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Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 6 credits Lecturer: Dr Alberto Asquer [email protected] Phone: 070 6753399. University of Cagliari, Faculty of Economics, a.a. 2012-13. Lecture 4

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University of cagliari faculty of economics a a 2012 13

Business Strategy and Policy

A course within the II level degree in

Managerial Economics

year II, semester I, 6 credits

Lecturer:

Dr Alberto Asquer

[email protected]

Phone: 070 6753399

University of Cagliari, Faculty of Economics, a.a. 2012-13


Lecture 4 the strategic interaction between firms

Lecture 4

The strategic interaction between firms

Business Strategy and Policy


Introduction

1. Strategic interaction

2. Dominant strategies

3. Nash equilibrium strategies

4. Coordination strategies

5. Coordination and competition (co-opetition)

6. Mixed strategies

7. Sequential strategic games

- - - - - - - - - - - - -

8. Summary

Introduction


Within military field strategy as winning manoeuvring in the battlefield

Within military field, strategy as winning manoeuvring in the battlefield

1. Strategic interaction


1 strategic interaction

Within game theory, strategy as the analysis of strategic interaction

What choice option do rational agents select in order to maximise their payoff, taking into account the choice of other agents?

(in common-sense argumentation, put yourself “behind your rivals' desk” in order to take into account what they do when you make decisions that affect your interests)

Warning: every agents behaves rationally and takes into account the choice of others

(in common-sense argumentation, take into account that also your rivals make decisions taking into account what you do)

1. Strategic interaction


1 strategic interaction1

Game theory: some basic lexicon

Game: the structure of interaction between agents (players). Typically, in a game the payoff of agents depends on the choices made by all agents (i.e. not by one agent alone)

Simultaneous games: agents make choices at the same time (i.e., one agent cannot wait and see the choice made by others)

Sequential games: agents make choices according to a pre-determined sequence (i.e., who chooses later can see what other agents, who chose earlier, did)

Repeated games: agents face again the choice situation over time.

Non repeated games: agents play the game only once.

1. Strategic interaction


1 strategic interaction2

Game theory: some basic lexicon

Dominant strategy: the only choice that an agent rationally does, no matter what other agents do (or did or will do)

Nash equilibrium: a set of strategies where each agent is rationally choosing the best option, given the choice of other agents

1. Strategic interaction


2 dominant strategies

2. Dominant strategies

Firms may choose their course of action irrespective of what other players do

Low

price

B = 500

B = 1,000

A = 500

A = 0

Boeing

B = 0

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project

Airbus


2 dominant strategies1

2. Dominant strategies

Firms may choose their course of action irrespective of what other players do

Low

price

B = 500

B = 1,000

A = 500

A = 0

Boeing

B = 0

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project

Airbus


2 dominant strategies2

2. Dominant strategies

Firms may choose their course of action irrespective of what other players do

Low

price

B = 500

B = 1,000

A = 500

A = 0

Boeing

B = 0

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project

Airbus


3 nash equilibrium strategies

3. Nash equilibrium strategies

But sometimes, firms behave depending on what other firms do

Low

price

B = 500

B = 1,000

A = 500

A = 0

Boeing

B = 600

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project, but

Boeing can earn even if

losing the bid

Airbus


3 nash equilibrium strategies1

3. Nash equilibrium strategies

  • But sometimes, firms behave depending on what other firms do

Low

price

B = 500

B = 1,000

A = 500

A = 0

Boeing

B = 600

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project, but

Boeing can earn even if

losing the bid

Airbus


3 nash equilibrium strategies2

3. Nash equilibrium strategies

  • But sometimes, firms behave depending on what other firms do

Low

price

B = 500

B = 1,000

A = 500

A = 0

?

Boeing

B = 600

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project, but

Boeing can earn even if

losing the bid

Airbus


3 nash equilibrium strategies3

3. Nash equilibrium strategies

Airbus is playing 'low price' anyway (has a dominant strategy)...

Low

price

B = 500

B = 1,000

A = 500

A = 0

Boeing

B = 600

B = 750

High

price

A = 1,000

A = 750

Low

price

High

price

Scenario: bidding for

10 aircrafts project, but

Boeing can earn even if

losing the bid

Airbus


4 coordination strategies

4. Coordination strategies

Sometimes strategy is about cooperation rather than competition

Alpha

B = 100

B = 50

A = 100

A = 50

Boeing

B = 50

B = 100

Beta

A = 50

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Comm technology invest

in

Airbus


4 coordination strategies1

4. Coordination strategies

  • Sometimes strategy is about cooperation rather than competition

Alpha

B = 100

B = 50

A = 100

A = 50

Boeing

B = 50

B = 100

Beta

A = 50

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

Airbus


4 coordination strategies2

4. Coordination strategies

  • Sometimes strategy is about cooperation rather than competition

Alpha

B = 100

B = 50

A = 100

A = 50

Boeing

B = 50

B = 100

Beta

A = 50

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

Airbus


5 collaboration and competition co opetition

5. Collaboration and competition (co-opetition)

Sometimes it is good to cooperate, but every firms has own interests

Alpha

B = 100

B = 40

A = 50

A = 40

Boeing

B = 25

B = 50

Beta

A = 25

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

Airbus


5 collaboration and competition co opetition1

5. Collaboration and competition (co-opetition)

  • Sometimes it is good to cooperate, but every firms has own interests

Alpha

B = 100

B = 40

A = 50

A = 40

Boeing

B = 25

B = 50

Beta

A = 25

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

Airbus


5 collaboration and competition co opetition2

5. Collaboration and competition (co-opetition)

  • Sometimes it is good to cooperate, but every firms has own interests

Alpha

B = 100

B = 40

A = 50

A = 40

Boeing

B = 25

B = 50

Beta

A = 25

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

Airbus


5 collaboration and competition co opetition3

5. Collaboration and competition (co-opetition)

  • Sometimes it is good to cooperate, but every firms has own interests

Alpha

B = 100

B = 40

A = 50

A = 40

Boeing

B = 25

B = 50

Beta

A = 25

A = 100

Alpha

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

Airbus


6 mixed strategies

6. Mixed strategies

Sometimes, there is really no equilibrium

Negative

tones

B = 10

B = -10

A = -10

A = 10

Boeing

B = -10

B = 10

Positive

tones

A = 10

A = -10

Negative

notes

Positive

tones

Scenario: Boeing and

Airbus choose their

advertisement campaign

Airbus


6 mixed strategies1

6. Mixed strategies

Sometimes, there is really no equilibrium

Negative

tones

B = 10

B = -10

A = -10

A = 10

Boeing

B = -10

B = 10

Positive

tones

A = 10

A = -10

Negative

notes

Positive

tones

Scenario: Boeing and

Airbus choose their

advertisement campaign

Airbus


7 sequential strategic game

7. Sequential strategic game

Sometimes, one player chooses before the other

Boeing: 100

Airbus: 50

Alpha

Airbus

Alpha

Boeing: 40

Airbus: 40

Beta

Boeing

Boeing: 25

Airbus: 25

Alpha

Beta

Airbus

Boeing: 50

Airbus: 100

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

– but Boeing chooses first!


7 sequential strategic game1

7. Sequential strategic game

What will Airbus choose?

Boeing: 100

Airbus: 50

Alpha

Airbus

Alpha

Boeing: 40

Airbus: 40

Beta

Boeing

Boeing: 25

Airbus: 25

Alpha

Beta

Airbus

Boeing: 50

Airbus: 100

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

– but Boeing chooses first!


7 sequential strategic game2

7. Sequential strategic game

What does Boeing choose – provided what Airbus will choose?

Boeing: 100

Airbus: 50

Alpha

Airbus

Alpha

Boeing: 40

Airbus: 40

Beta

Boeing

Boeing: 25

Airbus: 25

Alpha

Beta

Airbus

Boeing: 50

Airbus: 100

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

– but Boeing chooses first!


7 sequential strategic game3

7. Sequential strategic game

What does Boeing choose – provided what Airbus will choose?

Boeing: 100

Airbus: 50

Alpha

Airbus

Alpha

Boeing: 40

Airbus: 40

Beta

Boeing

Boeing: 25

Airbus: 25

Alpha

Beta

Airbus

Note: Airbus would really

like to make a credible

threat to choose Beta!

Boeing: 50

Airbus: 100

Beta

Scenario: Boeing and

Airbus choose which

Communication

technology they invest in

– but Boeing chooses first!


8 summary

8. Summary

Main points

Game theory provides a powerful analytic approach to strategic interaction

The approach is especially relevant when the expected performance (payoff) is dependent on the decisions (choices) made by players (firms)

Game theory allows to model a wide range of strategic interactions: competition, cooperation, co-opetition, uncertainty and mixed strategies, and sequential games

It is enlightening for better understanding the interdependencies between firms' decisions (e.g., issues of credible commitments and sequence of moves)


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