over 2500 miles and the highest rate,53 cents per mile,for
30、 trips under 250 miles.Why did American propose this plan,and what made it so attractive to the other airlines?The aim was to reduce price competition and achieve a collusive pricing arrangement.Fixing prices is illegal.Instead,the companies would implicitly fix prices by agreeing to use the same fa
31、re-setting formula.The plan failed,a victim of the prisoners dilemma.Pan Am,which was dissatisfied with its small share of the U.S.market,dropped its fares.American,United,and TWA,afraid of losing their own shares of the market,quickly dropped their fares to match Pan Am.The price-cutting continued,
32、and fortunately for consumers,the plan was soon dead.,SEQUENTIAL GAMES,As a simple example,lets return to the product choice problem.This time,lets change the payoff matrix slightly.,sequential game Game in which players move in turn,responding to each others actions and reactions.,SEQUENTIAL GAMES,
33、extensive form of a game Representation of possible moves in a game in the form of a decision tree.,The Extensive Form of a Game,Product Choice Game in Extensive Form,Figure 13.2,SEQUENTIAL GAMES,The Advantage of Moving First,THREATS,COMMITMENTS,AND CREDIBILITY,Suppose Firm 1 produces personal computers that can be used both as word processors and to do other tasks.Firm 2 produces only dedicated w
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