GAME THEORY & COMPETITIVE STRATEGYSizing up competitive situationsaccording to:

1. Number of Competitors

2. The Degree of Conflict or Cooperation

3. The Opportunity for Communication

Chapter 10slide 14. Single or Repeated Competition

5. The Amount of Information Available

ANALYZING PAYOFF TABLESFirst, 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, 2 , 1 , -4

, -3 , -2 , -5

, 7 , 3 , 5 C1 C2 C3

R1 -2 -1 4

R2 3 2 5

R3 7 -3 -5 10.3ZERO-SUM GAMESMarket-Share ExampleHow does one findEquilibrium Strategies?Equilibrium: R2 versus C2 (where circle and square coincide).Resulting Value is (2, -2).7242-25ZERO-SUM GAMES: SUMMARY- There is pure conflict: one sides gain is the others loss.

- There is no possibility of cooperation.10.4- Equilibrium strategies result in definite value for the game.

- Making the first move is never an advantage and is often a disadvantage.

NON-ZERO-SUM GAMES A Price War

High P=$8 Low P=$6

High P=$8 10, 10 5, 12

Low P=$6 12, 5 7, 7

12771210.5AC=$4

(2.5, 2.5)

(6, 1.25) (3.5, 3.5) Price Rivalry (w/ Brand Allegience)

High P=$8 Low P=$6

High P=$8 10, 10 5, 12

Low P=$6 12, 5 7, 7

AC=$4

(2.5, 2.5)

(4, 2) (3.5, 3.5) 10108, 8 8, 8 88Price competition leads to alow prices and modest profits.With strong brand allegiance,price competition is blunted. Each firms self-interest is to set a high price.CLASSIC NON-ZERO-SUM GAMESThe Prisoner's Dilemma

Holdout Double Cross

Hold Out 2, 2 8, 1

Double Cross 1, 8 5, 5 General

Cooperate Defect

Cooperate R, R S, T Defect T, S P, P15TP15TP10.6T > R > P > SBoth prisoners double cross,so both serve long, 5-year terms.Each players dominant strategyis to defect (because the temptationpayoff is best and the sucker payoffis worst.QUANTITY COMPETITIONIndustry Price Depends OnTotal Output: P = 30 - [Q1 + Q2].

Payoff Table: Q2 = 6 Q2 = 8 Q2 = 10 Q1 = 6 72, 72

Q1 = 8 64, 64

Q1 = 10 40, 4010.7My Best Response to Competitor's Output?494981646481Each Firm's MC is $6.According to table,Equilibrium is: Q1 = Q2 = 880, 6060, 8060, 4848, 8080, 48 48, 60 Stay Out Enter

Stay Out 0, 0 0, 4

Enter 4, 0 -4, -4 4004MARKET ENTRY10.8Is there a first-mover advantage?Absolutely. The firm that enters firstpreempts the market and deters the other from ever entering.THINKING AHEADFashioning Strategies using Interactive Decision TreesExample: Deterring Market Entry E M

5, 10

-5, 5 Keep PriceEMMKeep PriceCut PriceCut PriceEnterStay Out 0, 20

0, 15 Keep CutEnter 5, 10 -5,-5

Not 0,20 0,15E enters in equilibrium. Ms threat to cut price is not credible.10.9DETERRING MARKET ENTRY (cont.)What if M commits to a pricing strategy before E can commit to entering? E M

5, 10

0, 20 Keep PriceMEE EnterStay Out-5, 5

0, 15Stay OutCut PriceEnterCutting price in advance deters entry! Keep CutEnter 5, 10 -5,-5

Not 0,20 0,1510.10BATTLE FOR AIR PASSENGERSMarket = $900k (3,600 x $250)

Each flight: $25k & 300 seatsTherefore, A = 900[A/(A+B+C)] 25AAirlines will make first-period decisions and see the profit results.

Then, they will play for second and thenthird periods.Benchmarks: Collusion Perfect Competition Equilibium4 each, = 200 each12 each, = 0 each 8 each, = 100 each10.11