managerial economics jack wu. nov. 16: coca-cola raised price 7% nov. 22: pepsi raised price 6.9%...
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Managerial EconomicsJack Wu
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Nov. 16: Coca-Cola raised price 7% Nov. 22: Pepsi raised price 6.9% “Coke and Pepsi will move now
from price-based competition to marketing-based competition”,
Andrew Conway, Morgan Stanley
Coke vs. Pepsi, 1999
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Competitive DilemmaPepsi
Raise price Discount
Raise price
C: 3, P: 3
C: 0, P: 5
Coke Discount C: 5,
P: 0 C: 1, P: 1
What should Coke do?
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Strategic Situationsparties actively consider the interactions with
one another in making decisionsgame theory -- set of ideas and principles to
guide strategic thinkingsimultaneous actions: strategic formsequential actions: extensive form
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Dominated Strategygenerates worse consequences than another strategy, regardless of the choices of the other parties
never use dominated strategy
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Nash EquilibriumGiven that the other players choose their Nash equilibrium strategies, each party prefers its own Nash equilibrium strategy
• No one is willing to deviate unilaterally from a Nash equilibrium
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Solving for Nash Equilibriumeliminate dominated strategies, then check
remaining cells“arrow” technique
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Coke and Pepsi GameNash equilibrium: for both parties, “raise
price” is dominated by “discount”. but discounting is bad for both -- if only they
could agree somehow to raise price. Coke and Pepsi stuck in this situation for four
years until November 1999.
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Radio FormatsMerkur
Lite AC no change
Jupiter
Hot AC J: 60,
M: 40
J: 60,
M: 40
no change J: 70,
M: 30
J: 50,
M: 50
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Radio FormatsFor Merkur, “Lite AC” is dominated by “no
change”; so consider only “no change”, assuming Merkur chooses “no change”,
Jupiter should choose “Hot AC”.
Repeat using “arrow technique”.
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Out of Nash EquilibriumWhat if another player doesn’t play Nash equilibrium strategy? Nash equilibrium strategy may not be best still don’t use dominated strategy
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No Nash equilibrium in pure strategies
Competitor.com
NBA NHL
NBA W: 4, C: 3
W: 3, C: 4
We.com NHL W: 3,
C: 4 W: 4, C: 3
Where to advertise?
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Randomized Strategieschoose among pure strategies according to
probabilitiesmust be unpredictableExample: retail market random discountExample: where to advertise_ We.com: ½ NBA and ½ NHL_ Competitor.com: ½ NBA and ½ NHL
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Evening News:
TVB
7:30pm 8:0pm
7:30pm A: 1, B: 1
A: 3, B: 4
ATV 8:0pm A: 4, B: 3
A: 2.5, B: 2.5
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Coordination and CompetitionPrime time for news is 8:0pm; second best is
7:30pm; since audience is limited, get maximum
viewership if two channels schedule at different times.
Question: which station gets 8:0pm? Situation has elements of
coordination -- avoiding same time slot competition -- getting the 8:0pm slot
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Zero/Positive Sumzero-sum games: pure competition -- one
party better off only if other is worse offpositive-sum games: coordination -- both can
be better off or both worse offco-opetition: competition and coordination
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Adopting Database SoftwareSol
IBM Oracle
Venus
IBM V: 1.5,
S: 1.5
V: 1,
S: 1
Oracle V: 1,
S: 1
V: 1.5,
S: 1.5
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Focal PointNash equilibriummultiple Nash equilibria
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SequencingGame in extensive form – sequence of moves:
nodesbranchesoutcomes
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Extensive Form: Equilibriumbackward induction
final nodes intermediate nodes initial node
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TVB
ATV
ATV
4, 3
2.5, 2.5
1, 1
3, 4
8:00
7:30
7:30
8:00
7:30
8:00
TVB, ATV
TV News: Sequential Moves
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Strategic MoveAction to influence beliefs or actions of other parties in a favorable way
•credibility– first mover advantage– second mover advantage
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Examples Examples: Evening TV news -- both stations want to move first: which one can?
Use strategic move, eg, contracts with advertisers to deliver news at 8pm.
Famous Chinese general: after crossing a river, burnt his ships -- strategic move to force soldiers to fight harder.
Issue: Is the move credible? Will it convince the other players?
Advantage doesn’t always go to first mover; In war, better to see opponent’s move, and then take action, eg is enemy
moving south or north? new product category -- let competitor test the market and educate the
customers
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consumer
Litho
LithoMake prints
Do not
Buy
Do not
Make more prints
Do not
(1) serial number (2) destroying the plate(3) other solution?
Lithographer
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Conditional Strategic Movesthreatspromises
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Morgan Stanley:“Shareholder rights plan”
If any party acquires 15% or more of company’s shares, other shareholders get right to buy additional shares at 50% discount. Impact on hostile bidder?
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Shareholder Rights PlanThis shareholder rights plan is a threat to
potential bidders: most hostile bidders begin with small stake; with shareholder rights plan, if bidder acquires
more than 15%, then rights triggered, and bidder will be diluted.
Nickname: poison pill. Actually works against shareholder rights -- by
entrenching existing management.
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Sharon
Hilda
acquires 100,000shares
doesn’t bid
does not
activates rights
Hilda loses on initial stake + cost of takeover rises
Poison Pill
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Union
Employer
reject union demand
accept
do not
strike Lose current wageand possibly gain infuture wage
Maintain current wage
Why are strikes rare inAmerican professional football?
Strike
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AnswerStrike is a threat: must be credible, otherwise employer will
not raise wage; for threat to be credible, expected gain from strike in future
wage > loss of current wage.
American professional sports: football -- players have very short careers; if they strike for
one season, reduce professional careers by 20-25%. baseball -- long playing careers; strikes more common
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depositor
bankmaintains deposit
run
Promise
withdraws deposit
remains solvent n.a.
?