Chapter 13 Game Theory and Competitive Strategy Chapter Outline >Gaming and Strategic Decision Dominant Strategies The Nash Equilibrium Revisited Repeated Games Sequential Games Threats,Commitments,and Credibility Entry Deterrence Bargaining Strategy
Chapter 13 Game Theory and Competitive Strategy Chapter Outline ➢ Gaming and Strategic Decision ➢ Dominant Strategies ➢ The Nash Equilibrium Revisited ➢ Repeated Games ➢ Sequential Games ➢ Threats, Commitments, and Credibility ➢ Entry Deterrence ➢ Bargaining Strategy
13.1 Gaming and Strategic Decisions Game-Situation in which players (participants)make strategic decisions that take into account each other's actions and responses. Payoff-Value associated with a possible outcome of a game that generates rewards or benefits for the player. Strategy-Rule or plan of action for playing a game
13.1 Gaming and Strategic Decisions Game - Situation in which players (participants) make strategic decisions that take into account each other’s actions and responses. Payoff -Value associated with a possible outcome of a game that generates rewards or benefits for the player. Strategy - Rule or plan of action for playing a game
Optimal strategy-Strategy that maximizes player's expected payoff. Cooperative game-Game in which participants can negotiate binding contracts that allow them to plan joint strategies. Noncooperative game-Game in which negotiation and enforcement of binding contracts between players are not possible
Optimal strategy - Strategy that maximizes player’s expected payoff. Cooperative game - Game in which participants can negotiate binding contracts that allow them to plan joint strategies. Noncooperative game - Game in which negotiation and enforcement of binding contracts between players are not possible
13.2 Dominant Strategies Dominant strategy-Strategy that is optimal no matter what an opponent does. Equilibrium in dominant strategies-Outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing
13.2 Dominant Strategies Dominant strategy - Strategy that is optimal no matter what an opponent does. Equilibrium in dominant strategies - Outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing
Payoff Matrix for Advertising Game Firm B Advertise Don't advertise Advertise 10,5 15,0 FirmA Don't advertise 6,8 10,2
10, 5 15, 0 6, 8 10, 2 Firm B Advertise Don’t advertise Firm A Advertise Don’t advertise Payoff Matrix for Advertising Game
Modified Advertising Game Firm B Advertise Don't advertise Advertise 10,5 15,0 FirmA Don't advertise 6,8 20,2
10, 5 15, 0 6, 8 20, 2 Firm B Advertise Don’t advertise Firm A Advertise Don’t advertise Modified Advertising Game
13.3 The Nash Equilibrium Revisited Nash equilibrium-Set of strategies or actions in which each firm does the best it can given its competitors'actions. Each firm has no incentive to change its decision. Comparison of Nash equilibrium with an equilibrium in dominant strategies Equilibrium in I'm doing the best I can no matter what you do. Dominant Strategies You're doing the best you can no matter what I do. Nash equilibrium I'm doing the best I can given what you are doing. You're doing the best you can given what I am doing
13.3 The Nash Equilibrium Revisited Nash equilibrium - Set of strategies or actions in which each firm does the best it can given its competitors’ actions. Each firm has no incentive to change its decision. Comparison of Nash equilibrium with an equilibrium in dominant strategies Equilibrium in Dominant Strategies I’m doing the best I can no matter what you do. You’re doing the best you can no matter what I do. Nash equilibrium I’m doing the best I can given what you are doing. You’re doing the best you can given what I am doing
Product Choice Problem Firm 2 Crispy Sweet Crispy -5,-5 10,10 Firm 1 Sweet 10,10 -5,-5
-5, -5 10, 10 10, 10 -5, -5 Firm 2 Crispy Sweet Firm 1 Crispy Sweet Product Choice Problem
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 only Nash equilibrium
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 only Nash equilibrium
If your competitor located at point A,you would want to move until you were just to her 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
If your competitor located at point A, you would want to move until you were just to her 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