Strategic Corporate Management 45-870. Professor Robert A. Miller Fourth Mini 2014 Teaching assistant: John Gardner: [email protected] Preamble.
. . . to help you make better strategic decisions.
We begin this course by laying out the four basic questions of every strategic situation. Then we define the extensive form, and explain: what we mean by the empirical distribution of moves, what is a best response (to that distribution for example), and the concept of dominance.
After struggling through the Great Depression of the 1930s Pepsi finds its soft drink sales are stalled in the 1940s.
Coke is the industry leader, and its products command a premium price over Pepsi’s.
The country is at war, but remains segregated along racial lines, with blacks economically and socially disadvantaged.
Management at Pepsi
White cola demanders
Black cola demanders
Pepsi could target its product line to African American consumers, Pepsi could target a new product line to African American consumers, or Pepsi could pursue another strategy, such as expanding its operations in Canada.
Coke could respond aggressively or passively to any marketing initiative taken by Pepsi.
White consumers might be alienated by a marketing campaign that targets African American consumers.
If Coke responds to an advertising campaign both firms will sell more cola in return for lower profits.
If Coke does not respond to Pepsi, how much value will be added or lost to each company?
If the white community is alienated by both companies targeting the African American community, would Coke be hurt more than Pepsi?
Will white cola drinkers be alienated by the introduction of a marketing campaign that targets the African American community?
If both companies target blacks, the probability of alienating whites is higher than if only Pepsi does.
Moreover as the company with the bigger white market share, Coke has more to lose in this case.
Who are the players?
What are their potential moves?
What is their information?
How do they value the outcomes?
10 years ago Ware received a patent for Dentosite that has since captured 60 percent share in the market. National had been the largest supplier of material for dental prosthetics before Dentosite was introduced.
A new material FR 8420 was recently developed by NASA.
If Ware develops a new composite with FR 8420 it will be a perfect substitute for Dentosite.
If the technique is feasible then Ware would have just as good a chance as National of proving it first.
If Ware develops it first they could extend the patent protection to this technique and prevent any competitors.
Ware’s problem is bound to National’s.
Ware does not want to develop a technology that would not be used if the competitor does not develop it.
If National develops the technology Ware cannot afford to drop out of the race.
It all depends how people at National see this situation. Are Ware and National equally as well informed?
Using the facts we can present the case in the following diagram:
Folding back the moves of chance that are related to developing a new technology we obtain the following simplification.
-0.401*p + 1.106*(1 – p)
-0.401*p + 1.106*(1 – p) = 0
=> p = 0.734
-2.462*q - 0.955*(1 – q)
2.462*q + 0.955*(1 – q) = 3.015*q
=> q = .633
Play a best response to the empirical distribution as best you understand it.
In many situations, you must decide all your moves without knowing what your rivals are doing, and their situations are similar to yours.
Even if the moves are not literally taking place at the same moment, but all the moves must be made before anybody can react, the moves are effectively simultaneous.
A game where no player can make a choice that depends on the moves of the other players is called a simultaneous move game.
The Ware case is an example of a simultaneous move game.
Campeau made an unconditional two tier offer. The price paid per share would depend on what fraction of the company Campeau was offered.
If Campeau got less than half, it would pay 105 per share. If it got more than half, it would pay 105 on the first half of the company, and 90 on any remaining shares.
Each share tendered would receive a blend of these two prices so that every share received the average price paid. If a percentage x > 50 of the company is tendered, then 50/x of them get 105, and (1 - 50/x) of them get 90 for a blended price of:
105* 50/x + 90(1 - 50/x) = 90 + 15(50/x).
Macy's offer was conditional at a price of 102 per share: it offered to pay 102 for each share tendered, but only if at least 50% of the shares were tendered to it.
Note that if everyone tenders to Macy's, they receive 102 per share, while if everyone tenders to Campeau, they receive 97.50. so, shareholders are collectively better off tendering to Macy's than to Campeau.
After the offers are made, Federated shareholders play an acceptance/rejection game.
Each shareholder asks what proportion of their shares should be:
sold to Macy’s
sold to Campeau’s
Note the payoffs received by each shareholder depend on what the other shareholders do.
Shareholders are better off as a group tendering to Macy’s, but each individual shareholder is better off tendering to Campeau, regardless of what the other players do.
Strategies that are optimal for a player regardless of whether the other players play rationally or not are called dominant.
If a dominant strategy is unique, it is called strictly dominant.
Although a player's payoff might depend on the choices of the other players, when a dominant strategy exists, the player has no reason to introspect about the objectives of the other players in order to make his own decision. He should simply play the dominant strategy.
A dominant response is always a best response to the empirical distribution. Therefore if you have a dominant response, you should play it.