MANAGERIAL ECONOMICS 12th Edition

1. MANAGERIAL ECONOMICS12th Edition By Mark Hirschey

2. Game Theory and Competitive Strategy Chapter 14

3.  Chapter 14 OVERVIEW Game Theory Basics Prisoner’s Dilemma Nash Equilibrium Infinitely Repeated Games Finitely Repeated Games Game Theory and Auction Strategy Competitive Strategy Pricing Strategies Non-price Competition

4. Chapter 14KEY CONCEPTS game theory zero-sum game positive-sum game negative-sum game cooperative game sequential game look ahead and extrapolate back simultaneous-move game equilibrium outcome game-theory strategy payoff matrix Prisoner’s Dilemma one-shot game repeated game dominant strategy secure strategy Nash equilibrium randomized strategies Nash bargaining infinitely repeated game finitely repeated game trigger strategy end-of-game problem multistage games first-mover advantage English auction winner’s curse sealed bid auction Vickrey auction Dutch auction competitive advantage comparative advantage limit pricing predatory pricing customer lock-in effect network externalities market penetration pricing non-price competition

5. Game Theory Basics Types of Games Zero-sum game: offsetting gains/losses. Positive sum game: potential for mutual gain. Negative-sum game: potential for mutual loss. Cooperative games: joint action is favored. Role of Interdependence Sequential games involve successive moves. Simultaneous-move games incorporate coincident moves.

6. Prisoner’s Dilemma Classic Riddle Rational individual behavior can give suboptimal group result. Rationality can hamper beneficial cooperation. Business Application Dominant strategy gives best result regardless of moves by other players. Secure strategy gives best result assuming the worst possible scenario.

7. Nash Equilibrium Nash Equilibrium Concept Neither player can improve their payoff through a unilateral change in strategy. Nash equilibrium concept is broader than the concept of a dominant strategy equilibrium. Every dominant strategy equilibrium is also a Nash equilibrium. Nash equilibrium can exist where there is no dominant strategy equilibrium. Nash Bargaining Any haggling over valued item.

8. Infinitely Repeated Games Role of Reputation Infinitely repeated games occur over and over again without boundary or limit. Firms receive sequential payoffs that shape current and future strategies. Reputations for high quality give consumers confidence for repeat transactions. Product Quality Games In a one-shot game, poor quality can fool customers. In an infinitely repeated game, poor quality is shunned by customers.

9. Finitely Repeated Games Uncertain Final Period Finitely repeated games have limited duration. With end point uncertainty, a finitely repeated game mirrors an infinitely repeated game. End-of-game Problem Enforcing end-of-game performance is difficult. Solution: simply extend the game! First-mover Advantages Benefits earned by the player able to make the initial move in a sequential move or multistage game.

10. Competitive Strategy Basic Concepts Effective competitive strategy involves search for uniquely attractive products. Competitive Advantage Unique or rare ability to create, distribute, or service products valued by customers. Business-world analog to national comparative advantage. When Large Size Is a Disadvantage Nimble firms sometimes translate the benefits of small size into a distinct competitive advantage.

11. Game Theory and Auction Strategy Auction Types English auction winner is the highest public bidder. Sealed-bid auction winner is the highest secret bidder. Vickrey auction winner pays the second-highest sealed bid. Dutch auction winner is the first party willing to pay the auctioneer’s price Public Policy Implications Auctions are a proven tool for marketing public resources. Winners sometimes overpay (“winner’s curse”).