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Chapter 10

1) Game theory and competitive strategy involves analyzing competitive situations according to factors such as the number of competitors, degree of conflict/cooperation, opportunity for communication, whether competition is single or repeated, and available information. 2) Payoff tables can be used to translate competitive situations and analyze them to find each side's best responses, identify dominated strategies, and determine if there are equilibrium strategies. 3) In zero-sum games where one side's gain equals the other's loss, the equilibrium results in a definite value for the game and going first is never an advantage.

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DaMin Zhou
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100 views11 pages

Chapter 10

1) Game theory and competitive strategy involves analyzing competitive situations according to factors such as the number of competitors, degree of conflict/cooperation, opportunity for communication, whether competition is single or repeated, and available information. 2) Payoff tables can be used to translate competitive situations and analyze them to find each side's best responses, identify dominated strategies, and determine if there are equilibrium strategies. 3) In zero-sum games where one side's gain equals the other's loss, the equilibrium results in a definite value for the game and going first is never an advantage.

Uploaded by

DaMin Zhou
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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GAME THEORY & COMPETITIVE STRATEGY

Sizing up competitive situations


according to:
1. Number of Competitors
2. The Degree of Conflict or Cooperation
3. The Opportunity for Communication
4. Single or Repeated Competition
5. The Amount of Information
Available

Chapter 10
slide 1

ANALYZING PAYOFF TABLES


First, Translate Competitive Situation into a Payoff
Table.
Second, Analyze Table.
1. Identify Each Sides Best Responses.
2. Eliminate Dominated Strategies (if any).
Does either side have a dominant strategy?
3. In the Absence of Dominant Strategies,
is there a Pair of Equilibrium Strategies?

10.2

10.3

ZERO-SUM GAMES
Market-Share Example
C1

C2

C3

R1 -2 , 2

-1 , 1

4 , -4

R2 3 , -3

2 , -2
-2

5 , -5

R3 7 , 7

-3 , 3

-5 , 5

How does one find


Equilibrium Strategies?

Equilibrium: R2 versus C2
(where circle and square coincide).
Resulting Value is (2, -2).

ZERO-SUM GAMES: SUMMARY

10.4

- There is pure conflict: one sides gain is the others loss.


- There is no possibility of cooperation.
- Equilibrium strategies result in definite value for the game.
- Making the first move is never an advantage and is
often a disadvantage.

10.5

NON-ZERO-SUM GAMES
A Price War
AC=$4

High P=$8
Low P=$6

High P=$8

Price Rivalry (w/ Brand Allegience)

Low P=$6

High P=$8

Low P=$6

10, 10
10
10

5,
88, 12
8

AC=$4

10, 10

(2.5, 2.5)

5, 12
12

High P=$8

(2.5, 2.5)

12,
12 5

77, 77

(6, 1.25)

(3.5, 3.5)

Price competition leads to a


low prices and modest profits.

Low P=$6

12,
8, 85

7, 7

(4, 2)

(3.5, 3.5)

With strong brand allegiance,


price competition is blunted.
Each firms self-interest is to
set a high price.

10.6

CLASSIC NON-ZERO-SUM GAMES

The Prisoner's Dilemma

General

Holdout Double Cross


Hold Out

2, 2

8, 1

Double Cross 11, 8

55, 55

Cooperate

Defect

Cooperate

R, R

S, T
T

Defect

T
T, S

P P
P, P

T > R > P > S

Both prisoners double cross,


Each players dominant strategy
so both serve long, 5-year terms. is to defect (because the temptation
payoff is best and the sucker payoff
is worst.

10.7

QUANTITY COMPETITION
Each Firm's MC is $6.

Industry Price Depends On


Total Output: P = 30 - [Q1 + Q2].
Payoff Table:
Q2 = 6
Q1 = 6
Q1 = 8
Q1 = 10

72, 72

Q2 = 8

60, 80 81 48, 80

64
80, 60
64, 64
64
81
80, 48 49 60, 48

My Best Response to
Competitor's Output?

Q2 = 10
49
48, 60
40, 40

According to table,
Equilibrium is:
Q1 = Q 2 = 8

MARKET ENTRY

10.8

Stay Out

Enter

Stay Out

0, 0

00, 4

Enter

44, 00

-4, -4

Is there a first-mover advantage?


Absolutely. The firm that enters first
preempts the market and deters the
other from ever entering.

10.9

THINKING AHEAD
Fashioning Strategies using Interactive Decision Trees
Example: Deterring Market Entry
E
Keep Price
Enter

5, 10

M
Cut Price

Keep Price
Stay Out

-5, 5
0, 20

Keep
Enter
Not

Cut

5, 10 -5,-5
0,20

0,15

E enters in equilibrium.

M
Cut Price

0, 15

Ms threat to cut price


is not credible.

DETERRING MARKET ENTRY (cont.)

10.10

What if M commits to a pricing strategy


before E can commit to entering?
E
Enter
Keep Price

5, 10

E
Stay Out

Enter
Cut Price

Enter
0, 20
-5, 5

E
Stay Out

Keep

0, 15

Cutting price in advance deters entry!

Not

Cut

5, 10 -5,-5
0,20

0,15

BATTLE FOR AIR PASSENGERS


Market = $900k (3,600 x $250)
Each flight: $25k & 300 seats
Therefore, A = 900[A/(A+B+C)] 25A
Airlines will make first-period decisions
and see the profit results.
Then, they will play for second and then
third periods.
Benchmarks:
Collusion
Perfect Competition
Equilibium

4 each, = 200 each


12 each, = 0 each
8 each, = 100 each

10.11

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