Game Theory and Competitive Strategy

Chapter 13
Game Theory and Competitive Strategy
Topics to be Discussed
Gaming and Strategic Decisions
Dominant Strategies
The Nash Equilibrium Revisited
Repeated Games
2005 Pearson Education, Inc.
Chapter 13
Topics to be Discussed
Sequential Games
Threats, Commitments, and Credibility

Entry Deterrence
Bargaining Strategy
Auctions
Chapter 13

Game is any situation in which players (the participants) make strategic decisions
Ex: firms competing with each other by setting prices, group of consumers bidding against each other in an auction
Strategic decisions result in payoffs to the players: outcomes that generate rewards or benefits
2005 Pearson Education, Inc. Chapter 13 4

Game theory tries to determine optimal strategy for each player Strategy is a rule or plan of action for playing the game Optimal strategy for a player is one that maximizes the expected payoff We consider players who are rational they think through their actions

If I believe that my competitors are rational and act to maximize their own profits, how should I take their behavior into account when making my own profitmaximizing decisions?(Text, p. 474)
Chapter 13
Noncooperative vs. Cooperative Games

Cooperative Game
Players negotiate binding contracts that allow them to plan joint strategies
Example:
Buyer and seller negotiating the price of a good or service or a joint venture by two firms (i.e., Microsoft and Apple) Binding contracts are possible
Chapter 13

Noncooperative Game
Negotiation and enforcement of binding contracts between players is not possible
Example:
Two competing firms, assuming the others behavior, independently determine pricing and advertising strategy to gain market share Binding contracts are not possible
Chapter 13

The strategy design is based on understanding your opponents point of view, and (assuming your opponent is rational) deducing how he or she is likely to respond to your actions. (Text, p. 475)
Chapter 13

An Example: How to buy a dollar bill
1. Auction a dollar bill 2. Highest bidder receives the dollar in return for the amount bid 3. Second highest bidder must pay the amount he or she bid but gets nothing in return 4. How much would you bid for a dollar?
Typically bid more for the dollar when faced with loss as second highest bidder
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10
Acquiring a Company
Scenario
Company A: The Acquirer Company T: The Target A will offer cash for all of Ts shares
The value and viability of T depends on the outcome of a current oil exploration project
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11
Acquiring a Company
Project failure: Ts value = $0 Project success: Ts value = $100/share All outcomes in between equally likely Ts value will be 50% greater with As management
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12
Acquiring a Company
Scenario
A must submit the proposal before the exploration outcome is known T will not choose to accept or reject until after the outcome is known only to T Company T will accept any offer that is greater than the per share value of the company under current management
How much should A offer?

Dominant Strategies
Dominant Strategy is one that is optimal no matter what an opponent does
An Example
A
and B sell competing products They are deciding whether to undertake advertising campaigns
Chapter 13
14
Payoff Matrix for Advertising Game

Firm B Advertise
Dont Advertise
Advertise
10, 5
15, 0
Dont Advertise
6, 8
10, 2
Chapter 13
15

Observations
A: regardless of B, advertising is the best B: regardless of A, advertising is best
Advertise Firm A Firm B Dont Advertise Advertise
10, 5
15, 0
Dont Advertise
6, 8
10, 2
Chapter 13
16

Observations
Dominant strategy for A and B is to advertise Do not worry about the other player Advertise Equilibrium in dominant strategy
Firm A Dont Advertise Firm B Dont Advertise Advertise
10, 5
15, 0
6, 8
10, 2
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17
Dominant Strategies
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 Optimal strategy is determined without worrying about the actions of other players
However, not every game has a dominant strategy for each player
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18
Dominant Strategies
Game Without Dominant Strategy
The optimal decision of a player without a dominant strategy will depend on what the other player does Revising the payoff matrix, we can see a situation where no dominant strategy exists
Chapter 13
19
Modified Advertising Game

Firm B Advertise Dont Advertise
Advertise
10, 5
15, 0
Dont Advertise
6, 8
20, 2
Chapter 13
20
Modified Advertising Game

Observations
A: No dominant strategy; depends on Bs actions B: Dominant strategy is to advertise Firm A determines Bs dominant strategy and makes its decision accordingly
Advertise Firm A Dont Advertise
Firm B Dont Advertise Advertise
10, 5
15, 0
6, 8
20, 2
Chapter 13
21

A dominant strategy is stable, but in many games one or more party does not have a dominant strategy A more general equilibrium concept is the Nash Equilibrium introduced in Chapter 12
A set of strategies (or actions) such that each player is doing the best it can given the actions of its opponents

None of the players have incentive to deviate from its Nash strategy, therefore it is stable
In the Cournot model, each firm sets its own price assuming the other firms outputs are fixed. Cournot equilibrium is a Nash Equilibrium.
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Dominant Strategy
Im doing the best I can no matter what you do. Youre doing the best you can no matter what I do.
Nash Equilibrium
Im doing the best I can given what you are doing. Youre doing the best you can given what I am doing.
Dominant strategy is a special case of Nash equilibrium


Two cereal companies face a market in which two new types of cereal can be successfully introduced, provided each type is introduced by only one firm Product Choice Problem
Market for one producer of crispy cereal Market for one producer of sweet cereal Each firm only has the resources to introduce one cereal Noncooperative
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Product Choice Problem

Firm 2 Crispy Sweet
Crispy
-5, -5
10, 10
Sweet
10, 10
-5, -5
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Product Choice Problem

Firm 2
If Firm 1 hears Firm 2 is introducing a new sweet cereal, its best action is to make crispy Bottom left corner is Nash equilibrium What is other Nash Equilibrium?
Crispy
Sweet
Crispy Firm 1 Sweet
-5, -5
10, 10
10, 10
-5, -5
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27
Beach Location Game

Scenario
Two competitors, Y and C, selling soft drinks Beach is 200 yards long Sunbathers are spread evenly along the beach Price Y = Price C Customer will buy from the closest vendor
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28
Beach Location Game

Ocean
C
Beach
200 yards
Where will the competitors locate (i.e., where is the Nash equilibrium)? Will want to all locate in center of beach
Similar to groups of gas stations, car dealerships, etc.

Maximin Strategies - Scenario
Two firms compete selling file encryption software They both use the same encryption standard (files encrypted by one software can be read by the other - advantage to consumers) Firm 1 has a much larger market share than Firm 2 Both are considering investing in a new encryption standard
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Maximin Strategy
Firm 2
Dont invest Invest
Dont invest
0, 0
-10, 10
Firm 1
Invest
-100, 0
20, 10
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Maximin Strategy
Observations
Dominant strategy Firm 2: Invest Firm 1 should expect Firm 2 to invest Nash equilibrium Firm 1: invest Firm 2: Invest This assumes Firm 2 understands the game and is rational
Firm 2 Dont invest
Invest
Dont invest Firm 1
0, 0
-10, 10
Invest
-100, 0
20, 10
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Maximin Strategy
Observations
If Firm 2 does not invest, Firm 1 incurs significant losses Firm 1 might play dont invest Minimize losses to 10 maximin strategy
Firm 2 Dont invest
Invest
Dont invest Firm 1
0, 0
-10, 10
Invest
-100, 0
20, 10
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Maximin Strategy
If both are rational and informed
Both firms invest Nash equilibrium
If Player 2 is not rational or completely informed

Firm 1s maximin strategy is to not invest Firm 2s maximin strategy is to invest If 1 knows 2 is using a maximin strategy, 1 would invest
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Maximin Strategy
If Firm 1 is unsure about what Firm 2 will do, it can assign probabilities to each possible action
Could use a strategy that maximizes its expected payoff Firm 1s strategy depends critically on its assessment of probabilities for Firm 2
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35
Prisoners Dilemma
Prisoner B
Confess Dont Confess
Confess
-5, -5
-1, -10
Dont Confess
-10, -1
-2, -2
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Prisoners Dilemma
What is the:
Dominant strategy Nash equilibrium Maximin solution
Prisoner B
Confess Dont Confess
Dominant strategies Confess are also maximin strategies Both confess is both Prisoner A Dont Nash equilibrium and Confess maximin solution
-5, -5
-1, -10
-10, -1
-2, -2
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37
Mixed Strategy
Pure Strategy
Player makes a specific choice or takes a specific action
Mixed Strategy
Player makes a random choice among two or more possible actions, based on a set of chosen probabilities
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38
Matching Pennies
Player B Heads Tails
Heads
1, -1
-1, 1
Tails
-1, 1
1, -1
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Matching Pennies
Pure strategy: No Nash equilibrium
No combination of head and tails leaves both players better off
Heads Player A Tails Player B Heads Tails
1, -1
-1, 1
Mixed strategy: Random choice is a Nash equilibrium
-1, 1
1, -1
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Matching Pennies
Player A might flip coin playing heads with probability and tails with probability If both players follow this strategy, there is a Nash equilibrium both players will be doing the best they can given what their opponent is doing Although the outcome is random, the expected payoff is 0 for each player
Mixed Strategy
One reason to consider mixed strategies is when there is a game that does not have any Nash equilibriums in pure strategy When allowing for mixed strategies, every game has a Nash equilibrium Mixed strategies are popular for games like poker A firm might not find it reasonable
The Battle of the Sexes

Joan
Wrestling Opera
Wrestling
2,1
0,0
Jim
Opera
0,0
1,2
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The Battle of the Sexes

Pure Strategy
Both watch wrestling Both watch opera
Joan
Wrestling Opera
Mixed Strategy
Jim chooses wrestling Joan chooses wrestling
Wrestling
2,1
0,0
Jim
Opera
0,0
1,2
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44
Repeated Games
Game in which actions are taken and payoffs are received over and over again Oligopolistic firms play a repeated game With each repetition of the Prisoners Dilemma, firms can develop reputations about their behavior and study the behavior of their competitors
Chapter 13
45
Pricing Problem
Firm 2
Low Price High Price
Low Price
10, 10
100, -50
Firm 1
High Price
-50, 100
50, 50
Chapter 13
46
Pricing Problem
How does a firm find a strategy that would work best on average against all or almost all other strategies? Tit-for-tat strategy
Repeated game strategy in which a player responds in kind to an opponents previous play, cooperating with cooperative opponents and retaliating against uncooperative ones
Chapter 13
47
Tit-for-Tat Strategy
What if the game is infinitely repeated?
Competitors repeatedly set price every month, forever Tit-for-tat strategy is rational
If
competitor charges low price and undercuts firm Will get high profits that month but know I will lower price next month Both of us will get lower profits if keep undercutting, so not rational to undercut
What if repeated a finite number of times?
If both firms are rational, they will charge high prices until the last month After the last month, there is no retaliation possible But in the month before last month, knowing that will charge low price in last month, will charge low price in month before Keep going and see that only rational outcome is for both firms to charge low price every month
Chapter 13
49
If firms dont believe their competitors are rational or think perhaps they arent, cooperative behavior is a good strategy Most managers dont know how long they will be competing with their rivals In a repeated game, prisoners dilemma can have cooperative outcome
Chapter 13
50
Repeated Games
Conclusion
Cooperation is difficult at best since these factors may change in the long run Need a small number of firms Need stable demand and cost conditions
This
could lead to price wars if dont have them
Chapter 13
51
Oligopolistic Cooperation in the Water Meter Industry

Characteristics of the Market
Four producers of water meters
Rockwell
International Badger Meter Neptune Water Meter Company Hersey Products Rockwell has about 35% of market share Badger, Neptune, and Hersey combined have about a 50 to 55% share
Chapter 13
52

Most buyers are municipal water utilities Very inelastic demand
Not a significant part of the budget for providing water
Demand is stable
Demand grows steadily with population
Utilities have long-standing relationships with suppliers

Reluctant to switch

Significant economies of scale Both long term relationship and economies of scale represent barriers to entry
Hard for new firms to enter market
If firms were to cooperate, could earn significant monopoly profits If compete aggressively to gain market share, profits will fall to competitive levels

This is a Prisoners Dilemma what should the firms do?
Lower price to a competitive level Cooperate
Companies have been playing repeated game for decades Cooperation has prevailed given market characteristics
Sequential Games
Players move in turn, responding to each others actions and reactions
Ex: Stackelberg model (ch. 12) Responding to a competitors ad campaign Entry decisions Responding to regulatory policy
Chapter 13
56
Sequential Games
Going back to the product choice problem
Two new (sweet, crispy) cereals Successful only if each firm produces one cereal Sweet will sell better Both still profitable with only one producer
Chapter 13
57
Modified Product Choice Problem

If firms both announce their decisions independently and simultaneously, they will both pick sweet cereal and both will lose money What if Firm 1 sped up production and introduced new cereal first?
Now there is a sequential game Firm 1 will think about what Firm 2 will do
Chapter 13
58
Modified Product Choice Problem

Firm 2
Crispy Sweet
Crispy
-5, -5
10, 20
Sweet
20, 10
-5, -5
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59
Extensive Form of a Game

Extensive Form of a Game
Representation of possible moves in a game in the form of a decision tree
Allows one to work backward from the best outcome for Firm 1
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60
Product Choice Game in Extensive Form

Crispy Crispy Firm 1 Sweet Firm 2 Sweet -5, -5 Firm 2 -5, -5
Sweet
Crispy
10, 20
20, 10
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61
Sequential Games
The Advantage of Moving First
In this product-choice game, there is a clear advantage to moving first The first firm can choose a large level of output, thereby forcing second firm to choose a small level Can show the firms mover advantage by revising the Stackelberg model and comparing to Cournot
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62
First Mover Advantage

Assume: Duopoly
P 30 Q Q TotalProduction Q1 Q2 MC 0 Cournot : Q1 Q2 10 and P 10 100 / Firm

First Mover Advantage

Duopoly
With Collusion Q1 Q2 7.5 and P 15 112.50 / Firm Firm Moves First (Stackelberg) Q1 15 Q2 7.5 and P 7.50
1 112.50
2 56.25
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Choosing Output
Firm 2 7.5 10
93.75, 125
15
56.25, 112.50
7.5 112.50, 112.50

Firm 1 10
125, 93.75
100, 100
50, 75
15 112.50, 56.25
75, 50
0, 0
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Choosing Output
This payoff matrix illustrates various outcomes

Firm 2 7.5 10 15
Move together, both produce 10 If Firm 1 moves first (Q=15), best Firm 2 can do is 7.5
7.5 112.50, 112.50
93.75, 125
56.25, 112.50
Firm 1
10
125, 93.75
100, 100
50, 75
15 112.50, 56.25
75, 50
0, 0
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Strategic Moves
What actions can a firm take to gain advantage in the marketplace?
Deter
entry Induce competitors to reduce output, leave, raise price Implicit agreements that benefit one firm
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Strategic Move
Action that gives a player an advantage by constraining his behavior Firm 1 must constrain his behavior to the extent Firm 2 is convinced that he is committed
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68

How to Make the First Move
Demonstrate Commitment Firm 1 must do more than announce they will produce sweet cereal
Invest
in expensive advertising campaign Buy large order of sugar and send invoice to Firm 2
Commitment must be enough to induce Firm 2 to make the decision Firm 1 wants it to make
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Empty Threats
If a firm will be worse off if it charges a low price, the threat of a low price is not credible in the eyes of the competitors When firms know the payoffs of each others actions, firms cannot make threats the other firm knows they will not follow In our example, Firm 1 will always charge high price and Firm 2 knows it
Chapter 13
70
Pricing of Computers and Word Processors

Firm 2
High Price Low Price
High Price
100, 80
80, 100
Firm 1
Low Price
20, 0
10, 20
Chapter 13
71

Sometimes firms can make credible threats Scenario
Race Car Motors, Inc. (RCM) produces cars Far Out Engines (FOE) produces specialty car engines and sells most of them to RCM Sequential game with RCM as the leader FOE has no power to threaten to build big engines since RCM controls output
Production Choice Problem

Race Car Motors Small cars Big cars
Small engines
3, 6
3, 0
Far Out Engines

Big engines
1, 1
8, 3
Chapter 13
73

RCM does best by producing small cars Knows that Far Out will then produce small engines Far Out prefers to make big engines Can Far Out induce Race Car to produce big cars instead?
Chapter 13
74

Suppose Far Out threatens to produce big engines no matter what RCM does?
Not credible since once RCM announces they are producing small cars, FOE will not have incentive to carry out threat Can make threat credible by altering pay off matrix by constraining its own choices
Shutting
down or destroying some small engine production capacity
Chapter 13
75
Modified Production Choice Problem

Race Car Motors
Small cars Big cars
Small engines
0, 6
0, 0
Far Out Engines

Big engines
1, 1
Chapter 13
8, 3
76
Modified Production Choice Problem

Strategic commitments can be effective but not without risk
Rely heavily on accurate knowledge of payoff matrix and industry May have competitors out there that they dont know about and lose sales
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77
Role of Reputation
If Far Out gets the reputation of being irrational
They threaten to produce large engines no matter what Race Car does
Threat might be credible because irrational people dont always make profit maximizing decisions A party thought to be crazy can lead to a significant advantage
Bargaining Strategy
Bargaining situation can depend on ability to affect relative bargaining position Consider two firms introducing one of two complementary goods:
Firm 1 has cost advantage in Good A Firm 2 has cost advantage in Good B
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Bargaining Strategy
Firm 2
Produce A Produce B
Produce A
40, 5
50, 50
Firm 1
Produce B
60, 40
Chapter 13
5, 45
80
Bargaining Strategy
With collusion:
Firm 1 Produces A and Firm 2 produces B (50,50)
Firm 2
Produce A Produce B
Without collusion:
Produce A
Firm 1 produces A and Firm 2 produces Firm 1 B (50,50) Produce B Nash equilibrium
40, 5
50, 50
60, 40
5, 45
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Bargaining Strategy
Suppose each firm is also bargaining on the decision to join in a research consortium with a third firm Dominant strategy is for both firms to enter consortium
Chapter 13
82
Bargaining Strategy
Firm 2
Work alone Enter consortium
Work alone
10, 10
10, 20
Firm 1
Enter consortium
20, 10
Chapter 13
40, 40
83
Bargaining Strategy
Linking the Bargaining Problem
Firm 1 announces it will join the consortium only if Firm 2 agrees to produce A and Firm 1 will produce B Firm 2s best interest is to produce A with Firm 1 producing B
Firm
1s profit increases from 50 to 60
Chapter 13
84
Bargaining Strategy
Strategic moves can be used in bargaining Combining issues in bargaining can benefit one side at others expense
Chapter 13
85
Wal-Mart Stores Preemptive Investment Strategy

How did Wal-Mart become the largest retailer in the U.S. when many established retail chains were closing their doors?
Gained monopoly power by opening in small towns with no threat of other discount competition Preemptive game with Nash equilibrium
Chapter 13
86
The Discount Store Preemption Game

Company X
Enter Dont enter
Enter
-10, -10
20, 0
Wal-Mart
Dont enter
0, 20
0, 0
Chapter 13
87
The Discount Store Preemption Game

Two Nash equilibrium
Low left Upper right
Company X
Enter Enter Dont enter
Must be preemptive to win
-10, -10 0, 20
20, 0 0, 0
Wal-Mart
Dont enter
Chapter 13
88
Entry Deterrence
Barriers to entry important for monopoly power
Economies of scale, patents and licenses, access to critical inputs Firms can also deter entry
To deter entry, the incumbent firm must convince any potential competitor that entry will be unprofitable
Chapter 13
89
Entry Possibilities
Potential Entrant (X) ($80 fixed costs)
Enter Stay out
High price
(accommodation)
100, 20
200, 0
Incumbent (I)
Low Price
(warfare)
70, -10
Chapter 13
130, 0
90
Entry Deterrence
Scenario
If X does not enter, I makes a profit of $200 million If X enters and charges a high price, I earns a profit of $100 million and X earns $20 million If X enters and charges a low price, I earns a profit of $70 million and X earns $-10 million
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91
Entry Deterrence
Could threaten X with warfare if enters market
Not credible because once X has entered, it is in your best interest to accommodate and maintain high price
Chapter 13
92
Entry Deterrence
What if firm I makes an investment before entry to increase capacity?
Irrevocable commitment
Gives new payoff matrix since profits will be reduced by investment Threat is completely credible Rational for Firm X to stay out of market
Chapter 13
93
Entry Deterrence
Potential Entrant (X)
Enter Stay out
High price
(accommodation)
50, 20
150, 0
Incumbent (I)
Low price
(warfare)
70, -10
130, 0
Chapter 13
94
Entry Deterrence
If incumbent has reputation of price cutting competitors even at loss, then threat will be credible Short run losses may be offset by long run gains as monopolist
Chapter 13
95
Entry Deterrence
Production of commercial airlines exhibit significant economies of scale Airbus and Boeing considering new aircraft Suppose it is not economical for both firms to produce the new aircraft
Chapter 13
96
Development of a New Aircraft

Airbus
Produce Dont produce
Produce
-10, -10
100, 0
Boeing
Dont produce
0, 120
0, 0
Chapter 13
97

Boeing has head start Boeing will produce Airbus will not Produce produce
Boeing
Dont produce
Airbus
-10, -10
100, 0
0, 120
0, 0
Chapter 13
98

Governments can change outcome of game European government agrees to subsidize Airbus before Boeing decides to produce With Airbus being subsidized, the payoff matrix for the two firms would differ significantly
Development of an Aircraft After European Subsidy

Airbus
Produce
-10, 10
100, 0
Boeing
Dont produce
0, 120
0, 0
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100
Development of an Aircraft After European Subsidy

Airbus will produce Boeing will not produce
Produce
Airbus
-10, 10
100, 0
Boeing
Dont produce
0, 120
0, 0
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101
Diaper Wars
Even though there are only two major firms, competition is intense The competition occurs mostly in the form of cost-reducing innovation Small cost savings can lead to capturing of market share Both firms spend significantly on R&D
Chapter 13
102
Competing Through R & D

Kimberly-Clark
R&D No R&D
R&D
40, 20
80, -20
P&G
No R&D
-20, 60
Chapter 13
60, 40
103
Competing Through R & D

Both spend on R&D
Dominant strategy
Why not cooperate? Strengthening Bargaining Power

Credibility Reducing flexibility
Kimberly-Clark
R&D No R&D
R&D
40, 20
80, -20
P&G
No R&D
-20, 60
60, 40
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104
Auctions
Markets in which products are bought and sold through formal bidding processes
Encourages competition that increases sellers revenue Low cost of transactions Useful for unique items or those with fluctuating value
Tokyo
fish market
Chapter 13
105
Auction Formats
1. Traditional English (oral)
Seller actively solicits progressively higher bids from a group of potential buyers Buyers are always aware of highest bid Stops when no one passes highest bid
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106
Auction Formats
2. Dutch auction
Seller begins by offering item at relatively high price, then reduces it by fixed amounts until item is sold First buyer accepting offered price can buy item at that price
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107
Auction Formats
3. Sealed-bid
All bids are made simultaneously in sealed envelopes, where winning bid is the one who submitted highest bid A. First price
Sales price equals highest bid Sales price equals second highest bid
B. Second price
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108
Valuation and Information

How to choose an auction format
1. Private-value auction bidder knows individual valuations of object, but valuations differ from bidder to bidder
Signed baseball
2. Common-value auction: bidders uncertain what the value is
Offshore oil reserve
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109
Price-Value Auctions
Each bidder must choose bidding strategy Payoff for winning is reservation price minus price paid Payoff for losing is zero
Chapter 13
110
Private Value Auction

English oral auction and secondprice sealed bid auctions
Bidding truthfully is dominant strategy Pay based on value of second highest bidder so no incentive not to bid reservation price Risk to bidding higher than reservation price
Chapter 13
111
Private Value Auctions

English auction
Continue bidding until second person is unwilling to make bid
Sealed-bid auction
Winning bid approximately equal to the second highest bidders reservation price
Both yield the same revenue
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112
Common Value Auctions

Winners Curse
The winner is worse off because they overestimated the value of the item and thereby overbid Must reduce bid by amount equal to the expected error of the winning bidder If a lot of variation in other bidders, then estimates are fairly imprecise
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113
Maximizing Auction Revenue

1. Private Value Auction
Encourages many bidders to increase expected bid of winner
2. Common Value Auction

Uses open rather than sealed bid
Generates greater revenue
Reveals information about true value, reducing concern of winners curse
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114
Maximizing Auction Revenue

3. Private value auction
Sets min bid equal to or higher than value to you of keeping good for future sale Protects against loss if bidders are unaware of value Increases size of bids by letting bidders think item is valuable No sale could make bidders think item is low quality
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115
Bidding and Collusion

Buyers can allow benefit from collusion
Can be done legally through buying groups Can be done illegally through collusive agreements that violate antitrust laws Collusion is not easy because of large incentive to cheat Repeated auctions allow for penalizing participants that break agreement
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116
Bidding and Collusion

Examples 1. Collusion among baseball owners to limit their bidding for free agent players in the 1980s 2. Two of the worlds most successful auction houses were found guilty of agreeing to fix prices of commissions
Sothebys and Christies
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117
Internet Auctions
Popularity of auctions has skyrocketed with growth of internet Most popular site is eBay
Dominates online person-person auction industry
Subject to large network externalities

Choose auction site with largest number of potential bidders
Chapter 13
118
Internet Auctions
eBay auctions are somewhat different from types discussed A few caveats:
No quality control function Poor seller feedback Bid manipulation may occur
Chapter 13
119

Game Theory and Competitive Strategy

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Chapter 13

Game Theory and Competitive Strategy

2005 Pearson Education, Inc.

Threats, Commitments, and Credibility

2005 Pearson Education, Inc.

Gaming and Strategic Decisions

Gaming and Strategic Decisions

Gaming and Strategic Decisions

2005 Pearson Education, Inc.

Noncooperative vs. Cooperative Games

2005 Pearson Education, Inc.

Noncooperative vs. Cooperative Games

2005 Pearson Education, Inc.

Noncooperative vs. Cooperative Games

2005 Pearson Education, Inc.

Gaming and Strategic Decisions

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

How much should A offer?

2005 Pearson Education, Inc.

Payoff Matrix for Advertising Game

2005 Pearson Education, Inc.

Payoff Matrix for Advertising Game

2005 Pearson Education, Inc.

Payoff Matrix for Advertising Game

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

Modified Advertising Game

2005 Pearson Education, Inc.

Modified Advertising Game

Firm B Dont Advertise Advertise

2005 Pearson Education, Inc.

The Nash Equilibrium Revisited

The Nash Equilibrium Revisited

2005 Pearson Education, Inc.

The Nash Equilibrium Revisited

Dominant strategy is a special case of Nash equilibrium

The Nash Equilibrium Revisited

2005 Pearson Education, Inc.

Product Choice Problem

2005 Pearson Education, Inc.

Product Choice Problem

Crispy Firm 1 Sweet

2005 Pearson Education, Inc.

Beach Location Game

2005 Pearson Education, Inc.

Beach Location Game

The Nash Equilibrium Revisited

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

Firm 2 Dont invest

Dont invest Firm 1

Dont invest Firm 1

2005 Pearson Education, Inc.

If Player 2 is not rational or completely informed

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.

2005 Pearson Education, Inc.