D.  Game Theory and Strategic Behavior

1.  Basic concepts

a.  Players - decision makers (competitors, suppliers, customers, etc.)

b.  Strategies - choices that can be made by the players

c.  Payoffs - outcome or consequence of each strategy

d.  Payoff matrix - table giving the payoffs from the different combinations of each strategy

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e.  Zero-sum game - gain by one player is a loss for another

f.  Nonzero-sum game - gains do not come at the expense of another player

(1) Positive-sum game - both players better off

(2) Negative-sum game - both players worse off

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2.  Equilibrium strategies

a.  Dominant strategy

• One strategy optimal regardless of action taken by competitor

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b. Nash equilibrium

• Each player does the best they can, given the strategies of the other players

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c. Prisoners' Dilemma

• Players acting in their own best interest (i.e., employing dominant strategy) are worse off than if they had cooperated

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Ex. - Price competition

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Ex. - Nonprice competition

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Ex. - Cartel cheating

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3.  Repeated competition

• Game played indefinitely

• Tit-for-tat strategy - match what competitor does

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3.  Strategic moves

a.  Threat, commitment, and credibility

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b.  Entry deterrence

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c.  International competitiveness

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4.  Sequential games

• Series of actions over time - moves, countermoves
  
  
• Use decision tree to analyze

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