Documente Academic
Documente Profesional
Documente Cultură
12th Edition
By
Mark Hirschey
Game Theory and
Competitive Strategy
Chapter 14
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
Chapter 14
KEY CONCEPTS
game theory infinitely repeated game
zero-sum game finitely repeated game
positive-sum game trigger strategy
negative-sum game end-of-game problem
cooperative game multistage games
sequential game first-mover advantage
look ahead and extrapolate back English auction
simultaneous-move game winner’s curse
equilibrium outcome sealed bid auction
game-theory strategy Vickrey auction
payoff matrix Dutch auction
Prisoner’s Dilemma competitive advantage
one-shot game comparative advantage
repeated game limit pricing
dominant strategy predatory pricing
secure strategy customer lock-in effect
Nash equilibrium network externalities
randomized strategies market penetration pricing
Nash bargaining non-price competition
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.
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.
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.
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.
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.
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.
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”).
Pricing Strategies
Limit Pricing
Limit pricing strategy sets less than monopoly prices
to deter entry by competitors
Predatory pricing is pricing below marginal cost (rare).
Limit pricing is often confused with predatory pricing.
Market Penetration Pricing
Market penetration pricing sets very low (or zero)
prices to create a new market or grab market share.
Objective is to gain a critical mass of customers,
make network effects, and generate viable business.
Non-price Competition
Advantages of Non-price Competition
Non-price competition can be an effective means for
growing market share and profitability.
Nonprice competition can be difficult to imitate.
Optimal Level of Advertising
Profit-maximizing level of non-price competition is
found by setting activity MR = MC.
Set MRA = MCA to determine optimal advertising.