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Chapter 9: Economics of Strategy: Game theory. Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture , 4th ed. Game theory learning objectives. Structure a simple game in both matrix and tree formats Specify a simple game Identify Nash equilibria

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Chapter 9: Economics of Strategy: Game theory


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chapter 9 economics of strategy game theory

Chapter 9: Economics of Strategy:Game theory

Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 4th ed.

game theory learning objectives
Game theorylearning objectives
  • Structure a simple game in both matrix and tree formats
  • Specify a simple game
  • Identify Nash equilibria
  • Identify dominant strategies
game theory overview
Game theory overview
  • General analysis of strategic interaction
  • Optimal decision making when
    • all decision agents are presumed rational
    • each attempts to anticipate actions of rivals
simultaneous move non repeated interaction
Simultaneous-move,non-repeated interaction
  • Simultaneous?
    • Rivals must make decisions with no knowledge of each other’s decisions
  • Nonrepeated?
    • The interaction occurs only once
example
Example
  • Boeing and Airbus individually choose and simultaneously submit a bid price (high or low) for 10 planes
  • Each cell entry represents the payoffs
  • A dominant strategy is one the firm chooses no matter what its rival does
nash equilibrium revisited
Nash equilibriumrevisited
  • In the absence of a dominant strategy, Nash equilibrium may predict outcome
  • Nash equilibrium is set of strategies where firm does its best given rival’s actions
  • Use arrow technique to identify Nash equilibrium
competition versus cooperation
Competition versus cooperation
  • Boeing and Airbus make simultaneous choices of new communications systems
    • two technologies: Alpha & Beta
    • both benefit with same choice
  • Results in two Nash equilibria
    • benefits from pre-commitment communication
mixed strategies
Mixed strategies
  • Mixed strategy offers an element of surprise
  • Boeing and Airbus must simultaneously commit to an advertising campaign
    • Boeing benefits most from same strategy
    • Airbus benefits most from differentiation
  • Randomization with p=.5 is Nash equilibrium for both
sequential interactions
Sequential interactions
  • Boeing & Airbus communications technology choice
    • Boeing chooses first
  • Analyze with backward induction
    • Boeing must take Airbus’s best response into account in making its choice
    • Boeing has first mover advantage
  • Credible commitment by second mover can alter first mover choice
repeated strategic interaction
Repeated strategic interaction
  • Boeing and Airbus compete often
  • Strategic choices can come to incorporate more than short-term payoffs
strategic interaction and organizational architecture
Strategic interaction and organizational architecture
  • Kiana manages Lenin
  • Len must choose between working and shirking
  • Kiana must choose whether to incur monitoring costs
  • No pure strategy equilibrium exists