university of cagliari, faculty of economics, a.a. 2012-13
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Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 6 credits Lecturer: Dr Alberto Asquer [email protected] Phone: 070 6753399. University of Cagliari, Faculty of Economics, a.a. 2012-13. Lecture 4 - PowerPoint PPT PresentationTRANSCRIPT
University of Cagliari, Faculty of Economics, a.a. 2012-13
Business Strategy and Policy
A course within the II level degree in Managerial Economics
year II, semester I, 6 credits
Lecturer:Dr Alberto [email protected]
Phone: 070 6753399
Business Strategy and Policy
Lecture 4
The strategic interaction between firms
Introduction
1. Strategic interaction
2. Dominant strategies
3. Nash equilibrium strategies
4. Coordination strategies
5. Coordination and competition (co-opetition)
6. Mixed strategies
7. Sequential strategic games
- - - - - - - - - - - - -
8. Summary
1. Strategic interaction
Within military field, strategy as winning manoeuvring in the battlefield
1. Strategic interaction
Within game theory, strategy as the analysis of strategic interaction
What choice option do rational agents select in order to maximise their payoff, taking into account the choice of other agents?
(in common-sense argumentation, put yourself “behind your rivals' desk” in order to take into account what they do when you make decisions that affect your interests)
Warning: every agents behaves rationally and takes into account the choice of others
(in common-sense argumentation, take into account that also your rivals make decisions taking into account what you do)
1. Strategic interaction
Game theory: some basic lexicon
Game: the structure of interaction between agents (players). Typically, in a game the payoff of agents depends on the choices made by all agents (i.e. not by one agent alone)
Simultaneous games: agents make choices at the same time (i.e., one agent cannot wait and see the choice made by others)
Sequential games: agents make choices according to a pre-determined sequence (i.e., who chooses later can see what other agents, who chose earlier, did)
Repeated games: agents face again the choice situation over time.
Non repeated games: agents play the game only once.
1. Strategic interaction
Game theory: some basic lexicon
Dominant strategy: the only choice that an agent rationally does, no matter what other agents do (or did or will do)
Nash equilibrium: a set of strategies where each agent is rationally choosing the best option, given the choice of other agents
2. Dominant strategiesFirms may choose their course of action irrespective of what other
players do
AirbusScenario: bidding for 10 aircrafts project
High price
High price
Low price
Low price
B = 500
A = 500
B = 0
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
Boeing
2. Dominant strategies
AirbusScenario: bidding for 10 aircrafts project
High price
High price
Low price
Low price
B = 500
A = 500
B = 0
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
Boeing
Firms may choose their course of action irrespective of what other players do
2. Dominant strategies
AirbusScenario: bidding for 10 aircrafts project
High price
High price
Low price
Low price
B = 500
A = 500
B = 0
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
Boeing
Firms may choose their course of action irrespective of what other players do
3. Nash equilibrium strategies
But sometimes, firms behave depending on what other firms do
Airbus
Scenario: bidding for 10 aircrafts project, butBoeing can earn even iflosing the bid
High price
High price
Low price
Low price
B = 500
A = 500
B = 600
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
Boeing
3. Nash equilibrium strategies
But sometimes, firms behave depending on what other firms do
Airbus
Scenario: bidding for 10 aircrafts project, butBoeing can earn even iflosing the bid
High price
High price
Low price
Low price
B = 500
A = 500
B = 600
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
Boeing
3. Nash equilibrium strategies
But sometimes, firms behave depending on what other firms do
Airbus
Boeing
Scenario: bidding for 10 aircrafts project, butBoeing can earn even iflosing the bid
High price
High price
Low price
Low price
B = 500
A = 500
B = 600
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
?
3. Nash equilibrium strategies
Airbus is playing 'low price' anyway (has a dominant strategy)...
Airbus
Boeing
Scenario: bidding for 10 aircrafts project, butBoeing can earn even iflosing the bid
High price
High price
Low price
Low price
B = 500
A = 500
B = 600
A = 1,000
B = 1,000
A = 0
B = 750
A = 750
4. Coordination strategies
Sometimes strategy is about cooperation rather than competition
Airbus
Boeing
Scenario: Boeing andAirbus choose which Comm technology investin
Beta
BetaAlpha
Alpha B = 100
A = 100
B = 50
A = 50
B = 50
A = 50
B = 100
A = 100
4. Coordination strategies
Sometimes strategy is about cooperation rather than competition
Airbus
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in
Beta
BetaAlpha
Alpha B = 100
A = 100
B = 50
A = 50
B = 50
A = 50
B = 100
A = 100
4. Coordination strategies
Sometimes strategy is about cooperation rather than competition
Airbus
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in
Beta
BetaAlpha
Alpha B = 100
A = 100
B = 50
A = 50
B = 50
A = 50
B = 100
A = 100
5. Collaboration and competition (co-opetition)
Sometimes it is good to cooperate, but every firms has own interests
Airbus
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in
Beta
BetaAlpha
Alpha B = 100
A = 50
B = 25
A = 25
B = 40
A = 40
B = 50
A = 100
5. Collaboration and competition (co-opetition)
Sometimes it is good to cooperate, but every firms has own interests
Airbus
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in
Beta
BetaAlpha
Alpha B = 100
A = 50
B = 25
A = 25
B = 40
A = 40
B = 50
A = 100
5. Collaboration and competition (co-opetition)
Sometimes it is good to cooperate, but every firms has own interests
Airbus
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in
Beta
BetaAlpha
Alpha B = 100
A = 50
B = 25
A = 25
B = 40
A = 40
B = 50
A = 100
5. Collaboration and competition (co-opetition)
Sometimes it is good to cooperate, but every firms has own interests
Airbus
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in
Beta
BetaAlpha
Alpha B = 100
A = 50
B = 25
A = 25
B = 40
A = 40
B = 50
A = 100
6. Mixed strategies
Sometimes, there is really no equilibrium
Airbus
Boeing
Scenario: Boeing andAirbus choose theiradvertisement campaign
Positivetones
Positivetones
Negativenotes
Negativetones
B = 10
A = -10
B = -10
A = 10
B = -10
A = 10
B = 10
A = -10
6. Mixed strategies
Sometimes, there is really no equilibrium
Airbus
Boeing
Scenario: Boeing andAirbus choose theiradvertisement campaign
Positivetones
Positivetones
Negativenotes
Negativetones
B = 10
A = -10
B = -10
A = 10
B = -10
A = 10
B = 10
A = -10
7. Sequential strategic game
Sometimes, one player chooses before the other
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in – but Boeing chooses first!
Airbus
AirbusAlpha
Beta
Alpha
Beta
Alpha
Beta
Boeing: 100Airbus: 50
Boeing: 40Airbus: 40
Boeing: 25Airbus: 25
Boeing: 50Airbus: 100
7. Sequential strategic game
What will Airbus choose?
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in – but Boeing chooses first!
Airbus
AirbusAlpha
Beta
Alpha
Beta
Alpha
Beta
Boeing: 100Airbus: 50
Boeing: 40Airbus: 40
Boeing: 25Airbus: 25
Boeing: 50Airbus: 100
7. Sequential strategic game
What does Boeing choose – provided what Airbus will choose?
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in – but Boeing chooses first!
Airbus
AirbusAlpha
Beta
Alpha
Beta
Alpha
Beta
Boeing: 100Airbus: 50
Boeing: 40Airbus: 40
Boeing: 25Airbus: 25
Boeing: 50Airbus: 100
7. Sequential strategic game
What does Boeing choose – provided what Airbus will choose?
Boeing
Scenario: Boeing andAirbus choose which Communication technology they invest in – but Boeing chooses first!
Airbus
AirbusAlpha
Beta
Alpha
Beta
Alpha
Beta
Boeing: 100Airbus: 50
Boeing: 40Airbus: 40
Boeing: 25Airbus: 25
Boeing: 50Airbus: 100
Note: Airbus would reallylike to make a crediblethreat to choose Beta!
8. Summary
Main points
Game theory provides a powerful analytic approach to strategic interaction
The approach is especially relevant when the expected performance (payoff) is dependent on the decisions (choices) made by players (firms)
Game theory allows to model a wide range of strategic interactions: competition, cooperation, co-opetition, uncertainty and mixed strategies, and sequential games
It is enlightening for better understanding the interdependencies between firms' decisions (e.g., issues of credible commitments and sequence of moves)